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News January 30, 2012 Issue

What’s Behind the Upswing in Adviser Enforcement Actions?

Why all of a sudden does it appear to be raining adviser enforcement actions?

Advisers, like all other SEC registrants, are susceptible to error and even outright wrongdoing. All along, OCIE Ė and if necessary, the Division of Enforcement Ė is there to watch advisers and to keep them on the right path.

OCIE typically cites any compliance or regulatory deficiencies it finds during an examination in a letter to the registrant. Such letters not only flag actual and potential compliance weaknesses, but also can inform an adviser of the SECís view on what constitutes effective compliance in certain regards.

That was then.

Now the Division of Enforcement has established its specialized working groups, one of which is the new Asset Management Unit. The Asset Management Unit surveils the activities of advisers, investment companies, mutual funds, hedge funds and private equity funds. The Unitís mission is to focus on large-scale and organized insider trading and market manipulation schemes, and uses advanced technology to assist its investigative efforts.

The Unitís only "dashboard" for success however, is the number of successful actions it brings. Like the Division of Enforcement itself, the Unit will be evaluated by what it is finding and the results it produces in administrative actions and court proceedings.

Whether to drive home points about compliance best practices, deter recidivist behavior, or to develop policy, the nascent Asset Management Unit appears to be flexing a little muscle.

"Things that used to be addressed in deficiency letters are now being brought as enforcement actions," observed one industry representative.

OCIE director Carlo di Florio recently denied that Enforcement staff "ride shotgun" on examinations as a regular practice. He also noted, however, that internal collaboration at the SEC is on the rise, and that OCIE and Enforcement regularly exchange information and ideas, as well as discuss findings and work jointly on exams both substantively and for training purposes.

In recent remarks at the Northwestern University School of Lawís 39th Annual Securities Regulation Institute in Coronado, California, Enforcement director Robert Khuzami noted that hedge fund issues were among his divisionís top priorities.

Hedge funds especially warrant attention because they can control significant amounts of capital with little and no transparency, and can employ significant leverage and short-selling activity, he said. Khuzami praised the work of the Asset Management Unit, crediting the rise in adviser enforcement actions over the past year to the Unitís work coupled with a reallocation of Division resources to adviser issues.

The bottom line? Donít be surprised to see more enforcement proceedings against advisers in the future, and try your best not to be in one of them.