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Your professionally curated research and reference resource fully integrating treatise and how-to guidance with underlying laws, rules, interpretations, and hundreds of sample documents.

New Marketing Rule Effective

The new marketing rule became effective on May 4. However, there is an 18 month transition period. So the drop dead compliance date is Nov. 4, 2022 Please refer to our collection of materials on the new rule in the adjoining News column for more information.

Adviser Regulatory & Compliance News

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SEC Brings Charges Against an Adviser for Failing to Address Conflicts of Interest

September 10, 2021

The SEC brought an enforcement action against Diastole Wealth Management, Inc. (Diastole) and Elizabeth Eden, its principal, for failing to adequately disclose conflicts of interest related to investments they managed for a private fund client. The SEC stated that Diastole and Eden invested certain of the private fund’s assets in a company that Eden’s son principally owned and operated. The fund’s limited partners were all also individual advisory clients, such that Diastole and Eden owed a fiduciary duty both to the fund and directly to the fund’s limited partners. However, the SEC stated that Diastole and Eden initially did not disclose that the fund had invested in Eden’s son’s company. Diastole and Eden also did not make adequate disclosures of material financial conflicts relating to the fund’s investments in Eden’s son’s company. For example, the SEC stated that Diastole and Eden did not disclose that fund investment amounts could and would be used to pay off loans Diastole had made to the son’s company. Diastole and Eden breached their fiduciary duties as investment advisers by making conflicted investments without disclosing material facts, and they also made certain misleading statements to investors in a pooled investment vehicle, all in violation of various provisions of the Advisers Act.

SEC Finds that Adviser Had Inadequate Supervisory Structure

September 8, 2021

The SEC brought an enforcement action against Horter Investment Management, LLC and Drew K. Horter for failing reasonably to supervise Kimm Hannan, an Investment Adviser Representative (IAR) with Horter Investment. The SEC found that from at least November 2015 through at least March 2017, Hannan misappropriated $728,001 from Horter Investment clients purportedly for his outside business activities, but instead he used those funds to gamble, pay personal expenses, and repay other investors. The SEC noted that Horter Investment’s overall supervisory structure was inadequate to reasonably supervise its IARs generally and Hannan specifically. According to the SEC, Horter Investment failed to establish supervisory policies and procedures and failed to follow those policies and procedures it had in place. Horter Investment also failed reasonably to follow up on red flags. Similarly, the SEC noted that Horter, who had overall supervisory responsibility for Horter Investment, failed to follow specific policies and procedures, failed reasonably to supervise Hannan, made open-ended delegations of supervisory responsibility without following up, and failed reasonably to follow up on red flags.

Are SPACS Investment Companies under the ‘40 Act?

September 1, 2021

Several lawsuits have been filed recently asserting that some of the structural underpinnings of SPACS effectively make them "investment companies" which should be regulated under the Investment Company Act of 1940. Of course, the SEC has reviewed dozens, if not hundreds of these structures and not asserted the issue. And many of the largest '40 Act law firms have banded together to push back against the notion. Attached is an article from Goodwin Procter discussing the issue (click the headline to this blurb).

Cybersecurity Troubles at Advisers Continue

August 31, 2021

Cybersecurity has been an on-going concern and problem for advisers for over a decade. Nonetheless, advisers still seem to get it wrong, often failing to have basics like policies and procedures in place. The SEC recently took action against three firms for their failures and lapses. Please click the headline to this blurb to access the SEC's press release and the underlying administrative actions.

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