Adviser Regulatory & Compliance News

SEC Compliance Outreach Seminar in April

February 14, 2018

The SEC recently announced its 2018 outreach program national seminar for investment companies and investment advisers. The event is intended to help CCOs and other senior personnel at investment companies and investment advisory firms to enhance their compliance programs for the protection of investors. We've been to these in the past and they are invaluable for insights and guidance on the SEC's current regulatory and examination focus points. Please click the heading above to be linked to the announcement and registration pages.

SEC Offers Advisers Potential Amnesty for Self-Reporting of Fund Share Revenue Sharing Violations

February 13, 2018

On Feb. 12, the SEC announced a new initiative designed to encourage advisers to self-report inappropriate mutual fund share class revenue sharing arrangements. These arrangements generally arise when an adviser counsels clients to purchase higher commission or fee producing mutual fund share classes when less costly ones are available. Typically, there is a lapse in disclosure to the client underlying the sale, which can be viewed as fraudulent. According to the SEC press release, "Under the Share Class Selection Disclosure Initiative..., the [Enforcement] Division will agree not to recommend financial penalties against investment advisers who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues and promptly return money to harmed clients." Please click the heading for the full announcement.

Examination Priorities 2018 Released

February 8, 2018

The SEC has released its 2018 exam priorities. The key themes are a continuation of past trends, organized around five themes: 1. Matters of importance to retail investors, including seniors and those saving for retirement; 2. Compliance and risks in critical market infrastructure; 3. Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB); 4. Cybersecurity; and 5. Anti-Money laundering programs. See link embedded in the title of this news blurb to link to the full document.

SEC Investor Bulletin: Investment Adviser Sponsored Wrap Fee Programs

January 5, 2018

In early December the SEC published an Investor Bulletin updating and outlining the basics of wrap fee programs from an investor's perspective. The Bulletin is instructive on the SEC's current advice and views of such programs, which are growing rapidly. Notably at the end of the Bulletin the SEC references several key enforcement actions regarding such programs. Click the heading of this blurb for a link to the Bulletin.

Senate Confirms Peirce and Jackson as New Commissioners

December 22, 2017

The full Senate on confirmed by voice vote Hester Pierce, a Republican, and Robert Jackson, a Democrat, to be Commissioners of the SEC. The SEC now has its full allotment of commissioners. Mr. Jackson, a professor at Columbia University, and Ms. Peirce, a senior research fellow at George Mason University, will join the SEC after they are sworn in. Chairman Jay Clayton and Commissioners Michael Piwowar and Kara Stein are the other three Commissioners.

ICOs:  the Chairman Speaks

December 20, 2017

When the SEC Chairman speaks, folks listen. On Dec. 11, SEC Chair Clayton issued a lengthy "statement" on the current wave of initial coin offerings (ICOs) (see our Nov. 13 story on the basics), focusing on whether ICOs are treated as securities under the federal securities laws. He noted that, while not all tokens may be securities, simply calling a token something else does not bring an offering outside the SEC’s purview. “Key hallmarks” of tokens being securities include, in the SEC’s view, when an issuer emphasizes the possibility for ICO tokens to appreciate in value or encourages a secondary market for tokens. Clayton’s statement, along with recent SEC efforts to stop certain ICOs, indicate that increased enforcement activity in this area will continue. Click the heading to access the Statement.

F-Squared Related Action Brought Against an Investment Adviser

December 8, 2017

The SEC brought an enforcement action against Horter Investment Management, LLC that was related to a prior enforcement action against F-Squared. The SEC stated that the matter arises from misstatements made by registered investment adviser Horter to certain of its advisory clients concerning F-Squared Investments, Inc.’s materially inflated, and hypothetical and back-tested, performance track record for its AlphaSector strategy. The SEC noted that from January 2012 to October 1, 2013, in reliance on F-Squared’s false statements, Horter disseminated AlphaSector advertisements falsely stating: (a) assets had been invested in the AlphaSector strategy from April 2001 to September 2008; and (b) the track record had significantly outperformed the S&P 500 Index from April 2001 to September 2008. In fact, no F-Squared or other client assets had tracked the strategy from April 2001 through September 2008. In addition, the SEC found that F-Squared miscalculated the historical performance of AlphaSector from April 2001 to September 2008 by incorrectly implementing signals in advance of when such signals actually could have occurred. Because of this inaccurate compilation of historical data by F-Squared, Horter advertised the AlphaSector strategy by using hypothetical and back-tested historical performance that was inflated substantially over what performance would have been if F-Squared had applied the signals accurately. As a result, Horter violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder by publishing, circulating, and distributing advertisements that contained untrue statements of material fact.

SEC Commissioner Stein Speaks on Adviser Issues

December 7, 2017

SEC Commissioner Kara Stein spoke at the at Investment Company Institute’s 2017 Securities Law Developments Conference on a number of investment management issues including those impacting advisers. After speaking about ETFs and fund disclosure issues, she discussed the relationship between an investment adviser and its client. She spoke about the debate around standards of conduct, are conflicts of interest. She stated that conflicts can result from a number of sources and relationships, but some of the most significant are those resulting from compensation arrangements. She stated that this is true whether compensation is transactional or fee-based; each can incentivize certain behaviors that may not be in the best interests of a particular customer or client. She then stated that brokers and advisers should be required to mitigate these conflicts, and the standard of conduct by which they provide advice can help ensure that that happens. She posed the question of whether it is better to have multiple standards or one standard that fits all; the question ought to be whether the standard is appropriate for the conduct in which the person is engaging. She concluded by noting that disclosure has always been an important piece of this puzzle for the SEC and the securities laws, and there are clearly existing models on both the broker-dealer and investment adviser sides. She stated that we all know that providing disclosure, and ensuring that those disclosures are effective, are very different things; certain academic evidence notes that disclosure leads advisers to be even more biased by seeming to absolve them from paying attention to their advisees’ interests. In effect, disclosure has limited utility for both the investor and the professional providing it to the investor.

Private funds and managers:  Dealing with the Seemingly Crazy Broker-Dealer Requirements

December 2, 2017

For private fund managers, the tricks and traps of selling their funds can be maddening! Believe me, I've been there. All sorts of issues: is the fund exempt? Do placement agents and finders have to be registered as a broker or dealer or personnel of one? Etc.! Foley & Lardner recently published a short guide to navigating the broker-dealer rules. Click the headline to get the publication.

ALJ’s Officially Ratified and Appointed

December 2, 2017

Addressing a nettlesome issue, the SEC Commissioners formally ratified the appointment of the SEC's administrative law judges. The ratification attempts to defuse a constitutional issue re: the appointment of the judges and the validity of their actions some of which have been challenged in court. Click the link in the heading to read the SEC's press release.

DoL Rule Update:  the Final Say

November 29, 2017

Should be final...maybe! After many months of wrangling, by a notice published in the Federal Register on November 29, 2017, the Department of Labor extended from January 1, 2018, until July 1, 2019, the date for compliance with the full conditions in its new “investment advice” fiduciary definition and related exemptions, which became generally applicable on June 9 of this year. A great Eversheds summary and schedule for implementation is available by clicking the heading.

Global Securities Litigation Overview

November 23, 2017

One of the challenges money managers and investment advisers face is the need to protect their investors against the myriad of scams and frauds. Securities litigation has gone global, and Dechert recently prepared a nice summary of the state of global securities litigation. Click the title to access the link.

SEC Div. of Enforcement 2017 Annual Report

November 22, 2017

The SEC's Enforcement Division recently issued its Annual Report. Please use the link in the heading to access it directly. Bottom line: enforcement actions vs. advisers were down a bit from 2016. For the next year, the report notes that we can expect greater focus on cyber security and on protection of retail investors.

Flip a Coin:  ICO Basics

November 13, 2017

Cryptocurrencies, ICOs, coin offerings......they're all the buzz right now. Do you understand them? Do you realize that ICOs have raised more $$ this year than venture capital funds have? If your PMs or even clients haven't approached you yet on ICOs and cryptocurrencies, they will soon. Pepper Hamilton recently hosted an educational session, which they've posted on-line, both a podcast and slide deck. Check it out. Click the heading above for this link: A REVIEW OF INITIAL COIN OFFERINGS: AND WHAT THEY MEAN FOR THE INSTITUTIONAL INVESTOR COMMUNITY, 11/07/2017