© 2013 The Texas Lawbook.
By Mark Curriden, JD
Senior Writer for The Texas Lawbook
(November 1) – Twenty-five agents of the U.S. Securities and Exchange Commission invade Houston next week to conduct dozens of financial examinations of broker-dealers and investment advisors that either haven’t been audited in many years or, in many instances, ever.
The SEC is launching a weeklong Houston initiative in an effort to raise the agency’s profile by holding open door educational seminars and meet-and-greet opportunities with senior SEC leaders, as well as conducting as many as 40 intensive in-person examinations.
While securities law experts praise the SEC’s efforts in Houston as greatly needed and long overdue, they say it falls short of what is actually needed: the reopening of an SEC branch office in the largest city in the country where the agency does not have a permanent presence.
But SEC officials say that budget cuts make next week’s efforts the best that they can do at this point.
“We don’t want registrants in Houston to think of the SEC as just an uninvited guest who rolls into town every once in a while for an unannounced examination,” says Marshall Gandy, deputy director of the SEC’s Fort Worth Regional Office.
“These meetings reinforce the regulatory footprint of the Fort Worth office in our sister city to the south,” Gandy says. “These exams next week will be narrowly focused and will take just one day. Normal examinations can take several days or even a couple weeks.”
Houston is home to more than 260 broker-dealer and investment advising operations with about $300 billion of assets under management. In addition, there are an estimated 2,500 broker-dealer branch offices in Harris County.
Scores of Houston-based private equity firms and hedge funds have been added to the SEC’s registrants during the past two years as the result of the implementation of the Dodd Frank law.
But the SEC has examined the books of less than 10 percent of Houston area broker-dealers and investment advisors during the past two years and some investment advisors have not been inspected for more than a dozen years.
“Financial advisors in Houston have been left alone by the SEC for many years, ever since the Allen Stanford scandal really, and the investment advising community here has gotten complacent about compliance,” says Houston securities lawyer Charles Parker, a partner at Yetter Coleman.
As part of the SEC’s weeklong effort, agency leaders are holding open meetings Tuesday with corporate compliance officers, general counsels and risk managers of financial advising institutions at the Federal Reserve Bank’s Houston branch.
More than 115 investment advisors and broker-dealers have registered for the program and will be able to ask questions and raise concerns with senior ranking SEC officials, with lunch between sessions.
Gandy says the educational is necessary because an increasing number of broker-dealers are shifting their business model to become investment advisors because the fees are more lucrative in managing assets than transaction fees generated by just buying and selling stocks and bonds.
“It’s an opportunity to sit down, break bread and help them understand the issues we face as regulators and to hear their concerns,” says Gandy. “We are trying to reach out to new registrants, such as private equity firms and hedge funds, who have been previously untouched by our agency.”
Securities experts say the dialogue is needed because financial advisors believe they are receiving mixed signals from the SEC.
“Marshall Gandy is saying Kumbaya and that the SEC just wants more openness, but SEC Chairwoman [Mary Jo] White is out there saying they are going to start prosecuting everything more aggressively,” says Houston-based corporate compliance consultant Linda Shirkey, who advises investment advisors, including a few that are the targets of SEC examinations next week.
Shirkey, who supports the SEC’s outreach efforts in Houston, say that the financial firms facing the upcoming SEC examinations should not forget the reasons why the federal agency is conducting the reviews.
“The number one thing the SEC is looking for is fraud – are these advisors stealing their clients’ money?” she says. “The number two thing is, are they doing what they say they are doing in their marketing materials?”
“Advisors should not forget that these examiners are essentially carrying guns,” says Shirkey. “All that being said, this is a real opportunity for the SEC to hear real issues that our clients face, including the fact that rules that are written to govern deals involving securities are being applied to people who buy oil wells.”
While the SEC’s initiative next week will help regulated entities, including private equity firms and hedge funds, better understand what is expected of them, securities law expert Kenneth Held says that opening an SEC office in Houston would be much more effective.
David Woodcock, the director of the SEC’s Fort Worth Regional Office, which oversees all examinations and securities enforcement actions in Texas and three other states, says there is “very little likelihood” of the SEC opening a Houston office. The SEC had an office in Houston for decades, but closed it in 1990 amid a sexual harassment scandal.
“Would it be optimal for us to have a Houston office? Yes,” says Woodcock. “Is it financially feasible at this time? No.
“But I think we do a pretty good job of covering Houston without having a Houston office,” he says.
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