Is It 2017 Repeating Itself?

The return of a focus on combatting retail investor fraud under a potential reprise of the Trump administration reflects a priority similar to that of 2017 for the US Securities and Exchange Commission (SEC). In the past, under Jay Clayton’s leadership in 2017, the SEC highlighted the pursuit of misconduct impacting retail investors as a key enforcement priority. An initiative was launched to create the Retail Strategy Task Force, aiming to develop targeted initiatives proactively identifying such misconduct.

Fast forward to February 2025, with the emergence of the second potential Trump administration. Even before the confirmation of chair nominee Paul Atkins, the SEC seems poised to revisit its previous priorities. In a recent development on February 14, 2025, the SEC issued its first enforcement press release under the new administration, signaling a potential return to the agenda of 2017.

The enforcement action brought against a registered investment adviser and one of its representatives emphasized misconduct against retail investors, particularly affecting elderly individuals. The SEC’s order revealed violations of fiduciary duties related to the inadequate disclosure of advisory fees during the conversion of brokerage accounts to advisory accounts. This lack of disclosure led to increased costs for clients without additional services or benefits and failed to address resulting conflicts of interest. Consequently, civil penalties totaling US$225,000 were imposed, including a nine-month industry suspension for the representative, along with the retention of an independent compliance consultant.

While the focus on misconduct against senior citizens is evident, the SEC’s endeavor under the first Trump administration was not limited to investigations of fraud targeting the elderly. The SEC’s initiatives encompassed various issues impacting retail investors, including disclosures on fees, market manipulations, and fraud associated with unregistered offerings. The agency’s commitment to combatting retail investor fraud consisted of addressing microcap frauds, Ponzi schemes, and the sale of unsuitable products, aligning with Chair Clayton’s emphasis on protecting retail investors.

Furthermore, the SEC’s 2018 Annual Report highlighted its scrutiny of interactions between investment professionals and retail investors. Initiatives like the Share Class Selection Disclosure Initiative aimed to address disclosure failures regarding marketing and distribution fees, such as ’12b-1 fees,’ charged to advisory clients. The SEC’s focus on ensuring transparency in fund share class selections aimed to prevent advisors from placing clients in higher-cost share classes without adequate disclosure of lower-cost alternatives available.

Throughout the first Trump administration, the SEC’s enforcement actions targeted unregistered fraudulent offerings, Ponzi schemes, and interactions between investment professionals and retail investors. Notable cases involved substantial financial implications and diverse groups like deaf investors, military personnel, seniors, and various ethnic and religious communities. The agency’s efforts reflect a commitment to safeguard retail investors from fraudulent practices and maintain transparency in financial transactions.