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SEC Puts Budget Where Its Mouth Is on Retail Enforcement

SEC Puts Budget Where Its Mouth Is on Retail Enforcement

For the last eight months, the SEC has talked a big game on retail investors. With remarkable consistency, Chairman Jay Clayton returns in his public remarks to the theme of protecting “Main Street investors.” At this point in his tenure, it is safe to say that is more than a triumph of messaging. In the fall, the SEC announced two major enforcement initiatives – a Retail Strategy Task Force and a Cyber Unit – whose work has been aimed squarely at retail investors. Then, just this week, the SEC put its money where its mouth is, submitting a budget to Congress that reinforces its dedication to those initiatives – and, by implication, retail investors themselves.

The FY2019 budget asks for a 3.5 percent increase in the SEC’s overall budget (taking it to $1.66 billion). Calling for a thaw of the hiring freeze that has been in place at the SEC since 2017, it asks to restore 100 lost positions, including 17 enforcement roles supporting the Cyber Unit and Retail Strategy Task Force.

It has only been a matter of months since those two bodies were announced. In October, Stephanie Avakian, the new co-director of the enforcement division, gave a speech in which she explained the thinking behind them. Noting that protecting retail investors “has long been at the heart of what we do in enforcement,” she said the Retail Strategy Task Force would, among other things, use data to uncover large-scale problems: “There are all sorts of ways to use technology to slice and dice data and apply analytics to look for all kinds of problems – by product, by investor type, by location, by sales or trading practice, by fee, you name it.” Speaking of the Cyber Unit, she made special mention of blockchain-based “Initial Coin Offerings.” “The popular appeal of virtual currency and blockchain technology can be an attractive vehicle for fraudulent conduct,” Avakian said, suggesting that the Cyber Unit could help to stem it.

The SEC has backed up this talk with action. The Cyber Unit’s first fraud case, brought in December, targeted an ICO. It shut down a second ICO just two weeks later, and in late January halted an allegedly fraudulent ICO that had raised $600 million. The SEC has also taken action on the retail front, including an action filed in December against two brokers for making unsuitable investment recommendations and churning their clients’ accounts.

In addition to adding enforcement personnel to the two initiatives, the “the new budget request also singles out allocations to develop expertise in overseeing cryptocurrency sales.” Funds would also be used to support the Retail Strategy Task Force, which the budget notes “will focus on harnessing the commission’s ability to use technology and data analytics to identify large-scale wrongdoing.”

Lastly, while not going directly to the Retail Strategy Task Force or Cyber Unit, it’s worth noting that the SEC’s budget also asked for additional funds to support its examinations of registered investment advisors. The SEC wants 13 new examiners for its Office of Compliance Inspections and Examinations (OCIE), allowing it to examine 15 percent of the country’s 12,500 RIA firms in 2019, up from 11 percent in 2016.

The OCIE ask is one more indication that the SEC is putting its budget where its mouth is on protecting retail investors.

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