Lawsuit Challenges SEC’s Authority to Impose Industry Bans on Advisors

In 2022, Michael and David Sztrom settled with the SEC over alleged fraud, assuming they could resume their advisory practice. However, a new lawsuit claims they now face a “career death penalty” after a follow-on proceeding by the SEC to banish them from the industry. The father-son duo behind Sztrom Wealth Management in San Diego, California, had agreed to pay $50,000 and accept sanctions to settle allegations of fraud several years earlier. The SEC later initiated a follow-on proceeding to impose an industry ban on them to protect investors from potential harm in the future.

Critics of the SEC have raised concerns about the agency’s use of internal administrative processes like follow-on proceedings. A recent victory in the U.S. Supreme Court against the SEC in SEC v. Jarkesy required regulators to bring fraud charges in court and not solely through internal procedures, as opposed to previous practices. However, the SEC still has the authority to impose industry bans post-court ruling, even without a formal hearing, which has drawn criticism for concentrating too much power in the hands of the agency.

The complaint against the SEC alleges that the follow-on proceedings against the Sztroms are unwarranted since regulators did not accuse them of harming investors. The alleged misdeed dated back to 2015-2018, subjecting the Sztroms to prolonged regulatory uncertainty. The SEC initially accused Michael Sztrom of misleading clients about his affiliation with a registered investment advisor, Advanced Practice Advisors, following his departure from UBS amid customer complaints. To circumvent his inability to register with Advanced Practice Advisors, Michael allegedly used his son as a front. Despite guidelines requiring him to maintain a distance from the business, the SEC claimed Michael continued interacting with clients and providing financial advice through his son’s position at Sztrom Wealth Management.

The lawsuit highlights the complexity and potential consequences of SEC actions, emphasizing the importance of understanding industry regulations to ensure compliance and avoid unintended penalties.