Adviser Regulatory & Compliance News

Division of Examinations Observations: Investment Advisers’ Fee Calculations

November 16, 2021

This seems like an issue that never dies: advisers just can't calculate fees correctly! On Nov. 10, the SEC published a Risk Alert highlighting its findings from 130 examinations of advisers re: fee calculations. Briefly, the key deficiencies observed included: (1) advisory fee calculation errors, such as over-billing of advisory fees, inaccurate calculations of tiered or breakpoint fees, and inaccurate calculations due to incorrect householding of accounts; and (2) not crediting certain fees due to clients, such as prepaid fees for terminated accounts or pro-rated fees for on-boarding clients. In addition, the staff observed fee-related compliance and disclosure issues. The SEC specifically notes that this Risk Alert updates an earlier Alert (from 2018) and provides guidance on how advisers can improve compliance. Please click the headline to this summary to access the Risk Alert.

Robo-advisers flagged for multiple regulatory and compliance weaknesses

November 15, 2021

In mid-November, the SEC published a lengthy Risk Alert highlighting its findings from recent examinations of a variety of advisers providing electronic investment advice ('Robo-advisers"). The Alert notes that almost every adviser examined by the SEC was cited for deficiencies. Notably such deficiencies included, (1) weak compliance programs, including policies, procedures, and testing; (2) deficient portfolio management, including, but not limited to, an adviser’s fiduciary obligation to provide advice that is in each client’s best interest; and (3) marketing/performance advertising, including misleading statements and missing or inadequate disclosure. The Risk Alert provides guidance on the steps Robo-advisers can take to assure compliance. Please refer to the Risk Alert by clicking the headline to this summary.

Observations from Examinations in the Registered Investment Company Initiatives

November 1, 2021

In late October the SEC published a Risk Alert highlighting its findings from examinations of mutual funds, ETFs, and their advisers during 2018-2020. Over 100 advisers were included in the examinations. The examinations focused on aspects of funds and advisers' management that impacted retail investors. Numerous deficiencies and weaknesses were found in the industry and highlighted in the Risk Alert. Key issues identified: weak compliance programs with multiple aspects of fund operations and management; issues with fund board oversight; and the fact that funds had inaccurate, incomplete and/or omitted disclosures in their filings and advertising/marketing. The SEC Staff provide guidance on how funds and advisers can improve compliance in the Alert, which is accessible by clicking the link in the headline to this summary.

Digital Assets Terminology Summary

October 21, 2021

The Cole Schotz law firm published a really helpful summary of key terms used re: digital assets. Please click the headline to this blurb to access the summary.

Proxy Reporting May Change

October 21, 2021

In late Sept., the SEC proposed changes to Form N-PX which would change proxy voting reporting requirements for funds. At the same time, the SEC proposed new Rule 14Ad-1 under the Exchange Act to require institutional investment managers, who are required to report on Form 13F, to disclose how they voted on executive compensation matters. Please click on the headline to this summary for additional materials.

Time to Reevaluate Your China Investments Disclosures?

September 24, 2021

Evergrande seems to be going under. Cryptocurrencies have been banned. The status of U.S. listed Chinese companies seems to be in question. For advisers investing in Chinese securities and other investments, this may be turning into treacherous ground. The SEC recently published an "Investor Bulletin: U.S.-Listed Companies Operating Chinese Businesses Through a VIE Structure" highlighting the challenges and issues of U.S. listed Chinese companies. If your adviser hasn't evaluated and rewritten its disclosures regarding Chinese investments, now is the time. Please click the headline to this summary to access the Investor Bulletin, which has a variety of additional resources.

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.

SEC Seeks Public Input Re:  IA and BD Digital Engagement Practices

August 28, 2021

Call it the Robinhood and gamification spill over. The SEC announced "that it is requesting information and public comment on matters related to the use of digital engagement practices by broker-dealers and investment advisers. These tools include behavioral prompts, differential marketing, game-like features (commonly referred to as gamification), and other design elements or features designed to engage with retail investors on digital platforms (e.g., websites, portals, and applications), as well as the analytical and technological tools and methods (collectively called digital engagement practices (DEPs))." Clearly, all the excitement and speculation in stocks like GameStop, AMC, etc.---arguably prompted in part by Robinhood's trading platform---has gotten the SEC's attention. This is the first step in the process of regulating some aspects of the tools. Please click the headline to this blurb to access the SEC's press release.

Marketing Rule Reference Materials

August 15, 2021

While we draft a whole section of the website regarding the recently adopted Marketing Rule, this posting provides members with a good collection of materials for reference. Note that for many advisers there will be a critical choice over the next year to 18 months: stay with the old rules until the new rule compels compliance (Nov. 4, 2022) or opt in to the new rule's requirements beginning May 4, 2021. But it's a one way path: once you've opted in, you must comply with the new rule. Please click the headline to this summary to access the reference page.

SEC:  CRS Disclosures Must Be Timely

July 28, 2021

On July 26, 2021, the SEC announced the resolution of 26 administrative actions regarding failure to timely deliver Form CRS to advisory or brokerage clients. From the press release, "According to the SEC’s orders, each of the firms charged today missed those regulatory deadlines. The orders find that none of the firms filed or delivered its Form CRS, or posted it to its website, until being twice reminded of the missed deadlines by their regulators—in the case of investment advisers, by the SEC’s Division of Examinations, and in the case of broker-dealers, by the Financial Industry Regulatory Authority." Please click the headline to this summary to access the Press Release and the links to the 26 settled actions.

SEC Issues Risk Alert Re:  Wrap Fee Programs

July 23, 2021

July 21, 2021 was a busy day at the Examinations Division: they issued two Risk Alerts. One related to trading practices and is discussed in a separate blog entry. The second relates to advisers' wrap fee programs. EXAM staff noted their prioritization of examining advisers that have wrap fee programs or otherwise participate in such programs. A more complete summary can be accessed by clicking the headline to this summary.

Schwab Robo Service Under Scrutiny; Firm Sets $200 Million Aside for Charges

July 5, 2021

In a recent regulatory filing (Form 8-K), Charles Schwab noted that it was taking a $200 million charge to its financials related to an on-going SEC investigation of a compliance issue. According to press reports, the issue appears to be related to either cash allocation policies or advertising of its robo-adviser service, Schwab Intelligent Portfolios. Please click the headline to this summary to access more information.

Florida-based Firms and Individuals Allegedly Engage in “Cherry-Picking” Scheme

June 17, 2021

The SEC filed fraud charges against Ramiro Jose Sugranes, UCB Financial Advisers Inc., and UCB Financial Services Limited (UCB entities), which are based in Miami, Florida, for engaging in an alleged “cherry-picking” scheme in which they channeled millions of dollars in trading profits to preferred accounts. According to the SEC, the individuals and UCB engaged in a scheme since at least September 2015 to divert profitable trades to two accounts believed to be held by Sugranes’ relatives and saddle other clients with losing trades. The individuals allegedly used a single account to place trades without specifying the intended recipients of the securities at the time they placed the trades. As alleged, after a position was established, if the price of the securities increased during the trading day, the individuals usually closed out the position and allocated those profitable trades to the two preferred accounts. Conversely, the SEC alleges that if the price of the securities decreased during the trading day, the individuals usually allocated the unprofitable trades to other client accounts. According to the SEC, the preferred clients, who are named as relief defendants in the enforcement action, received approximately $4.6 million from profitable trades while other clients sustained more than $5 million in first-day losses.

SEC Adjusts Qualified Client AUM and Net Worth Tests

June 17, 2021

Section 205(a)(1) of the Advisers Act generally prohibits an investment adviser from entering into an investment advisory contract with a client that provides for it earning a performance fee. Rule 205-3 under the Advisers Act exempts an investment adviser from the prohibition against charging a client performance fees when the client is a “qualified client.” The Rule allows an adviser to charge performance fees if the client has at least a certain dollar amount in assets under management (currently, $1,000,000) with the adviser immediately after entering into the advisory contract (Assets-Under-Management Test) or if the adviser reasonably believes, immediately prior to entering into the contract, that the client has a net worth of more than a certain dollar amount (currently, $2,100,000) (Net Worth Test). The dollar amount of the assets-under-management test increases from $1,000,000 to $1,100,000, and the dollar amount of the net worth test increases from $2,100,000 to $2,200,000 on August 16, 2021.

Please Welcome our New Interns

June 14, 2021

We're delighted to have two interns from Suffolk Law School in Boston to help us this summer with our transition to a new publishing platform and in updating our materials. Doug Buonanno is a third year student who wrote a fine paper on the new Marketing Rule in the Suffolk Law Investment Management Regulation class last semester. Doug is extremely interested in a career in investment management. Jordyn Murphy is also a third year law student with expertise in social media, marketing, and securities regulation. She's exploring investment regulation as a possible practice specialty. Last semester she interned for the SEC!

What to Expect from the SEC in the Coming Months

June 13, 2021

Periodically, the SEC releases its Regulatory Agenda. On June 11th, it published its Spring agenda. Nothing targets investment advisers directly, but several initiatives will impact advisers re: things like ESG mandates, management of private funds, investment strategies, etc. Please click the headline of this summary to access the longer article and references.

Out of Pocket Expense Clauses Need to Be Carefully Negotiated and Monitored

June 1, 2021

Out of Pocket Expense ("OOPs") clauses in service agreements need to be examined carefully. When I was on the service side of the industry, I was amazed how many clients routinely approved the OOPs clauses without negotiation. Our suggestion is to carefully put limits on OOPs to prevent overcharging. State Street Bank recently settled litigation in which it was charged with overcharging for out of pocket expenses. The Bank entered into a deferred prosecution agreement and agreed to pay a $115 million criminal penalty to resolve charges related to overcharging custody clients. Please click the headline to this blog posting to access the federal Dept. of Justice press release and the litigation documents.

Tax Minimization Strategies for SMAs

May 28, 2021

Investment adviser lawyers and compliance staff occasionally may get tax related questions. One area that has challenged advisers is taxes on SMAs. Cohen & Co, specialists in tax and accounting for advisers and funds, recently published an interesting article on how to minimize taxes on SMAs. You can access the article by clicking on the headline to this blog post.

Fund Derivative Actions re:  Fees Winding Down

May 25, 2021

Looking through ICI Mutual's Litigation Notebook, it's apparent that derivative suits re: excessive fund management fees are winding down. It appears that one of the final suits, Zoidis v. T. Rowe Price Associates, was dismissed with prejudice on Jan. 4, 2021. Litigation appears to have shifted to ERISA actions. Click the headline to this summary for links to the Litigation Notebook and the Zoidis case materials.

Will Your Firm’s Clients Clear The New, Higher Thresholds (re: Performance Based Fees)?

May 17, 2021

The SEC recently issued a notice that it plans to raise the thresholds for accounts which may be charged performance based fees. Reflecting inflation, the SEC intends to increase the thresholds for “qualified client” in Advisers Act Rule 205-3 as follows: from $1.0 million to $1.1 million AUM; and from $2.1 million to $2.2 million for the net worth test. All of that is subject to whether the SEC orders a hearing on the matter (requests for a hearing are due by 5:30 p.m. on June 4) speak now or hold your peace! Assuming the matter passes muster, the implementation date of the adjustments will be 60 days after the final order is issued. Please click the headline to this summary to access the notice.

Key New Checklists:  FoF, ESG, Valuation, Derivatives

May 7, 2021

Our friends, the great lawyers at Morgan Lewis just published a set of checklists pertinent to advisers managing funds! The checklists cover four key areas of recent regulatory action and easily can be integrated into a compliance program: fund of funds, valuation, derivatives and ESG investing. Please click the headline to this summary to access the PDF file of checklists.

NYSE Proposal to LImit Closed-End Fund Investments in Private Funds

April 29, 2021

History doesn’t usually repeat but it often rhymes. One of the reasons we have the ’40 Acts is that in the 1920s and 1930s there was a dangerous layering of investment companies. The SEC and NYSE acted recently to propose limits on investments by listed closed-end funds in unregistered investment funds. The proposal was made on April 20, 2021 and involves a potential amendment to Section 102.04 of the NYSE Listed Company Manual. This may be of importance to our members who managed closed-end funds. Please click the headline to this blurb to learn more.

ESG Under Scrutiny

April 27, 2021

Can anyone clearly define what ESG investing is? Anyone? Well, that's the problem: there are a multitude of definitions and much confusion. The SEC Examinations division (f/k/a OCIE) discovered a variety of issues related to ESG during its recent examinations of advisers and funds. Accordingly, it has issued a Risk Alert to highlight a variety of these issues and to note that it will focus on them on future exams. A bit earlier the CFTC also chimed in on the issue by creating a Climate Risk Unit to "o support the agency’s mission by focusing on the role of derivatives in understanding, pricing, and addressing climate-related risk and transitioning to a low-carbon economy." Please click the headline to this summary to access a more complete explication of the SEC's Risk Alert and for links to key materials.

Acting SEC Chair Lee Gives Speech on Proxy Voting Issues

March 17, 2021

Acting SEC Chair Allison Herren Lee spoke at the 2021 ICI Mutual Funds and Investment Management Conference about proxy voting issues. She began by stating that there are two key trends that have brought us to our current posture and which necessitate updates to our rules and guidance to reflect a new reality regarding proxy voting and corporate governance. First, is the growth in households invested in funds. A second key trend is the soaring demand for opportunities to invest in vehicles with ESG strategies. Millennials, in particular, are increasingly attuned to the specific ways in which funds and companies utilize their money, and their influence will only grow. She went on to say that it is high time to revisit Form N-PX, the form in which mutual funds and ETFs report their votes, and make it useful in creating needed transparency around the fundamental exercise of shareholder voting. Lastly, she spoke about structural voting issues that pose tremendous challenges to funds. On one front, she noted that funds as issuers themselves are confronted with obstacles when trying to obtain a quorum, while funds as voters face difficulties in obtaining information about their votes. She recognized that funds as an issuer community face a unique landscape as their ownership is highly intermediated and diffuse, making it difficult and expensive to identify shareholders. Her speech can be accessed by clicking the headline to this summary.

Corporate Transparency Act Implications for Advisers

March 12, 2021

The Corporate Transparency Act ("CTA") was passed by Congress as part of The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. (2020) ("NDAA") late its last session of the Trump administration. Tucked away in the CTA are substantial new reporting requirements on "reporting companies" regarding their financial activities. In short, AML has gotten a significant boost, which has implications for advisers and funds. The accompanying article provides a bit more detail and links to lengthier articles and the legislation. Please click the headline to this blurb to access the summary.

SEC Seeks Comments and Input on Cross-Trading Practices

March 12, 2021

On March 11, 2021, the Div. of Investment Mgmt. released a Staff Statement seeking "feedback on ways to enhance the regulatory regime governing investment company cross trading." If an adviser has investment company clients, it may be worthwhile reviewing and/or commenting on the Staff's Statement. Rule 17a-7 sets the ground rules for cross-trading, including various limitations on such transactions. The Staff seeks input on: (1) Current cross trading practices; (2) Securities Eligible to Cross Trade: Pricing and liquidity; (3) Controls; and (4) Market Transparency. The full Staff Statement can be accessed by clicking the headline to this summary.

Fine Article on Cybersecurity and Data Privacy

March 5, 2021

Cybersecurity is an everpresent issue for our industry. Our friends at Eversheds recently published an article, "Key lessons from 2020 to help navigate the future of cybersecurity and data privacy," looking back at the SolarWinds hack and other 2020 developments. It's a generalized article but lessons can be drawn for our RIA, adviser, broker-dealer and fund members. The article can be accessed by clicking the headline to this blurb.

SEC Announced Enforcement Task Force Focused on Climate and ESG Issues

March 5, 2021

Following quickly on publication of its 2021 Examination Priorities, the SEC announced on March 4, 2021 the formation of a specialized task force focused on climate and ESG issues. As noted in its press release, "The task force will ... analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies." As a practical matter, this suggests the RIAs and advisers need to pay attention to their documentation and disclosures regarding ESG investments and strategies. The press release may be accessed by clicking the headline to this blurb.

Division of Examinations’ 2021 Exam Priorities

March 4, 2021

On March 3, 2021, the SEC's Division of Examinations (formerly known as OCIE) released its 2021 report and exam priorities. The lengthy report reviews results and observations from 2020's work and Covid-related issues as well as laying out the 2021 priorities. A summary of the priorities is included in the attached article. The Report can be accessed by clicking the link at the end of the article.

State Privacy Regulations Spreading

March 3, 2021

On March 2, 2021, Virginia adopted a comprehensive new law regulating consumer data privacy. The law becomes effective on Jan. 1, 2023 and is the second such state law (California being the other). It appears other states may join VA and CA with European style privacy laws. Most RIAs appear not to be covered but nonetheless need to pay attention to this developing trend. Briefly, VA's law covers entities that (1) Annually control or process personal data of at least 100,000 Virginia residents, or (2) Control or process personal data of at least 25,000 Virginia residents and derive over 50% of gross revenue from the sale of personal data. If your company falls within those parameters, then you need to prepare to comply with GDPR type regulation if you have not done so already. Please click the headline to this blurb to be connected to an excellent Ropes & Gray legal alert on the subject.

“Accredited” Investor Status Changes

February 22, 2021

Assessing whether an investor is appropriately "accredited" is a challenge for issuers and adviser/brokers too. In Nov. 2020, the SEC adopted a new addition to Rule 506(c) under the Securities Act of 1933 to provide an additional method for assessing accredited status. The new verification method (Rule 506(c)(2)(ii)(E)) provides: "(E) In regard to any person that the issuer previously took reasonable steps to verify as an accredited investor in accordance with this paragraph (c)(2)(ii) [which sets out the requirement to use “reasonable steps to verify” accredited investor status and non-exclusive verification methods for natural persons], so long as the issuer is not aware of information to the contrary, obtaining a written representation from such person at the time of sale that he or she qualifies as an accredited investor. A written representation under this method of verification will satisfy the issuer’s obligation to verify the person’s accredited investor status for a period of five years from the date the person was previously verified as an accredited investor." O'Melveny Meyers recently published a legal alert discussing practical aspects of the new rule, which can be accessed by clicking the headline to this blurb.

Fintech Company Issues under the ICA

February 15, 2021

If you're venturing into the fintech space, you need to be aware of the potential for investment company status. Most RIAs and advisers generally will not face these challenges, but with folks trying all sorts of new approaches to financial services delivery certainly awareness of the Investment Company Act of 1940 is important. Mayer Brown recently published a legal update paper highlighting the issues and challenges. They review the implications of relief form the Act sought by a cloud-based data company and an online lending platform. Both companies successfully received relief from having to register as investment companies, but such relief was heavily conditioned. Please refer to the Mayer Brown paper available by clicking the link in the headline to this blurb.

Cybersecurity Observations of OCIE

February 8, 2021

The SEC's Examination branch (formerly OCIE, now Examinations) published in January 2021 a lengthy report summarizing its observations and resulting recommendations re: cybersecurity. The Cybersecurity and Resiliency Observations report covers the full spectrum of cybersecurity issues, from vendor management to insider threats. It can be accessed by clicking the headline to this summary.

ABA Digital Assets Whitepaper

January 22, 2021

In mid-January, the American Bar Association released an updated version of its extensive whitepaper on digital assets, including cryptocurrencies, blockchain, and bitcoin. The over 400 page paper is a comprehensive look at the current state of the law regarding these types of assets, including various aspects of commodities and securities law. The paper can be accessed by clicking the heading to this summary.

Legal and Compliance—2020 Review and 2021 Projections

January 22, 2021

In an extensive review of the past year's securities law and compliance developments, the law firm Gibson Dunn discussed the pending appointment of Gary Gensler as head of the SEC. Reflecting on Mr. Gensler's prior experience leading the CFTC the folks at Gibson Dunn noted that Gensler's SEC would likely shift its attention “away from retail investors and securities offering frauds and [have] an increased emphasis on the conduct of institutional market participants — investment advisers and broker-dealers, as well as public company accounting, financial reporting and disclosure.” The firm also speculated on future SEC enforcement and rule making, noting, "The takeaway from all of this is that the next four years will put a premium on legal and compliance departments and financial reporting functions of financial institutions, investment advisers, broker dealers and public companies." The Gibson Dunn memo is quite thorough in its discussion of recent developments: It can be accessed by clicking the heading to this article.

Comparison Chart of Fiduciary Standards

January 11, 2021

If you've paid attention, you know that there is a maddening patchwork quilt of fiduciary and related standards developing nationally. Our friends at Eversheds Sutherland compiled a fantastic quick reference chart of the current federal and state fiduciary and best interest regulations. Click the headline to this blurb to access the chart.

SEC Revamps Investment Adviser Advertisement Rules

December 22, 2020

The SEC adopted amendments to rules that govern investment adviser advertisements and payments to solicitors. The new rules create a single rule that replaces the current advertising and cash solicitation rules. The amended rules: • Re-defines “advertisement”; • Adds and/or modifies certain general prohibitions; • Modifies the regulation of testimonials, endorsements and third-party ratings; • Modifies the regulation of the presentation of adviser performance; • Amends and modifies certain advertising books and records rule; and • Amends and modifies Form ADV. These amendments will be effective 60 days after publication in the Federal Register and such publication likely will occur in January, 2021.

SEC Finds Adviser to Have Faulty Compliance Procedures Addressing Loans and Financial Condition

December 14, 2020

The SEC brought an enforcement action against Robert Lindner, the President, Chief Executive Officer, Chairman and majority shareholder of Lindner Capital Advisers, Inc. (LCA), an SEC registered investment adviser. The SEC found that during 2018 and 2019, LCA and Lindner made materially false statements in a report filed with the SEC and given to its clients, and failed to implement compliance procedures reasonably designed to prevent violations of the Advisers Act. the SEC found that LCA and Lindner disclosed that LCA had no financial condition that is reasonably likely to impair its ability to meet contractual obligations to clients. The SEC stated that this statement was false because, at the time and throughout the remainder of 2019, LCA was heavily leveraged and increasingly unable to meet its basic operating expenses.

Pricing Services Fails to Implement Adequate Compliance Procedures

December 9, 2020

The SEC brought an enforcement action against ICE Data Pricing & Reference Data, LLC, a registered investment adviser, provides global securities pricing, evaluations, and other information to its advisory clients through various subscription options. The SEC stated that the valuation of fixed-income securities can affect both retail and institutional investors. It noted that independent valuations play a critical role in complex fixed-income investments because these securities are largely traded in over-the-counter markets. It added that inaccurate valuations can affect investment decisions, advisory fees, the accuracy of financial statements and investor account statements, and reported investment returns and portfolio performance.

OCIE Issues A List of Issues Related to Advisers Compliance with Rule 206(4)-7

November 19, 2020

The Office of Compliance Inspections and Examinations published a list of compliance issues that it has identified with compliance by investment advisers with Rule 206(4)-7, the investment adviser compliance rule. Under that rule, it is unlawful for an investment adviser registered with the SEC to provide investment advice unless the adviser has adopted and implemented written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by the adviser or any of its supervised persons. The rule requires advisers to consider their fiduciary and regulatory obligations under the Advisers Act and to formalize policies and procedures to address them. The risk alert sets forth notable deficiencies or weaknesses identified by OCIE staff in connection with Rule 206(4)-7 compliance.

E-Signatures Now Permitted

November 17, 2020

The SEC adopted rules and rule amendments that will provide additional flexibility in connection with documents filed with the SEC by permitting the use of electronic signatures in authentication documents. he Commission adopted rule amendments to permit the use of electronic signatures when executing authentication documents in connection with many documents filed with the Commission. Rule 302(b) of Regulation S-T currently requires that each signatory to an electronic filing manually sign a signature page or other document ("authentication document") before or at the time of the electronic filing to authenticate the signature that appears in typed form within the electronic filing. Today's amendments permit a signatory to an electronic filing who follows certain procedures to sign an authentication document through an electronic signature that meets certain requirements specified in the EDGAR Filer Manual. In addition, the Commission amended certain rules and forms under the Securities Act, Exchange Act, and Investment Company Act to allow the use of electronic signatures in authentication documents in connection with certain other filings when these filings contain typed, rather than manual, signatures.

OCIE Issues Risk Alerts Highlighting Findings Made in Risk Exams

November 9, 2020

The SEC’s Office of Compliance Inspections and Examinations (OCIE) in an alert provided highlights from a series of examinations it conducted that focused on SEC-registered investment advisers operating from numerous branch offices and with operations geographically dispersed from the adviser’s principal or main. This initiative focused on, among other things, the assessment of the compliance and supervisory practices relating to advisory personnel working within the advisers’ branch offices. The risk alert contains observations resulting from the examinations under the Initiative, including nearly 40 examinations of advisers’ main offices combined with one or more examinations of each adviser’s branch offices.

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, ", 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 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.