Adviser Regulatory & Compliance News

SEC to Hold Event About Reg BI and Form CRS

October 24, 2020

The SEC will host a roundtable where Commission staff and FINRA will discuss initial observations on Regulation Best Interest and Form CRS implementation. The event will be webcast to the public. No registration or pre-registration is required.

SEC Relaxes Auditor Independence Rules

October 16, 2020

The SEC amended auditor independence requirements in Rule 2-01 of Regulation S-X. The amendments relax the rules requiring auditor independence. According to the SEC, the rules were amended to focus on relationships and services that are more likely to jeopardize the objectivity and impartiality of auditors.

Fund of Funds Rule Adopted

October 7, 2020

The SEC adopted Rule 12d1-4 under the Investment Company Act and several related amendments that will streamline how fund of funds arrangements are regulated. The modified restrictions are designed to prevent fund of funds arrangements that allow the acquiring fund to control the assets of the acquired fund and use those assets to enrich the acquiring fund at the expense of acquired fund shareholders.

Index Provider Personnel Charged with Insider Trading

September 21, 2020

The SEC brought an enforcement action against Yinghang “James” Yang, a senior index manager at a globally recognized index provider, and his friend Yuanbiao Chen, a manager at a sushi restaurant, with perpetrating an insider-trading scheme that generated more than $900,000 in illegal profits. The SEC alleges that between June and October of 2019, Yang and Chen repeatedly purchased call or put options of publicly traded companies hours before public announcements that those companies would be added to or removed from a popular stock market index that Yang helped his employer manage. When the options increased in value after the announcements, Yang and Chen allegedly liquidated their options positions for a substantial profit. The SEC stated that Yang and Chen conducted all of the illegal trading in Chen’s brokerage account, which allowed Yang to conceal his trading from his employer.

OCIE Risk Alert for RIAs and Brokers re:  Covid-19 Issues

August 13, 2020

On August 12, 2020, OCIE published a Risk Alert reviewing some key issue areas that they have observed re: the operations and risks of investment advisers and brokers. OCIE’s observations and recommendations fall broadly into the following six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information. Please click the headline to this summary to access the Risk Alert.

SEC Charges Mutual Fund/ETF Adviser with Improper Order Flow Arrangement

August 5, 2020

The SEC charged registered investment advisers WBI Investments Inc. and Millington Securities Inc. for making material misrepresentations to clients about compensation Millington received in an institutional payment for order flow arrangement for routing client orders to certain brokerage firms for execution. According to the SEC, WBI and Millington served as advisers to a series of mutual funds and a series of exchange-traded funds, among other clients. The order finds that Millington, which also served as WBI’s primary introducing broker, agreed to route WBI’s client orders to certain brokerage firms that agreed to pay Millington amounts they characterized as “payments for order flow.” The SEC found that the payments to Millington were $0.0125 to $0.0150 per share. The SEC further found that, in general and over time, the brokerage firms executing WBI’s client trades adjusted the execution prices by $0.02 to $0.03 per share higher for client buy orders and lower for client sell orders. According to the SEC, Millington and the brokerage firms mutually understood that the adjusted execution prices allowed the brokerage firms to recoup their payments to Millington and generate profits. The SEC noted, however, that on at least three occasions, WBI and Millington falsely assured the boards of the mutual funds and the ETFs that these institutional payment for order flow arrangements did not adversely affect the funds’ execution prices. More information can be accessed by clicking the headline to this summary.

SEC Proposes to Revamp Mutual Fund and ETF Shareholder Reports

August 4, 2020

The SEC proposed significant modifications to the mutual fund and exchange-traded fund disclosure framework. The stated goal of the proposed disclosure framework is to feature concise and visually engaging shareholder reports that would highlight information that is particularly important for retail investors to assess and monitor their fund investments. Specifically, the proposal would: • require streamlined reports to shareholders that would include, among other things, fund expenses, performance, illustrations of holdings, and material fund changes; • significantly revise the content of these items to better align disclosures with developments in the markets and investor expectations; • encourage funds to use graphic or text features—such as tables, bullet lists, and question-and-answer formats—to promote effective communication; and • promote a layered and comprehensive disclosure framework by continuing to make available online certain information that is currently required in shareholder reports but may be less relevant to retail shareholders generally. The proposed framework additionally would provide an alternative approach to keeping investors informed about their ongoing fund investments. Instead of receiving both prospectus updates and shareholder reports, which today can be lengthy and complex, existing investors would receive the streamlined shareholder report. According to the SEC, this would provide investors with timely and concise information to effectively assess and monitor their fund investments. Information currently required in shareholder reports that is not included in the streamlined shareholder report would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC. More information can be accessed by clicking the headline to this summary.

Adviser Charged with Misallocating Trades

July 31, 2020

The SEC brought an enforcement action against Birinyi Associates, a SEC-registered investment adviser for allegedly allocating profitable day trades from at least June 2014 to June 2019 in a manner that was unfair to certain clients and inconsistent with the firm’s disclosures and internal policies. The SEC stated that Birinyi Associates had a small group of clients whose strategy was limited to day trading, for whom equity positions were to be sold by the end of each trading day per client directives, while for the vast majority of its clients, Birinyi Associates followed a buy-and-hold strategy and primarily purchased stock for longer- term investment. The day trade client accounts were not affiliated in any way with Birinyi Associates or with its present or former principals, directors, officers, employees or agents. The SEC found that Birinyi Associates made block trades in a master account and then allocated stock purchases and sales to individual client accounts. During the relevant period, the SEC stated that Birinyi Associates occasionally executed a day trade in the master account and allocated the purchase and sale to a day trade client, rather than allocating the purchase to a buy and hold client’s account as originally intended. According to the SEC, the day trades allocated to the day trade clients were almost always profitable but the profits were small, averaging 0.30% of the purchase price. As a result, the SEC found that the day trade clients received risk-free day trades with small profits while the buy and hold clients effectively bore all market risk for the day trade clients. As a result, the SEC found that Birinyi Associates willfully violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon any client. More information can be accessed by clicking the headline to this summary.

SEC Creates Events and Emerging Risks Examination Team

July 28, 2020

The SEC launched the Event and Emerging Risks Examination Team (EERT) in the Office of Compliance Inspections and Examinations (OCIE). OCIE is responsible for conducting examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, and transfer agents, among others. EERT is designed to proactively engage with financial firms about emerging threats and current market events and quickly mobilize to provide expertise and resources to the SEC's regional offices when critical matters arise. EERT will focus on implementing OCIE exam priorities, including those identified in OCIE's annual examination priorities publication. It is hoped that EERT will help ensure, through examinations and other firm engagement and monitoring activities, that firms are better prepared to address exigent threats, incidents, and emerging risks. EERT will also work with OCIE staff to provide expertise and support in response to significant market events that could have a systemic impact or that place investor assets at risk, such as exchange outages, liquidity events, and cyber-security or operational resiliency concerns. More information can be accessed by clicking the headline to this summary.

Proxy Voting Rules Updated and Adviser Guidance Issued

July 24, 2020

On July 22, 2020 the SEC adopted amendments to its rules that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. This has been an area of concern and confusion the past few years. The amendments are intended to ensure that clients of proxy voting advice businesses receive more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice. The changes affect broad portions of Rules 14a-1, -2 and -9 under the Securities Exchange Act of 1934, with a focus on what constitutes "solicitation" under Sec. 14(a) of the Exchange Act. The amendments will be effective in about two months with full implementation for proxy voting advisers by Dec. 1, 2020. Investment advisers simultaneously received guidance updating last year's guidance (See, "Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers," Release Nos. IA-5325; IC-33605, Aug. 21, 2019). The updates focus on the impact of the changes made by the rule amendments. More information can be accessed by clicking the headline to this summary.

Adviser Fails to Have Rule 144A Procedures

July 16, 2020

The SEC brought an enforcement action against First Western Capital Management Company for failing to have Rule 144A compliance procedures. The SEC stated that from October 2010 through July 2017, First Western purchased for advisory clients securities that were sold in reliance on Rule 144A under the Securities Act of 1933 without having adequate compliance policies and procedures and without providing investment adviser representatives (IARs) training and supervision of Rule 144A securities. As a result, over a seven-year period, the SEC stated that certain IARs purchased for 81 First Western advisory clients a gross total of over $666 million worth of securities sold in reliance on Rule 144A when the clients were not qualified institutional buyers in a Rule 144A transaction. The SEC found that First Western willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require a registered investment adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder by the adviser and its supervised persons. In addition, the SEC noted that under Section 203(e)(6) of the Advisers Act, investment advisers are responsible for supervising, with a view to preventing violations of the federal securities laws, persons subject to their supervision. According to the SEC, First Western was responsible for supervising its IARs in making investments on behalf of advisory clients. FWCM failed to establish policies and procedures which would reasonably be expected to prevent and detect such violations. The SEC ruled that First Western failed reasonably to supervise within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing its IARs’ violations of Section 17(a)(3) of the Securities Act. In addition, the SEC found that First Western violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder by the adviser and its supervised persons. In addition, it ruled that First Western failed to reasonably supervise its IARs, within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing certain of the IARs’ violations of the federal securities laws. More information can be accessed by clicking the headline to this summary.

Form 13F Amendments Proposed

July 14, 2020

On July 10, 2020, the SEC released a proposal to amend Form 13F and Rule 13f-1, under the Securities Act of 1934, seeking to increase the reporting threshold for institutional investment managers and to require filers to provide additional information than previously. These proposed changes reflect the continuing evolution and growth of equity markets and institutional investment advisers since the Rule’s original implementation in 1978. To wit, as noted in the proposing release, "The Commission is proposing to: • Amend rule 13f-1 and Form 13F to raise the reporting threshold from $100 million to $3.5 billion to account for the changes in the size and structure of the U.S. equities market since 1975; and • Eliminate the omission threshold for individual securities on Form 13F." The Release also describes certain additional information that filing advisers will need to provide. Please click the headline to this summary to access the proposal.

It’s Back!  The DOL Rule, That’s What!

July 13, 2020

Yes folks the Department of Labor has proposed a new version of the DOL Rule....well, actually it proposed a series of actions to address the long history of attempts to regulate ERISA related investment advice. Please refer to the attached article for a summary and list of reference materials: just click the headline to this blurb to access the article.

Risk Alert:  Cybersecurity—-Ransomware Alert

July 13, 2020

OCIE released a new Risk Alert on July 10, 2020 concerning increased attempts to access and then ransom access to the computer networks of SEC registrants, including advisers and brokers. Basically, bad actors are using sophisticated phishing attempts to gain access to registrants' systems and then blocking access to the systems until a ransom is paid. The Alert refers readers to the Department of Homeland Security Cybersecurity and Infrastructure Security Agency's (CISA) series of cybersecurity alerts and provides suggestions on best practices for addressing the threats. Please click on the headline to this summary to access the Alert.

New Update to Form CRS FAQs

July 2, 2020

In early July, the SEC's staff added additional information to the FAQs for Form CRS to clarify that a broker-financial adviser must deliver an additional Form CRS (i) for its broker-dealer if it is not affiliated with its investment adviser; (ii) when converting an advisory account to a brokerage account; and (iii) when offering a new type of service that relates to a customer’s investment options. The additional FAQs provide additional information on wrap programs, prospective customers, and broker-adviser record keeping. Finally, the Staff reminds advisers and brokers of the disclosure focus of Form CRS, noting that it “is designed to serve as disclosure, rather than marketing material....” Please click on the headline to this summary to access the FAQs.

SEC Settles Lucia Action

June 26, 2020

In mid June, the SEC settled its enforcement action against Raymond Lucia, Sr. and his former investment advisory firm. The firm, which is no longer registered with the SEC, was not sanctioned. However, Mr. Lucia was fined $25,000 and effectively barred from the industry with a right to apply for reentry in the future. The settlement is notable is that it quietly ended a long fought legal battle that resulted in the US Supreme Court ruling in the case of Lucia v. SEC that the SEC’s Administrative Law Judges (ALJ) were appointed unconstitutionally. After the Supreme Court remanded the case back to the SEC, a new ALJ judge rejected Lucia’s claims that the case was barred by the statute of limitations. The judge also concluded that the original SEC order remained effective since the Supreme Court had not invalidated the order but instead directed that Lucia be provided with the opportunity for a new hearing before a constitutionally appointed ALJ, which the new judge was. While Mr. Lucia's action is settled, the legacy of ALJ constitutionality issues is its legacy. Please click the headline to this summary to access the SEC press release and the underlying settlement release.

Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds

June 24, 2020

On June 23, 2020, OCIE issued a Risk Alert which provides an overview of certain compliance issues it has observed in examinations of registered investment advisers that manage private equity funds or hedge funds (collectively, “private fund advisers”). The Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also to provide investors with information concerning private fund adviser deficiencies. Deficiencies fall into three categories as detailed in the Risk Alert: Conflicts of interest; Fees and expenses; and Codes of Ethics. Each of these areas have proven nettlesome to private fund advisers and been the source of numerous deficiency letters and some enforcement actions. The complete Risk Alert is available by clicking on the headline to this summary.

Is ESG Investing OK under ERISA?

June 24, 2020

That's the question the Dept. of Labor is trying to address in a newly proposed rule. ESG has been a hot investment mandate for many investors including pension funds. Many believe it is appropriate to balance greater social goods and needs with investment needs and performance. The DOL proposal reminds pension fund managers and plan providers that in light of their fiduciary duties it may be illegal under ERISA to sacrifice performance or assume additional risk through ESG investments. As noted in the press release announcing the proposal, "The proposal is designed, in part, to make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives." The press release can be accessed by clicking the headline to this summary. The full proposal is forthcoming.

LIBOR Transition Readiness—OCIE Exam Alert

June 19, 2020

LIBOR was for many years the go-to reference interest index rate or benchmark for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. After it was found that various banks conspired to manipulate the LIBOR rate to their advantage, the industry and regulators agreed to transition away from LIBOR. That transition is set to start in 2021 and will be completed after that. The SEC's OCIE has determined that LIBOR transition is a key risk for most financial institutions including advisers and brokers. In a June 18, 2020 Risk Alert they alerted the industry that they will be conducting targeted exams to test for LIBOR readiness. The Alert contains a sample document request that is very helpful to understand the nature of what will be examined and what is entailed to prepare for LIBOR transition. Please click the headline to this summary to access the Risk Alert.

Covid-19 Effects and Impacts:  Check Agreement Terms

June 8, 2020

Among the key effects of Covid-19 is the activation and use of the force majeure clauses in various contracts, most notably lease agreements. We have heard of some advisers down-sizing their physical offices and using force majeure clauses to renegotiate or break their leases. This is not without risk and in some circumstances may lead to litigation. Another impact is on partnership and fund agreements as highlighted in a recent article published by Sullivan & Worcester attorneys. They suggest that the pandemic may impact such terms as investment limitations, valuation and liquidation. The article can be found by clicking the link in the headline to this blurb.

Keep an Eye on Cybersecurity

May 22, 2020

We generally don't publish/republish links and articles from the popular press. However, the Wall St. Journal recently ran an article which provides a stark reminder that cybersecurity vigilance is still vital in these difficult times, perhaps even more so. In short, they noted that hacking and cyber attacks continue unabated. In addition, insurers are looking harder and harder at IA's and other businesses's cyber risks when issuing policies. Please click the headline to this blurb to be linked to the article.

Disclosure in the Time of Covid-19

May 9, 2020

The SEC has released some guidance to various types of registrants regarding their disclosure requirements in this pandemic. A recent article by the VedderPrice law firm provides sound overall guidance. Specifically, the article examines SEC enforcement practices in light of crisis events, and notes that "On April 2, 2020, SEC Chairman Jay Clayton released a statement that noted, in relevant part, that he 'expect[s] the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.' This does not mean that litigation and investigations won’t be commenced in the first place. It does, however, suggest that registrants who are able to demonstrate that their actions during this challenging time were risk appropriate and disclosure-consistent may be in the best position to argue that investor losses were the result of a truly novel pandemic, as opposed to registrant wrongdoing." Our thought is that this applies to advisers as much as to public companies and funds. Please click the heading to this summary to access the VedderPrice article.

Form CRS Sample

May 8, 2020

In the spring of 2020, registrants are beginning to file Form CRS, Client Relationship Summaries. Attached is one of the first we've been able to retrieve. However, no assessment of quality or compliance is made. Please click the headline to this summary to connect to the site.

SEC Coronavirus (COVID-19) Response—Update May 5, 2020

May 6, 2020

On May 5, 2020 the SEC published an update and summary of the actions taken to date to address the challenges of the Covid-19 pandemic. Notably the SEC stated that it is focused on " >maintaining the continuity of Commission operations; >monitoring market functions and system risks; >providing prompt, targeted regulatory relief and guidance to issuers, investment advisers and other registrants impacted by COVID-19 to facilitate continuing operations, including in connection with the execution of their business continuity plans (BCPs); and >maintaining our enforcement and investor protection efforts, particularly with regard to the protection of our critical market systems and our most vulnerable investors." Please click the headline to this summary to access the SEC's announcement and its summary of actions taken.

Fair Valuation Rule Proposed

April 24, 2020

In late April, the SEC finally proposed a rule permitting fund boards, or alternatively Valuation Committees of the boards, to delegate fair valuation of securities to fund advisers. Proposed Rule 2a-5 under the '40 Act would replace existing guidance. Key proposed provisions include: 1. Fund board or valuation committee may formally delegate fair value determinations to the fund's investment adviser 2. The investment adviser would be subject to board oversight and must make detail reporting, recordkeeping and meet other requirements to facilitate oversight by the board 3. Rule will prescribe detailed requirements for determining fair values 4. Rule will define the criteria for what makes a market quotation "readily available," which has been an on-going problem as it is currently undefined by the '40 Act and rules thereunder Comments on the proposal are due July 21, 2020. The link to the proposed rule is imbedded in the headline to this summary. Please click the headline.

Division of Investment Management Coronavirus (COVID-19) Response FAQs

April 15, 2020

The SEC has published a set of FAQs related to advisers' and funds' obligations with respect to Covid-19. We surmise that the list of FAQs will be supplemented or updated from time to time and we will publish such updates as needed. The current FAQs address a variety of issues, including: how to work with and deal with the SEC during the pandemic; how to work around the Brochure Rule delivery requirements and filing requirements as related to Forms ADV and PF; the role of utilization of Covid-19 relief provisions as relates to business continuity plans; disclosure requirements for advisers choosing to use the PPP, Paycheck Protection Program; and additional Brochure Rule and disclosure issues related to wrap-fee programs. The complete FAQ can be accessed by clicking the heading to this summary.

SEC Exams Related to Implementation of Reg. Best Interest

April 10, 2020

In early April, the SEC's Office of Compliance Inspections and Examinations (“OCIE”) released another in its series of Risk Alerts, in this case providing insight on OCIE's plans to examine and assess broker-dealers’ implementation and operational effectiveness of Regulation Best Interest. For dual hatted advisers/brokers this is an important issue to focus on. As noted in the Alert, ..."initial examinations, which will likely occur during the first year after the compliance date, are designed primarily to evaluate whether firms have established policies and procedures reasonably designed to achieve compliance with Regulation Best Interest. OCIE will also evaluate whether firms have made reasonable progress in implementing those policies and procedures as necessary or appropriate, including making such modifications as may be necessary or appropriate, in light of information gained from the implementation process and other facts and circumstances." Please click the headline to this summary to access the full Risk Alert.

Custody Rule FAQs in the Time of Covid-19:  Surprise Audits and Physical Certificates

April 10, 2020

Covid-19 continues to present a variety of peculiar circumstances for both advisers and regulators. To wit, in late March and early April, the SEC released updated FAQs relating to the custody rule, compliance with the surprise audit requirement and dealing with physical certificates of certain privately offered securities when the custodian isn't accepting physical securities. The article below extracts the updates which posted in the consolidated custody FAQ document a link to which is also provided below. Please click the heading to this summary to access the article below.

SEC Reaffirms June 30 Compliance Date for Reg Best Interest and Form CRS

April 3, 2020

Covid-19 will generally not relieve advisers from their obligations to comply with Regulation Best Interest (if applicable to them) and file Form CRS according to announcement released by the SEC on behalf of its Chairman Jay Clayton. Please click the heading to this summary to access the Announcement.

SEC Provides Funds and Advisers with Temporary Relief Related to Affiliated Purchases

March 31, 2020

Covid-19 created enormous stress and strains on the securities markets, including bond and fixed income markets. In a series of orders and no-action letters, the SEC provided temporary relief to advisers and affiliated money market and mutual funds permitting them to engage in affiliated transactions of fixed-income securities. Generally, such transactions are tightly proscribed or prohibited. However, under the exigent circumstances of the pandemic-induced market strains, the SEC sanctioned adviser purchases of debt securities from funds. Please click the heading to access the article below which provides links to the relevant orders and no-action letters.

SEC Still Examining and Enforcing

March 25, 2020

Despite the challenges Covid-19 is providing to the investment community and society at large, the SEC and OCIE reaffirmed their operational status and plans to continue examinations and the work of the SEC. However, it was noted in the Announcement dated March 23, 2020 that more of such work will be performed remotely without office visits. Please click the headline to this summary to access the Announcement.

Vigilance is vital sayeth the SEC folks

March 24, 2020

A reminder that even under the current hard times, compliance and regulatory vigilance is vital came from the SEC on March 23. In a public statement from the SEC's Co-Directors of Enforcement, the staff emphasized "the importance of maintaining market integrity and following corporate controls and procedures." They illustrated their point with a discussion of insider trading, noting that, "...broker-dealers, investment advisers, and other registrants must comply with policies and procedures that are designed to prevent the misuse of material nonpublic information." Please use the link in the headline to this blurb to access the Public Statement.

SEC Provides Relief to Investment Advisers in Reaction to Coronavirus

March 13, 2020

The SEC responded to the outbreak of coronavirus disease 2019 (COVID-19) with respect to investment advisers by issuing an order (Order) that states for the time period specified below that: (1) a registered investment adviser is exempt from the requirements: (a) under Rule 204-1 of the Advisers Act to file an amendment to Form ADV; and (b) under Rule 204-3(b)(2) and (b)(4) related to the delivery of Form ADV Part 2 (or a summary of material changes) to existing clients, where the conditions below are satisfied; (2) an exempt reporting adviser is exempt from the requirements under Rule 204-4 under the Advisers Act to file reports on Form ADV, where the conditions below are satisfied; and (3) a registered investment adviser that is required by Section 204(b) of and Rule 204(b)-1 under the Advisers Act to file Form PF is exempt from those requirements, where the conditions set forth in the Order are satisfied.

Massachusetts Securities Division Expands Jurisdiction to Non-Securities Activities

March 2, 2020

In a somewhat unusual move, the Mass. Securities Division recently asserted its jurisdiction over an individual, who was not registered as a broker or investment adviser, and who's business sought to have investors sell their securities to buy insurance products. This move by the Mass. regulator is consistent with the state's increasingly assertive actions regarding a state fiduciary standard. The law firm Mintz Levin in Boston published an fine memo detailing the case, which can be accessed by clicking the heading to this blurb.

Adviser Charged with Improperly Registering as an SEC Adviser

February 27, 2020

The SEC brought an enforcement action against William M. Malloy, III and two investment adviser firms under his control, MWM 1835, LLC and Fortress Investment Management, LLC for, among other things improperly registering with the SEC as investment advisers when such entities were not eligible to register as such.

SEC Brings Case Against Adviser for Failing to Disclose Conflict of Interest

February 27, 2020

The SEC brought an enforcement action against Sica Wealth Management, LLC (SWM), a registered investment adviser, and its principal Jeffrey C. Sica for not adequately disclosing certain conflicts of interest to advisory clients. The SEC found that from October 2013 to March 2015, on Sica’s recommendation, approximately 45 SWM advisory clients invested a total of more than $30 million in securities issued by Aequitas Commercial Finance, LLC (ACF), one of numerous entities affiliated with the Aequitas enterprise, the ultimate parent of which is Aequitas Management, LLC.

Adviser Charged with Engaging in Unlawful Client Cross Trade Transactions

February 24, 2020

The SEC brought an enforcement action against Lone Star Value Management LLC (Lone Star) and its founder, Jeffrey Eberwein, for improperly effecting 19 interfund cross trades in 2014 between two funds Lone Star managed, and, in June 2015, while registered with the SEC as an investment adviser, and improperly effecting 2 trades between a fund Lone Star managed and a separately managed account (SMA) for which Lone Star served as an investment adviser. The SEC stated that these 21 trades were made on a principal basis because Eberwein’s ownership stake in the Lone Star fund involved in each of these trades was more than 35% during the relevant time period. The SEC found that Lone Star failed to disclose in writing that it engaged in these principal transactions and did not obtain client consent before the completion of each of the transactions as required under Section 206(3) of the Advisers Act.

SEC Updates Form CRS FAQ

February 13, 2020

The SEC updated its frequently asked questions guidance about Form CRS. On June 5, 2019, the SEC adopted a new rule, Regulation Best Interest or Regulation BI that will require all SEC-registered investment advisers (as well as broker-dealers) with retail clients to create a new Form ADV, Part 3, also known as a Client Relationship Summary (Form CRS). SEC-registered investment advisors who service retail investors will be required to develop and deliver to clients Form CRS beginning in 2020.

SEC Updates Form CRS FAQ

February 13, 2020

The SEC updated its frequently asked questions guidance about Form CRS. On June 5, 2019, the SEC adopted a new rule, Regulation Best Interest or Regulation BI that will require all SEC-registered investment advisers (as well as broker-dealers) with retail clients to create a new Form ADV, Part 3, also known as a Client Relationship Summary (Form CRS). SEC-registered investment advisors who service retail investors will be required to develop and deliver to clients Form CRS beginning in 2020.

SEC Whistleblower Practice Guide

February 5, 2020

The Washington, DC law firm, Katz, Marshall & Banks, recently published its 2020 edition of The SEC Whistleblower Practice Guide. The Guide which is a nice compilation of whistleblower standards and practices. While the Guide appears designed as recruitment tool for whistleblowers, advisers and other industry participants may find it useful as well as they design their whistleblower policies and procedures. Please click the heading to this blurb for a link to the Guide.

Adviser Fails to Implement Adequate Insider Trading Procedures

February 4, 2020

The SEC brought an enforcement action against Cannell Capital, LLC (CCL) finding that from 2014 through October 2019, for failing to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material nonpublic information. Specifically, the SEC found that CCL failed to follow its written policies and procedures by not maintaining a list of securities that members, officers, and employees and their family household members were prohibited from trading after the firm came into possession of potential material nonpublic information.

OCIE Publishes Cybersecurity and Resiliency Observations

January 31, 2020

In late January 2020, OCIE published a 13 page booklet with its observations and commentary on cybersecurity. The observations cover a variety of areas, including Governance and Risk Management; Access Rights and Controls; Data Loss Prevention; Mobile Security; Incident Response and Resiliency; Vendor Management; and Training and Awareness. The observations cover a broad variety of securities markets participants and SEC registrants, including investment advisers. Please refer to the link in the heading of this blurb to connect with the publication.

Investment Mgmt Regulation Textbook—Publisher’s Special ETF Conference Discount

January 28, 2020

We're pleased to announce that Karl is co-author of the first new textbook about the '40 Acts in over 30 years! "Investment Management Regulation: An Introduction to Principles and Practices." Available now at cap-press.com. Just click on the headline to this blurb above to be taken to the publisher's site. As Members or ETF Conference attendees you are entitled to a 25% discount and free shipping at the Carolina Academic Press's site. Use code: FRANCO2020. Limited time only.

SEC Proposes to Modernize Regulation of the Use of Derivatives by Registered Funds and BDCs

January 17, 2020

In late Nov. 2019, the SEC again addressed the complicated subject of the use of derivatives by registered fund and BDCs, including mutual funds,ETFs and closed-end funds. The newly proposed rules supersede those proposed in 2015. The focus of the proposal is proposed Rule 18f-4 under the '40 Act, which would set forth the conditions under which open-end funds (including ETFs but excluding money market funds), closed-end funds and BDCs could enter into derivatives transactions. In addition, the proposal includes new rules under the Exchange Act and Advisers Act that governing sales practices for leveraged/inverse funds. The sales and use of such funds by brokers and advisers has been the source of some controversy in recent years. Finally, the proposal also includes new reporting requirements related to the use of derivatives by registered funds and BDCs. The attached article includes links to the SEC's proposal and to articles and analyses prepared by law firms. Updated by Karl Hartmann 01-17-2020

You Too May Be an “Accredited Investor!”

January 10, 2020

You don't have to be rich or super smart to be an "accredited investor" under the proposal made by the SEC recently. Traditionally, certain types of private investments such as private funds have been available only to investors who meet the standards for being an accredited investor, meaning that they met certain standards regarding wealth and sophistication. Under new rules proposed Dec. 18, 2019, the definition would be expanded to include more qualitative standards such as education/certification (e.g., Series 7 brokers) and employment (e.g., by a hedge fund). In addition, the SEC is seeking comments on whether clients of a registered investment adviser or broker-dealer but do not otherwise meet the financial thresholds should be considered accredited. The attached article contains a variety of analyses and reference materials.

CFTC Simplifies CPO and CTA Registration/Exemption

January 10, 2020

In late November, the Commodity Futures Trading Commission ( “CFTC”) finalized two new rule amendments which simplify and clarify the commodities registration/exemptions for investment advisers, investment companies and business development companies ("BDCs"). Historically, funds have filed notices under CFTC Rule 4.5 to claim exemption from registration as commodity pool operators ("CPOs"). In short, the new rules rationalize the approach by having fund advisers claim such exemptions and add a similar provision for BDC advisers. Additional provisions also codify a variety of no-action positions by adopting exemptions from CPO and CTA registration for qualifying “family offices.” Please refer to the attached article for links to the CFTC releases and additional reference materials. Updated Jan. 10, 2019 by Karl Hartmann

SEC Exam Priorities for 2020

January 9, 2020

The annual exam priorities were announced by the SEC's Office of Compliance Inspections and Examinations (OCIE) on Jan. 7. In summary, regarding investment advisers and investment companies, OCIE will continue its risk-based examinations as it has in recent years. In particular, examinations of RIAs will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds. Investment company examinations will focus on mutual funds and ETFs, the activities of their RIAs, and the oversight practices of their boards of directors. Please click on the headline to this blurb to be linked to the SEC's Priorities document.

NASAA Announces Top Investor Threats for 2020

December 31, 2019

Just in time for the holidays, NASAA revealed its top threats list. Based on its survey of members---being the state and provincial securities regulators throughout the United States, Canada and Mexico---the list was a short five threats long: 1. Promissory notes; 2. Ponzi schemes; 3. Real estate investments; 4. Cryptocurrency-related investments (e.g., tokens, ICOs, etc.); and 5. Social media/internet-based investment schemes (e.g., Crowdfunding among others). NASAA's President advises, “Remember, if it sounds too good to be true, it usually is.” Sound advice indeed as we head into the New Year and hopefully Roaring '20s! Please click the headline to be linked to the NASAA release.

New ETF Rule Adopted, Rule 6c-11

December 21, 2019

In Sept. 2019, the SEC adopted a long-awaited rule to standardize and simply ETF formation and regulation. This rule will likely have an enormous impact on the shape and structure of the money management industry. Basically, Rule 6c-11 sets aside many of the exemptive orders that ETFs have had to obtain in order to offer their shares to the public. The Rule replaces such exemptive orders with a standardized set of regulations applicable to most ETFs. In the attached article (click on the headline to this blurb) we will collect a variety of materials for your review and use. Last updated: Dec. 21, 2019 by Karl Hartmann

Recidivist Investment Adviser Charged with Defrauding Retirees

December 19, 2019

The SEC charged Sacramento, California-based investment adviser firm Springer Investment Management, Inc. and owner Keith Springer with defrauding hundreds of retail clients, most of them in or close to retirement. The SEC' alleged that Springer and hfs firm received millions of dollars in undisclosed compensation and other benefits for recommending certain investment products while claiming that they did not have any conflicts of interest. According to the SEC, many clients learned of Springer through his radio show, "Smart Money with Keith Springer," and Springer misled prospective clients into believing he was selected to host the show because of his industry expertise. In reality, SFA paid to broadcast the show. The SEC alleged that Springer went to great lengths to hide prior charges by the SEC and his disciplinary history with the New York Stock Exchange, hiring internet search suppression consultants and instructing employees not to provide the information to prospective clients.

Money management in Hong Kong

December 11, 2019

Being on the board of several Hong Kong based ETFs, Karl has a special interest in Hong Kong. We recently discovered an article which nicely spells out the regulatory environment for Hong Kong funds and advisers. It's a very thorough article covering the range of pooled funds from SMAs to retail funds. Please click the headline to be linked to the article.

SEC Issues FAQ on New Form CRS

December 6, 2019

The staff of the SEC’s Division of Investment Management and the Division of Trading and Markets have prepared a Frequently Asked Questions (FAQ) about Form CRS. The SEC stated that it expected to update from time to time its responses to additional questions.

Adviser Improperly Allocates Trades Resulting in Certain Clients Paying Lower Commissions than Other

November 22, 2019

The SEC brought an enforcement action against Channing Capital Management, LLC (“Channing”) because of its failure to adequately implement written policies and procedures governing the allocation of trading commission costs associated with aggregated (or block) securities trades on behalf of its institutional investor and pension fund clients. The SEC found that Channing’s written trade aggregation and allocation policies and procedures required it to allocate the transaction costs associated with block trades on a pro rata basis amongst all clients participating in the same block trade. It further noted that a separate written policy and procedure required Channing to follow the requirements and restrictions set forth in each client’s investment management agreement, including limitations placed on trading commissions. Certain of Channing’s institutional clients placed limitations on the amount they were willing to pay in commission rates for execution of their brokerage transactions. The SEC stated that Channing routinely conveyed those clients’ restrictions to executing brokers and requested that executing brokers apply lower commission rates for those clients while permitting them to participate in block trades with Channing’s other clients. This practice according to the SEC resulted in clients participating in the same block trade paying different commission rates. By failing to adequately implement its policies and procedures, the SEC concluded that Channing violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice

November 18, 2019

In recent years the use of proxy voting advice firms has come under scrutiny. In early Nov. 2019, a divided SEC proposed rule amendments to enhance the transparency of the voting advice being given by these firms and enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses may have. In addition, the proposal would provide an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice. The attached article (click the headline to this blurb) provides links to the SEC's materials as well as law firm memos and analyses.

Modernized Ad and Solicitation Rules Proposed

November 15, 2019

In early November 2019, the SEC proposed to modernize two rules under the Advisers Act which regulate advertising and solicitations. The advertising rule, Rule 206(4)-1, has been in use since 1961. The proposed changes shift the Rule's focus from standards setting to "principles based" regulation, meaning there's potentially more flexibility in administering ad requirements. If adopted the new ad rule would significantly change and update the regulatory landscape. The solicitation rule, Rule 206(4)-3, has been in use since 1979. The proposal would expand the rule to cover solicitation arrangements involving all forms of compensation, rather than only cash compensation, eliminate requirements duplicative of other rules, and tailor the required disclosures solicitors would provide to investors. The proposed rule would also refine the existing provisions regarding disciplinary events that would disqualify a person or entity from acting as a solicitor. The attached article provides links to the rule proposal (505 pages in length!!) and law firm analyses and memos.

Risk Alert:  Top Compliance Topics Observed in Examinations of Funds and Add’t'l Observations

November 11, 2019

In early Nov. 2019, the SEC's OCIE branch published a Risk Alert highlighting the most often cited deficiencies and weaknesses that the SEC staff has observed in recent examinations. The Alert also includes SEC staff observations from national examination initiatives focusing on money market funds and target date funds. Key points highlight: 1. Compliance programs often aren't tailored to the fund or clients' investment mandates 2. Policies and procedures aren't followed 3. Inadequate service provider oversight 4. Annual reviews aren't performed or don't address the adequacy of the funds' policies and procedures 5. Material gaps in disclosures to investors 6. Weaknesses in fund 15(c) advisory and distribution contract approval processes 7. Inadequacies in Code of Ethics adoption and implementation The full Risk Alert is available by clicking the heading to this blurb.

SEC Proposes to Revamp Investment Advisers Advertising Rules

November 4, 2019

The SEC proposed amendments under the Investment Advisers Act of 1940 to the rules that prohibit certain investment adviser advertisements and payments to solicitors, respectively. The proposed amendments to the solicitation rule update its coverage to reflect regulatory changes and the evolution of industry practices since the rule was adopted in 1979. The SEC is also proposing amendments to Form ADV that are designed to provide the SEC with additional information regarding advisers’ advertising practices. Finally, the SEC is proposing amendments under the Advisers Act to the books and records rule, to correspond to the proposed changes to the advertising and solicitation rules. We will publish more information on the proposal as it becomes available.

FAQs Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation

October 28, 2019

In mid-October the SEC's Div. of Investment Management posted a series of FAQs designed to address potential conflicts of interest arising from certain types of adviser compensation. Noting that "Compensation that an investment adviser, its affiliates or its associated persons receives in connection with the investments it recommends and related services it provides can result in the investment adviser having interests that conflict with those of its clients. Many investment advisers appear to have recognized these conflicts and responded through practices designed to address them, including through elimination, disclosure or a combination of disclosure and mitigation. However, SEC examinations staff have observed and enforcement cases have illustrated that, in some instances, investment advisers have not appropriately addressed these conflicts of interest." Noting that Rule 12b-1 payments and revenue sharing arrangements are among the more obvious potential conflict situations, the SEC also noted potential conflicts can arise from "an investment adviser’s direct or indirect receipt of service fees from its clearing broker-dealer, marketing-support payments from a mutual fund’s investment adviser, transaction fees, or receipt of payments from a mutual fund’s investment adviser to help defray the costs of educating and training its personnel regarding certain investment products." The FAQs then proceed to expand on these points. Please click on the heading to this summary to access the full SEC version of the FAQs.

Please Give Folks Accurate Performance Info, Says the SEC!

October 19, 2019

In early October 2019, the SEC published an Accounting and Disclosure Information notice, "ADI 2019-09 - Performance and Fee Issues." The notice summarizes recent findings by the DRAO, the Division of Investment Management’s Disclosure Review and Accounting Office, regarding general shortcomings in filings by advisers and funds with respect to performance and fee data. As noted by the SEC staff, "Key Takeaway: Verify the accuracy of your performance and fee disclosures prior to filing them with the Commission and providing them to investors." Please click the headline to this blurb to access the ADI.

Impact of Limitations on SEC Enforcement Powers

October 1, 2019

In 2017, we reported on a Supreme Court decision in the case of Kokesh v. SEC, which effectively limited disgorgement penalties for cases brought outside the five-year statute of limitations for civil penalties. An law firm article from earlier this year reported that the impact of the case has been almost $1 billion in foregone penalties and attempts by Congress to address some of the issues raised in the case. Please click the headline to link to the article.

Attorneys—Be Truthful About Clients’ Securities Offerings

September 26, 2019

File this one under: "Warning to Securities Lawyers!" In mid-September 2019, the SEC brought an action against a South Florida attorney for aiding and abetting a client's fraudulent offering and sale of securities. As part of its complaint, the SEC alleged that the attorney "knowingly falsified or omitted important facts and offered the opinion that [client's] notes likely were not securities." In addition, "According to the complaint, Atlas received a percentage of the commissions generated on the sale of 1 Global's notes, which totaled more than $600,000." So, not only did the attorney lie, he also got kick-backs from the fraudulent sale of $322 million worth of the notes. Please be sure to click the headline to this summary to access the SEC Litigation Release and its related complaint.

Caveat Emptor:  SEC’s Best Interest Fiduciary Initiatives Adopted [Updated]

September 20, 2019

It’s a matter of caveat emptor: buyer beware. After many months of consideration, investor testing/surveying, and circa 6,000 comment letters, the SEC acted in early June 2019 to enhance the protection of retail investors while not materially disrupting the existing investment industry business models and the ability of investors to choose among different types of providers such as advisers and brokers. The key measures adopted are as follows: • New Regulation BI (as in "Best Interest")…generally referred to as “Reg. BI;” • New Form CRS (i.e., "Customer Relationship Summary"); • Interpretive advice re: an investment adviser's fiduciary duties; and • An interpretation of the "solely incidental" aspect of the broker-dealer exclusion from the definition of an "investment adviser" under the Advisers Act. The new Reg. BI will go into effect in about a year (following formal publication of the new regulation). Many think that this will bring an end to the long journey and discussion regarding fiduciary duties of advisers and brokers. In reality, it really is a matter of caveat emptor both for the industry and retail investors. Much will be written in the coming months about the likely impact of the new measures. As a practical matter, advisers and brokers must review their policies and procedures (such as disclosure and customer on-boarding processes) to assure compliance in the future. PLEASE BE SURE TO CLICK THE HEADLINE TO THIS BLURB TO ACCESS AN EXTENSIVE RESOURCE COLLECTION ON THE NEW INITIATIVES. WE ARE ADDING TO THE REFERENCE LIST AS WE FIND MATERIALS.

Bloomberg:  End of Era: Passive Equity Funds Surpass Active in Epic Shift

September 12, 2019

We generally don't post news about markets and conditions. However, this is significant: the shift from active to passive management has been underway for many years, and it's accelerated this decade. According to the Bloomberg article, Morningstar data is showing that fund flows this past August tilted on balance to passive funds compared to actively managed funds. Of course, there's no knowing whether this will become a permanent trend, but it's noteworthy. Please click the headline to this blurb to be connected to the Bloomberg story.

SEC Publishes Compliance Guide for Form CRS Relationship Summary and Amendments to Form ADV

September 12, 2019

In early Sept. 2019, the SEC published a new web page designed as "A Small Entity Compliance Guide" relating to Form CRS and Form ADV compliance. The Guide provides a nicely curated set of materials and a Q&A format describing how to comply with the new requirements of Form CRS, the Client Relationship Summary adopted in June 2019 as well as related Form ADV changes. Please click the link in the headline of this article to access the original SEC document.

Investment Adviser Principal and Agency Cross Trading Compliance Issues Risk Alert

September 9, 2019

In early Sept. 2019, the SEC issued a Risk Alert by its OCIE division, providing an overview of the most common compliance issues identified by OCIE related to principal trading and agency cross transactions under Section 206(3) of the Advisers Act. These issues were identified in examinations of investment advisers over the past few years. Consistent with a series of enforcement actions for the most extreme violations, the key issues identified involve principal transactions and agency cross transactions when the adviser acts as a broker. The Risk Alert provides color and detail regarding the observed weaknesses and violations and "encourages advisers to review their written policies and procedures and the implementation of those policies and procedures to ensure that they are compliant with the principal trading and agency cross transaction provisions of the Advisers Act and the rules thereunder." Please click the headline to this article to access the complete, original Risk Alert.

Adviser Proxy Voting Guidance

September 4, 2019

In late August, the SEC published two forms of guidance regarding the proxy voting responsibilities of investment advisers. The guidance documents were not without controversy as they were adopted by a 3 to 2 vote of the Commissioners. As published, the guidance documents provide guidance and interpretations regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940 (the “Advisers Act”), and Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940 (the “Investment Company Act”), generally with respect to: (1) ensuring advisers are voting proxies in accordance with each client’s best interests; (2) advisers properly evaluate and oversee proxy advisory firms; and (3) structuring the client relationship to make clear the investment adviser’s proxy voting responsibilities. THE ACCOMPANYING ARTICLE PROVIDES ADDITIONAL INSIGHTS AND LINKS TO THE SEC DOCUMENTS AND A VARIETY OF HELPFUL LAW FIRM MEMOS. We'll be updating these as they become available.

Adviser Violates Fiduciary Duty to Clients

September 3, 2019

The SEC brought an enforcement action against Lefavi Wealth Management, Inc. (LWM) for violating its fiduciary duty to clients in connection with its recommendation and investment of client assets in non-traded real estate investment trusts, business development companies, and private placements (Alternative Investments). From June 2014 through December 2016, the SEC found that LWM recommended and invested certain advisory client assets in Alternative Investments at a share price that reflected a 7% commission. The SEC stated that LWM failed to disclose that it could have invested advisory client assets in the same Alternative Investment at a lower share price and that LWM did, in almost all instances, recommend and invest advisory client assets in Alternative Investments with higher share prices that included seven percent commissions. LWM also failed to disclose the conflict of interest associated with its and its investment adviser representatives’ (IARs) receipt of additional compensation for investing advisory client assets in Alternative Investments at a higher share price that included a commission. According to the SEC, LWM’s practice of recommending and investing advisory client assets in Alternative Investments with embedded commissions, rather than seeking for clients lower share prices for the exact same investments, was inconsistent with LWM’s duty to seek best execution for those transactions. LWM did not adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with Alternative Investments.

Adviser Violates Fiduciary Duty to Client

August 26, 2019

The SEC brought an enforcement action against Laurel Wealth Advisors, Inc. (LWA) for failing to supervise an investment adviser representative (IAR) associated with LWA engaging in undisclosed “cherry-picking,” a practice of fraudulently allocating profitable trades in an omnibus account to favored accounts. The SEC stated that LWA failed reasonably to supervise the IAR who engaged in cherry-picking and failed to implement policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. More specifically, LWA had a compliance procedure to prevent conflicts of interest that required IARs to pre-clear and obtain written approval before trading in their personal accounts, but LWA did not implement that procedure until January 2015. During the relevant time period, the SEC found that LWA’s Code of Ethics as disclosed in its Forms ADV stated that it had a pre-clearance procedure for IARs’ personal trading and that the firm required all transactions be carried out in a way that put its clients’ interests before its employees’ interests. These disclosures, according to the SEC, were false and misleading because LWA did not implement the pre- clearance procedure until January 2015, and an IAR’s misconduct put his personal interests before his clients’ interests.

Adviser Personnel Fail to Disclose Receipt of Brokerage Commissions Earned from Client Trades

August 13, 2019

The SEC brought an enforcement action against MVP Manager LLC (MVP), the personnel of which received brokerage commissions from counterparties to certain transactions with MVP’s advisory-client funds without adequate disclosure to those MVP clients or to investors in the client funds. MVP’s clients are private funds that it formed to invest in venture-backed companies that have not yet conducted an initial public offering (pre-IPO companies) that MVP projects have a potential for liquidity within two to five years by sale or public listing. In three instances, MVP personnel arranged to receive a brokerage commission from the counterparty that was selling pre-IPO company securities to MVP’s advisory client. The arrangement created a potential or actual conflict of interest for MVP in advising its client funds, which MVP failed to adequately disclose.

Don’t Hire Bad Actors!  OCIE Risk Alert

August 2, 2019

Well, that's not really the SEC's conclusion. However, caution and compliance monitoring is appropriate. In late July, the SEC's OCIE arm published a Risk Alert highlighting the observations of its staff from examining and inspecting a broad spectrum of investment advisers that had hired supervised persons with disclipinary histories. The Risk Alert details the findings and makes suggestions. Notably, the highlighted summary suggestion is, "OCIE encourages advisers, when designing and implementing their compliance and supervision frameworks, to consider the risks presented by hiring and employing supervised persons with disciplinary histories and adopt policies and procedures to address those risks." Please click on the headline to this Blurb to connect to the Risk Alert.

Adviser Charged with Failing to Disclose Conflicts of Interest

July 24, 2019

The SEC brought an enforcement action against N. Gary Price a principal of registered investment adviser firm Genesis Capital LLC (Genesis), to disclose his conflicts of interest to advisory clients. From 2013 through 2015, the SEC found that Genesis’s three mutual fund advisory clients made investments in promissory notes issued by Aequitas Commercial Finance, LLC (ACF), one of numerous entities affiliated with the Aequitas enterprise, the ultimate parent of which is Aequitas Management, LLC (Aequitas). Price served on the Genesis investment committee that approved these investments. As Genesis made the ACF investments, the SEC stated that Price benefited from financial ties to Aequitas. Price held ownership stakes with Aequitas in two other businesses in the Aequitas enterprise that together received a $10 million line of credit and $3.6 million in loans from ACF—the entity from which the mutual fund clients purchased the promissory notes. Additionally, during the same time period when Genesis’s mutual fund clients were investing their money in ACF, ACF was paying management fees to another Aequitas entity, which in turn paid $8 million in fees to another firm part-owned by Price in exchange for referring investors (separate from the Genesis clients) to ACF and other Aequitas issuers. These ties created a conflict between Price’s interests and those of the mutual funds. Genesis’s written policies and procedures required it to disclose such conflicts of interest to its clients in the firm’s Form ADV Brochure. During 2014 and 2015, Price received several drafts of the Genesis ADV Brochure to review. The drafts did not adequately disclose Price’s Aequitas- related conflicts of interest, and Price did not correct this deficiency. By the end of 2015, two of the Genesis-advised mutual funds each had more than 15 percent of its net assets invested in the ACF promissory notes. In March 2016, the Commission charged ACF and several other Aequitas companies and officers with concealing the true financial condition of Aequitas while defrauding the purchasers of more than $300 million in ACF promissory notes and other Aequitas securities. In May 2016, the two mutual funds were liquidated following ACF’s default on promissory notes held by the two funds.

OCIE Issues Risk Alert Concerning the Failure of Advisers to Adequately Disclose the Disciplinary Hi

July 23, 2019

OCIE issued a risk alert that notes that that nearly half of the disclosure-related deficiencies of its exams of investment were due to the firms providing inadequate information regarding disciplinary events. For example, OCIE found that advisers: • Omitted material disclosures regarding disciplinary histories of certain supervised persons or the adviser itself. Often the disciplinary omissions related to supervised persons occurred because the advisers solely relied on these supervised persons to self-report to the firms information about their required disclosures. • Included incomplete, confusing, or misleading information regarding disciplinary events. For example, they did not, as applicable: include the total number of events, the date for each event, the allegations, or whether the supervised persons were found to be at fault (i.e., whether fines, judgments or awards, or other disciplinary sanctions were imposed). • Did not timely update and deliver disclosure documents to clients, such as updating Form ADV for new disciplinary events of supervised persons reported on CRD (e.g., Form U5s). OCIE in the Risk Alert encouraged investment advisers, when designing and implementing their compliance and supervision frameworks, to consider the risks presented by hiring and employing supervised persons with disciplinary histories and adopt policies and procedures to address those risks.

SEC Publishes Investment Adviser Fiduciary Standard of Conduct Interpretation

July 12, 2019

The SEC published in the Federal Register in its interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940. In its Interpretation, the SEC states that an investment adviser's fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This fiduciary duty requires an adviser “to adopt the principal's goals, objectives, or ends.” This means the adviser must, at all times, serve the best interest of its client and not subordinate its client's interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times.

Sack and fumble returned for TD!  Lying IA sacked by SEC….

July 11, 2019

Supposed investment adviser to many NFL and other sports stars got sacked by the SEC recently. Daryl M. Davis and his firm Parrish Group, LLC were fined and Davis barred from the industry for multiple violations. While we expect that no one reading this news blurb would engage in the activities leading to the bar and fine, the findings and facts are nonetheless illustrative of the kind of competition and puffery endemic to our industry. In this case, Davis was: (1) an unregistered IA; (2) misrepresented his client list; (3) misrepresented his firm's staffing; and (4) lied about the firm's AUM. The SEC's settlement, which can be accessed by clicking the headline to this blurb, was premised on two findings of fraud under Sections 206(1) and 206(2) of the Advisers Act.

SEC Chairman Speaks on Regulation Best Interest

July 8, 2019

In a speech in Boston, Massachusetts, SEC Chairman Clayton reminded the audience that the SEC recently adopted a package of rules and interpretations designed to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. Importantly, he stated that they bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations. These actions, in his view, do not attempt to favor one type of service or relationship. Rather, he stated that they are designed to increase investor protection while preserving access for Main Street investors—both in terms of choice and cost—to a variety of investment services and products.

Member Discount!  New Textbook Available:  Investment Management Regulation

July 1, 2019

We're pleased top announce that Karl is co-author of the first new textbook about the '40 Acts in over 30 years! Investment Management Regulation: An Introduction to Principles and Practices. Available now at cap-press.com Just click on the headline to this blurb above to be taken to the publisher's site. As Members you are entitled to a 30% discount at the Carolina Academic Press's site. Please use the discount code, IMR2019. Valid until Sept. 30th, 2019. If you are a professor teaching this material, you may order a free review copy at the site.

OOPS:  Check Your Agreements OOPS Clauses

June 28, 2019

An often overlooked area of agreements of all sorts, including advisory agreements, is the clause regarding out of pocket expenses. Vendors often use them to pass off large costs to clients.....so, as a client, look at the clause carefully. See if you can limit it with a maximum amount or limit what is considered an out of pocket expense. A recent SEC enforcement action against State Street Bank is a clear reminder of this issue. State Street for almost two decades charged clients for bank related messaging services---and added a nice markup for doing so without disclosing it to clients. The expense and markup were billed under the OOPS clause. So next time you review a contract, check the expenses clause, lest you cause an OOPS for your firm! Click the headline to this blurb for the full SEC release.

SEC:  Concept Release on Harmonization of Securities Offering

June 26, 2019

Advisers who offer private funds or invest in private placements encounter the challenges of the crazy quilt of private/public securities offering regulations. Aware of this growing issue, in June 2019, the SEC released a "Concept Release." The Concept Release seeks public comment on ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation. THE ARTICLE ACCOMPANYING THIS BLURB CONTAINS LINKS TO THE SEC DOCUMENTS.

Found:  Dechert’s Summary Site on the DoL and State Fiduciary Rules

June 5, 2019

Dechert has published an aggregation page on its website for all key actions, legislation, rulemaking, and judicial decisions regarding the Department of Labor's now dead fiduciary rule under ERISA. In addition, the page highlights and tracks the efforts of various states to implement fiduciary standards. However, the page does not integrate the SEC's efforts in this area, notably Reg. BI and related initiatives. Please click the headline to this blurb to access the Dechert site. Thanks to Dechert for making this material available.

Presidential Executive Order May Impact ESG Investing

June 1, 2019

While not covered in the Dechert paper on ESG investing (see our May 31 blog posting), a recent Presidential Executive Order is an example of how ESG investing may be impacted by the vagaries of politics. In early April 2019, an Executive Order was issued directing the Department of Labor ("DOL") to assess, among other things, how the energy industry is being impacted by the proxy voting of retirement plans. Specifically, the Order directs DOL to do the following, within 180 days of the date the Order was issued: 1. Complete a review of available data filed with DOL by retirement plans subject to the ERISA in order to identify whether there are discernible trends with respect to such plans’ investments in the energy sector; 2. Provide an update to the Assistant to the President for Economic Policy on any discernible trends in energy investments by such plans; and 3. Complete a review of existing DOL guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets. A copy of the order can be accessed by clicking the headline to this blurb.

Dechert Paper on ESG Investing

May 31, 2019

ESG investing---investing with with environmental, social or governmental socially conscious screens---has been a hot topic in the industry on and off for the past 30+ years. Dechert recently published an excellent short paper on the "Unintended Consequences of Investing According to Environmental, Social and Governance Principles." The paper notes that lack of coherence and standards regarding such investments. Notably advisers are cautioned to keep in mind the sometimes disparate regulatory requirements of different governments, and how they might clash, when developing their firm's ESG screens. Please click the headline to this blurb to access the article.

Adviser Charged with Overcharging Clients

May 28, 2019

The SEC charged with Stephen Brandon Anderson with defrauding clients by overcharging advisory fees of at least $367,000. According to the SEC, Anderson owned and operated River Source Wealth Management, LLC, a now-defunct registered investment adviser in North Carolina. River Source’s primary revenue stream was customer advisory fees. Customer agreements provided that those fees would be based on each customer’s assets under management. The SEC found, however, that in 2015 and 2016, Anderson overcharged a majority of his clients. The amount and percentages of the overcharges varied according to the SEC but, in the aggregate, amounted to approximately 40% more than the agreed-upon maximum customer advisory fees. The SEC further noted that Anderson misled his clients about the reason he transferred their assets from River Source’s long-time asset custodian, falsely stating that it was his decision and that the separation was “amicable.” In fact, as the SEC stated that the asset custodian ended the relationship with River Source after it noticed irregular billing practices and failed to receive sufficient supporting documentation from Anderson. Furthermore, the SEC found that Anderson made material misstatements in reports filed with the SEC, including overstating River Source’s assets under management by at least $34 million (18%) in 2015 and $61 million (35%) in 2016, and failed to implement required compliance policies and procedures.

It’s in the Clouds!  OCIE Alert on Use of Cloud Storage for Records

May 24, 2019

In late May 2019, OCIE issued an Alert for advisers and broker-dealers entitled, "Safeguarding Customer Records and Information in Network Storage – Use of Third Party Security Features." The Alert is derived from the exam experience of OCIE, wherein it detected a variety of weaknesses at advisers and brokerage firms using cloud storage. The Risk Alert "highlights risks associated with the storage of electronic customer records and information by broker-dealers and investment advisers in the cloud and on other types of network storage solutions." OCIE noted that in its exam experience, some advisers and brokers have compliance problems with respect to the privacy and potential identity theft of their client data. Please click the headline to this blurb to access the Risk Alert.

FinCEN Alert on Illicit Activities Involving Crypto Currencies

May 13, 2019

In conjunction with its issuance of Guidance on crypto currencies ("CVCs"), FinCEN in early May 2019, issued an "Advisory on Illicit Activity Involving Convertible Virtual Currency." The Advisory was issued "to assist financial institutions in identifying and reporting suspicious activity concerning how criminals and other bad actors exploit convertible virtual currencies (CVCs) for money laundering, sanctions evasion, and other illicit financing purposes, particularly involving darknet marketplaces, peer-topeer (P2P) exchangers, foreign-located Money Service Businesses (MSBs), and CVC kiosks. Virtual currencies, particularly CVCs, are increasingly used as alternatives to traditional payment and money transmission systems. As with other payment and money transmission methods, financial institutions should carefully assess and mitigate any potential money laundering, terrorist financing, and other illicit financing risks associated with CVCs. This advisory highlights prominent typologies and red flags associated with such activity and identifies information that would be most valuable to law enforcement, regulators, and other national security agencies in the filing of suspicious activity reports (SARs)." As a practical matter, advisers should be reviewing and updating their policies and procedures to deal with CVCs, most notably the anti-money laundering and SAR policies and procedures. Please click the headline to this blurb to access the Advisory.

FinCEN Issues Helpful Crypto Guidance

May 13, 2019

Bitcoin, ICOs, and various other types of crypto currency offerings have been the talk of the markets over the past few years. The regulatory agencies have struggled with classifying and regulating these offerings and enterprises. In early May 2019, FinCEN issued a Guidance document entitled, "Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies." FinCEN derives its powers in part from the Bank Secrecy Act ("BSA") and issued the Guidance with reference to the BSA. As noted in the document, "This guidance does not establish any new regulatory expectations or requirements. Rather, it consolidates current FinCEN regulations, and related administrative rulings and guidance issued since 2011, and then applies these rules and interpretations to other common business models involving CVC engaging in the same underlying patterns of activity." Given the interest of many advisers in crypto currencies and ICOs, we thought it would be helpful to alert you to the Guidance, which can be accessed by clicking the headline to this blurb.

FAST Act Rules effective

April 25, 2019

Enacted in late March, a series of amendments to Regulation S-K and related rules and forms are now effective. Such amendments are designed to modernize and simplify certain disclosure requirements applicable to public companies, investment advisers and investment companies. These amendments implemented several of the recommendations in the SEC Staff’s November 2016 Report on Modernization and Simplification of Regulation S-K mandated by the FAST Act. For most advisers the changes will have little impact. For some, the most noteworthy changes included a simplification of MD&A disclosure and a significant reduction of the need for registrants to submit confidential treatment requests when omitting information from their exhibit filings. These amendments were originally proposed in October 2017 and received relatively little attention. Please click the headline to this blurb to access the SEC release.

SEC Div of Inv Mgmt legal staff replenished

April 20, 2019

In mid-April the SEC announced the hiring (from other SEC departments) of two new deputy chief counsels. This helps restaff the legal area after last fall's departure of some key folks including former Chief Counsel Doug Scheit. Please click the headline to this summary to access the SEC's press release.

Risk Alert Re:  Regulation S-P Compliance:  Privacy Policies

April 19, 2019

Privacy policies and relevant regulatory compliance have been on-going challenges for advisers. The SEC's exam staff have noted that they often observe issues in these areas at advisers. Growing out of the exam program is a recent Risk Alert which focuses on key issues observed by the OCIE staff during their exams. Key areas of issues are: 1. timely disclosure of privacy policies to clients and opt-out provisions 2. need for written documentation of privacy policies and procedures 3. policies which have not been properly implemented or not reasonably designed to safeguard customer records and information Please click on the headline to this summary to access the SEC announcement and Risk Alert.

New Investor Education Campaign

April 12, 2019

In early April, the SEC announced a new investor education program including several TV and other media public service announcements. As noted on the investor.gov site, "The SEC’s Office of Investor Education and Advocacy launched a public service campaign to empower Main Street investors to take control of their financial future. The campaign encourages investors to use the free tools and unbiased information available on Investor.gov to get answers to their questions about investing. Videos from the Good Questions campaign are available...." Please click the headline to this summary to access the SEC's site and materials.

The Future of Investment Mgmt monograph

March 27, 2019

From time to time we discover some good reads. A few months ago, the CFA Institute Research Foundation published a wonderful short monograph on the future of the industry. The arc and scope of the research paper by Ronald N. Kahn, managing director and global head of systematic equity research at BlackRock, is comprehensive, starting with the roots of the investment advisory industry to the current trends and projecting what things will look like in 5-10 years. It's a short, good read and paints a pretty optimistic picture despite several seemingly negative trends (e.g., passive investing, fee compression, etc.). Please click the headline to link to the document and enjoy the read!

Cross-Trading Fraud

March 22, 2019

Cross-trading remains a fertile ground for fraudulent behavior. A recent SEC enforcement action is illustrative: a private fund manager and COO was barred from the industry for a cross-trading fraud he facilitated. Basically, the manager sold securities from one client to a private fund managed by the firm at an artificially low price because the adviser and manager failed to obtain required third-party bids. Rather, the manager obtained manipulated prices for the securities which the fund purchased at a discount, which benefited the manger due to his holdings of the fund. An industry bar and $400,000 fine resulted. Please click the headline to be linked to the enforcement action.

Stradley Enforcement Summary and Discussion

March 18, 2019

Law firm Stradley Ronon issued a fine summary of SEC adviser and fund enforcement activities this week.Noting the government shutdown and SEC staff turnover, the authors explain that only 13 settled administrative actions involved Advisers Act violations during fiscal year 2018. For 2019, they predict vigorous enforcement in support of protecting retail investors. Click the headline to access the report.

Share Class Initiative Yields Fruit, Unfortunately

March 16, 2019

As we reported earlier this year,in February the SEC announced its Share Class Selective Disclosure Initiative offering a certain form of clemency for self-reporting advisers. In recent years, the SEC has investigated via sweep and targeted exams numerous advisers for their mutual fund share sales practices, finding a variety of fraudulent and inappropriate practices. In mid-March, the SEC staff announced that 79 advisers had self-reported and paid $125 million is restitution to investors. Click the headline for the full SEC press release and report.

Comments sought on digital assets and the Custody Rule

March 15, 2019

In early March, the SEC published a letter to Karen Barr, President of the Investment Adviser Assoc. seeking public comments on how the Custody Rule works for/with digital assets (e.g. bitcoin). The Division of Investment Mgmt’s request for comments includes several aspects (some of which are not Custody Rule-specific), including: (1) the treatment of digital assets for purposes of the Custody Rule; (2) how such assets are custodied (specifically whether advisers are relying on state-chartered trust companies or foreign financial institutions such custody; (3) how such custodians have performed in their duties; (4) the most appropriate ways to address concerns about adviser misappropriation of client digital assets and how to effectively leverage address the hazards of misappropriation; (5) if losses arise, how to remedy them effectively; and (6) whether advisers regard digital assets as “securities” for the purpose of determining whether they meet the definition of an investment adviser and their registration and reporting obligations. Please click on the headline to this blurb to access the letter.

Adviser Found to Have Conducted a Faulty Auction Process

March 15, 2019

The SEC brought an enforcement action against a registered investment adviser, Talimco, LLC (Talimco), in connection with the sale of a mortgage loan participation by one of its clients, a collateralized debt obligation, to another one of its clients, a commercial real estate investment fund (Fund). The SEC stated that Talimco, which owed a fiduciary duty to both the seller and buyer, breached its duty to the seller in violation of Section 206(2) of the Advisers Act by failing to seek out willing bidders for the asset. As part of the sale process, Rogers, Talimco’s chief operating officer, convinced two unwilling parties to agree to bid on the asset by assuring each of them that it would not win the auction. As a result of these actions, the SEC found that the collateralized debt obligation was deprived of the opportunity to obtain multiple bona fide bids for the asset. The Fund, which won the auction, later sold the asset at a profit, resulting in Talimco receiving management and performance fees.

Adviser Charged with Various Compliance Violations

March 11, 2019

The SEC charged Ascension Asset Management, LLC (Ascension) for not having a compliance manual and conducting annual compliance reviews. The SEC found from in or about October 2004 until November 2015, Ascension did not adopt and implement any written compliance policies and procedures required by Advisers Act Rule 206(4)-7(a). During this same time period, the SEC stated that Ascension did not conduct the reviews required by Advisers Act Rule 206(4)-7(b). Gooder, the founder of Ascension, despite being Ascension’s sole control person, failed to take any steps to prepare the required written compliance policies and procedures or conduct the required reviews for Ascension.

Wells Fargo Found to Have Breached Its Fiduciary Duty to Clients When Recommending Funds

March 11, 2019

The SEC brought an enforcement action against Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, finding breaches of fiduciary duty and inadequate disclosures in connection with mutual fund share class selection practices and the fees the Wells Fargo companies received pursuant to Rule 12b-1 under the Investment Company Act of 1940 (Rule 12b-1 fees). During the period January 1, 2014 to July 31, 2015, the Wells Fargo companies purchased, recommended, or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds for which the clients were eligible. The Wells Fargo companies received 12b-1 fees in connection with these investments. According to the SEC, the Wells Fargo companies failed to disclose in their Forms ADV or otherwise the conflicts of interest related to (a) their receipt of 12b-1 fees, and/or (b) their selection of mutual fund share classes that pay such fees. The Wells Fargo companies received 12b-1 fees for advising clients to invest in or hold such mutual fund share classes. Please click the heading to this blurb to link to the litigation release.

SEC Creates Chief Risk Officer Position

February 28, 2019

The SEC created a new position called the “Chief Risk Officer.” Gabriel Benincasa was named the SEC’s first Chief Risk Officer. This position will primarily focus on the agency’s risk management and cybersecurity efforts. The Chief Risk Officer will coordinate the SEC’s efforts to identify, monitor and mitigate key risks facing the SEC. The Chief Risk Officer is housed within the SEC’s Office of the Chief Operating Officer. The Chief Risk Officer will also serve as a key adviser on other matters related to enterprise risks and controls.

Maryland Joins Fiduciary Standard Hunt

February 8, 2019

Maryland is joining the effort of states to regulate securities brokers and insurance agents as fiduciaries. Legislation was introduced this week in the Maryland state house containing a brief provision that would require brokers and insurance agents to act as fiduciaries in the best interests of their customers, i.e., "without regard to" their own financial interests. Maryland's actions are part of a larger trend of states seeking to regulate fiduciary standards. The bill entitled the "Financial Consumer Protection Act of 2019" can be accessed by clicking the heading to this article.