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From Securities Regulation Daily, May 9, 2014

Gallagher calls on SEC to expel repeat offenders from the industry

By Jacquelyn Lumb

Commissioner Daniel Gallagher expressed concern about the potential for underreported investor adviser rule violations given the low percentage of inspections the SEC is able to conduct and the lack of a self-regulatory organization for the industry. In remarks at the annual Rocky Mountain securities conference in Denver, Colorado, he said the SEC finds many more broker-dealer violations than investment adviser violations because, with assistance from the SROs, a greater proportion of broker-dealers are examined. One way to address this imbalance, he said, would be to provide for third party examiners, which could include having an SRO that currently has oversight of broker-dealers also examine dually registered investment advisers. This approach would leverage current resources and avoid having to create, through Congress, a new investment adviser SRO, he said.

Dodd-Frank Section 913. Regardless of how the SEC manages to increase its examinations of investment advisers, he said doing so would help inform the Commission’s deliberations on Section 913 of the Dodd-Frank Act which authorized the SEC to adopt rules to establish a duty of care for broker-dealers that is no less stringent than the one that applies to investment advisers, and to harmonize the two regulatory regimes. Gallagher added that Section 913 has nothing to do with the financial crisis, but that may not dissuade the SEC from pursuing rulemaking. He also noted that it appears to be seen as an election year issue to pursue. As an independent agency, the SEC should never be persuaded by political forces, he said.

Gallagher reminded the group that the SEC still has almost 60 mandated Dodd-Frank rulemakings to complete and significant work remains on implanting the JOBS Act rules. Given the SEC’s heavy agenda, he questioned the basis for pursuing purely discretionary Section 913 rulemaking.

Identifying recidivists. Gallagher talked about the difficulty of removing recidivists from the industry. He said the percentage of repeat offenders is a real and growing problem. The SEC has made great strides in developing programmatic and technological tools that help identify the most egregious conduct, he advised, and for identifying individuals and firms that are most likely to be recidivists. He singled out the Office of Compliance Inspections and Examinations in particular, whose risk assessment and surveillance group helps identify the firms to be examined.

Gallagher said that OCIE can track individuals who hop from firm to firm and identify firms that attract those with long histories of complaints and disciplinary actions. Through its risk analysis examination initiative, OCIE can target firms that appear to be engaged in high pressure sales tactics and excessive trading.

Gallagher also pointed to the Enforcement Division’s task force that focuses on broker-dealer misconduct and coordinates with FINRA to target rogue representatives with prior disciplinary histories or customer complaints. This task force should complement the work of the asset management unit which investigates misconduct by investment advisers, investment companies and private funds; and the market abuse unit, which focuses on difficult to detect frauds. Together, Gallagher said these groups are making progress in identifying and rooting out the worst of the bad actors.

Expelling worst offenders. Gallagher believes the SEC should take more aggressive action to permanently expel the worst offenders from the securities industry. He noted that both the Exchange Act and the Investment Advisers Act authorize the SEC to deregister entities if it finds that the action would be in the public interest, but the SEC has rarely done so. He has seen several instances during his time as commissioner in which deregistration would be appropriate.

Gallagher said that working as a registered broker-dealer representative, or as an investment adviser representative, holding a securities license, or operating a securities firm are privileges with heavy responsibilities. These privileges should be taken away in cases of abuse. He called on the SEC to lead the way in targeting and eradicating the worst offenders from the markets.

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