Commissioner Gallagher Discusses Enforcement and Repeat Offenders in the Securities Industry

SEC Commissioner Daniel Gallagher delivered remarks at the Annual Rocky Mountain Securities Conference, focusing on enforcement issues and the need to eliminate repeat offenders.

Commissioner Gallagher stated that the SEC has been struggling for decades to find the best approach to root out recidivist misconduct. He referenced a report released 20 years ago called the "Large Firm Project," which reviewed the hiring, retention, and supervisory practices of nine of the country's largest broker-dealers. According to Commissioner Gallagher, the problems identified in this report, such as disclosure and inadequate supervisory issues, "are exactly the same types of behavioral red flags we still see today."

Commissioner Gallagher noted that this is not exclusively a broker-dealer problem; there are also repeat offenders at investment advisory firms who are engaging in misconduct. Commissioner Gallagher stated that he worries the under-reporting of investment advisor rule violations leads to an imbalance of enforcement action, and suggested that leveraging the current resources and expertise of broker-dealer SROs to assist in investment advisor examinations could facilitate the ability to examine advisors without creating a whole new SRO. Commissioner Gallagher explained that doing this would also foster informed debates on Dodd-Frank Section 913 ("Study and Rulemaking Regarding Obligations of Brokers, Dealers, and Investment Advisers"), which authorized the SEC to adopt rules establishing a duty of care for broker-dealers that is no less stringent than that which applies to investment advisors and to make efforts to harmonize the regulatory regimes.

In terms of curbing the abuses perpetrated by recidivist bad actors, Commissioner Gallagher mentioned the work of the SEC Office of Compliance Inspections and Examinations ("OCIE") and its Risk Assessment and Surveillance group, the new OCIE National Exam Analytics Program, and a new Division of Enforcement task force. Commissioner Gallagher stated his hope is that the task force complement the work of the Asset Management Unit and the Market Abuse Unit to identify and root out the worst of the bad actors. Commissioner Gallagher also said that most importantly, the SEC needs to take more aggressive action to permanently expel and deregister the worst offenders in the securities industry.

See: Commissioner Gallagher's Speech. See also: The Large Firm Project (referenced in the Commissioner's Speech).