Canadian financial advisors and firms should keep a close eye on enforcement developments south of the border, especially as U.S. regulators pursue record numbers of cases against investment advisors, U.S. regulatory experts said on Thursday.
At the Compliance and Risk Management Summit in Toronto, hosted by the Strategy Institute, John Walsh, partner at Sutherland Asbill & Brennan and former acting director in the office of compliance inspections and examinations at the Securities Exchange Commission (SEC), said the SEC’s enforcement division brought a total of 735 cases in 2011 – more than ever before.
“Last year was a record-setting year at the commission,” Walsh said. He added, “The number of cases against investment advisors went up by 30%. It was the largest number of cases against investment advisors ever.”
Canadian industry players should pay attention to activity across the border, since they’re affected by U.S. securities regulation in a variety of ways, Walsh said. Many Canadian firms, for instance, are registered and doing business in the U.S.
“There’s a lot of conduct that straddles the border, with clients going back and forth, with transactions going back and forth,” Walsh said. “If you have business or clients that are straddling the line, you need to think about how both sides might be implicated.”
“Once you register in the U.S.,” he added, “if you engage in conduct that violates U.S. law, you are liable for commission enforcement.”
For example, Walsh pointed to a case in September 2000 involving Ontario-based F.W. Thompson Company, which was registered in both Ontario and the U.S. and served clients on both sides of the border. When the company’s president engaged in a practice of favouring clients, by allocating popular initial public offerings only to certain clients – a practice considered inappropriate by U.S. regulators – the company was fined $100,000 by the SEC.
Another reason to monitor U.S. developments is the growing degree of collaboration and communication between Canadian and U.S. regulators, Walsh said.
“One of the things that I saw happening over the years before I left the commission is the increase in co-operation between regulators on both sides of the line,” he said.
For instance, he pointed to a 2010 case in which the managing members of two hedge funds were sued for false statements and for diverting assets to illiquid private investments and loans to affiliates. The SEC brought enforcement action against both U.S. and Canadian defendants in the case, and acknowledged the assistance and co-operation of the Alberta Securities Commission throughout the development of the case.
“This case is a really good example of working together to try and figure out how to deal with conduct that straddles the border,” he said.
SEC lacking resources: Tittsworth
Although enforcement activity at the SEC is on the rise, speakers at the conference suggested that the U.S. regulator is lagging on the examination and inspection side. David Tittsworth, executive director of the Investment Adviser Association in Washington, said that almost 40% of all U.S. investment advisors have never been inspected by the SEC.
“It’s just not an appropriate level of oversight,” said Walsh.
The problem is largely related to a lack of resources, Tittsworth said, noting that the staff and resources in the regulator’s inspection department has remained the same over several years despite steady growth in the number of SEC registered firms.
“The SEC can and should do more about this inspection problem,” Tittsworth said.