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due to mismanagement and not even know it.

SEC beefs up resources for identifying, combating investment fraud

A recent article in a national legal publication highlights the concern of federal securities regulators with the burgeoning investment-adviser industry operative across the United States.

As that media report notes, more than 2,000 new advisers have registered (as they are required to do under federal law) with the U.S. Securities and Exchange Commission within just the past two years. That material accretion now pushes the number of advisers under SEC oversight to more than 12,000.

Understandably, that is a challenge for the examination and compliance arm of the SEC, with the mounting work flow straining a department that has been limited in both its budget and manpower readily available to do its assigned job.

The National Law Review now reports that the SEC is injecting some serious muscle into its Investment Adviser/Investment Company Examination Program. Its stated rationale for doing so is to enhance its ability to take punitive actions against adviser behavior that defrauds and harms individual and institutional investors.

The Review points to recent SEC enforcement actions that it states reveal a heightened agency focus on specific areas of fraud. Those centrally include these realms:

  • Fee-related misrepresentations to investors in mutual funds, hedging entities and additional investment vehicles
  • Silence rather than disclosure regarding adviser behavior that points to a conflict of interest (e.g., steering consumers to comparatively pricier investments without disclosing that their purchases will yield higher remuneration for brokers)
  • Passing along fees and expenses to investors that should be borne by an equity firm instead
  • False advertising regarding performance

Such schemes have long existed in the investment world and brought great financial detriment to legions of good-faith investors. It remains to be seen whether a 20% infusion of SEC funds and resources into its enforcement program will materially curb their occurrences.

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