An industry group says it has tried asking nicely for information on how the SEC set fines in recent cases that hammered firms for
Now the American Securities Association
The ASA says in its suit that it submitted three formal requests on March 14 seeking information on how the SEC arrived at the fines agreed to in a recent series of cases involving advisors' alleged misuses of encrypted messaging services for so-called off-channel communications. Each of those requests, according to the suit, was denied.
The association's suit accuses the SEC of violating the federal Freedom of Information Act.
"In our democratic system, transparency is a two-way street. Federal law also demands transparency from the government," according to the complaint filed by Daniel Shapiro, a lawyer at Arlington, Virginia-based Consovay McCarthy, on behalf of the securities association.
More than $3 billion in sanctions
At the heart of the dispute is
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Despite frequent admonitions to avoid off-channel communications, many wealth managers have apparently not got the message. Over the past two and a half years, the SEC has slammed firms large and small with more than $3 billion in fines in total.
JPMorgan was the first to get hit,
The American Securities Association, whose board includes top executives from LPL Financial, Baird, Raymond James, Stifel and other large regional firms, said in its lawsuit that it has struggled to discern the reasoning behind the penalty amounts.
"Were they based on the content of the off-channel communications that were sent?" Shapiro wrote in the complaint. "The volume of communications collected? The controls that the firm had in place? The seniority of the employees who violated the regulations? Or were the fines entirely arbitrary? It's anyone's guess."
Representatives of both the ASA and the SEC declined to comment for this article.
A little bit of wiggle room
"They are trying to calibrate the penalties and other sanctions using a rough formula," Milnor said. "And, of course, anything that enforcement recommends ultimately needs to be approved by the commission."
Citing an exception
The ASA's lawsuit notes that the SEC denied its Freedom of Information Act request by citing an exemption allowing government agencies to withhold information that could "reasonably be expected to interfere" with ongoing or prospective enforcement actions. The association argued in two appeals that the exception shouldn't apply because it was only seeking documents from settled proceedings.
But the SEC again denied the requests, saying it could continue withholding the information because it was "investigat[ing] whether the Commission should bring an enforcement action against other entities for similar violations of federal securities laws," according to the suit. The securities association says in its lawsuit that it has exhausted its administrative remedies and now must turn to the courts.
The suit notes that, "not surprisingly" given the big settlements in off-channel communications cases, the SEC has been collecting record penalty amounts in recent years. It brought in more than
The SEC seeks to be upfront about what firms can do to avoid trouble in
Stop, pay up and listen
On May 22, two SEC commissioners
"When regulatory foot faults result in ever-steeper penalties that bear little to no relation to real-world harm, the perception that the Commission's penalty regime is more a tool to generate numbers for year-end statistics and less a means to achieve outcomes that enhance market integrity and investor protection begins to appear not unreasonable," according to the statement, which was cited in the ASA's lawsuit.
Milnor said she thinks a movement is afoot among federal lawmakers to bring more oversight to SEC fines and sanctions.
"There is some talk about where it's more proper for the commission to be told by Congress, 'This is what you need to do,'" Milnor said. "But this is not a new conversation. There have long been questions about how they arrive at penalty amounts in settled actions and in litigation."
