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Items of interest to investment advisers are constantly updated. Bookmark this page to read up-to-the-minute news and important regulatory changes!

IASEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Investment Professionals

On April 18, 2018, the Commission voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary.  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest.  The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.

SEC Chairman Jay Clayton stated, “The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct.  Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.  The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors.”
The public comment period will remain open for 90 days following publication of the documents in the Federal Register.

FACT SHEET

SEC Open Meeting
Apr. 18, 2018


The Commission proposed two rules and an interpretation to address retail investor confusion about the relationships that they have with investment professionals and the harm that may result from that confusion.  Evidence indicates that retail investors do not fully understand the differences between investment advisers and broker-dealers, which could lead them to choose the wrong kind of investment professional for their particular needs, or to receive advice that is not in their best interest.  The Commission will therefore consider strengthening the standard of conduct that broker-dealers owe to their customers, reaffirming and, in some cases, clarifying the standard of conduct that investment advisers owe to their clients, and providing additional transparency and clarity for investors through enhanced disclosure designed to help them understand who they are dealing with, and why that matters.  The rulemaking package seeks to enhance investor protections while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.

Proposal’s Highlights

Regulation Best Interest


A broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the retail customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.

A broker-dealer would discharge this duty by complying with each of three specific obligations:
Disclosure obligation: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.

Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
Conflict of interest obligation: establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.

Investment Adviser Interpretation


An investment adviser owes a fiduciary duty to its clients — a duty that the Supreme Court found exists within the Advisers Act.  The proposed interpretation reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.

Form CRS – Relationship Summary

Investment advisers and broker-dealers, and their respective associated persons, would be required to provide retail investors a relationship summary.  This standardized, short-form (4 page maximum) disclosure would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

Investment advisers and broker-dealers, and the financial professionals who work for them, would be required to be direct and clear about their registration status in communications with investors and prospective investors.  Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms “adviser” and “advisor” — which are so similar to “investment adviser” that their use may mislead retail customers into believing their firm or professional is a registered investment adviser.

Background

The Commission has been considering issues relating to changes in the market for investment advice, retail investor understanding of their advice relationships, and broker-dealer conflicts of interest, since the mid-1990s.  The staff studied these matters further pursuant to the Dodd-Frank Act’s mandate in Section 913.  Most recently, in June 2017, Chairman Jay Clayton sought public input on a variety of issues associated with standards of conduct for investment professionals.  Today’s proposed rules and interpretations are the outcome of the Commission and the staff’s extensive experience in and consideration of these issues.

What’s Next?

The Commission will seek public comment on the proposed rules and interpretations for 90 days.  This extended comment period will permit retail investors and other interested parties the opportunity to review the extensive material, and potentially to gather relevant data for submission in the comment file. Top 

SEC to Consider New Rules and Forms for IAs and BDs

The SEC will hold an Open Meeting on Wednesday, April 18, 2018, at 3:30 p.m. Under consideration are three matters:

OCIE's Overview of the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers

OCIE has issued a Risk Alert outlining a list of compliance issues relating to fees and expenses charged by SEC-registered investment advisers that were the most frequently identified in deficiency letters sent to advisers.

Although the Risk Alert does not address all deficiencies or weaknesses related to advisory fees and expenses, below are the most frequent deficiencies that OCIE staff has identified:

Fee-Billing Based on Incorrect Account Valuations. OCIE staff has observed advisers that incorrectly valued certain assets in clients’ accounts resulting in overbilled advisory fees. Because advisers generally assess fees as a percentage of the value of assets they manage in each client’s account, an incorrect account valuation will lead to an incorrect advisory fee being assessed to that client.

Billing Fees in Advance or with Improper Frequency. OCIE staff has observed issues with advisers’ billing practices relating to the timing and frequency for which advisory fees were billed.

Applying Incorrect Fee Rate. OCIE staff has observed advisers that applied an incorrect fee rate when calculating the advisory fees charged to certain clients.

Omitting Rebates and Applying Discounts Incorrectly. OCIE staff has observed advisers that did not apply certain discounts or rebates to their clients’ advisory fees, as specified in the advisory agreements, causing the clients to be overcharged.

Disclosure Issues Involving Advisory Fees. OCIE staff has observed several issues with respect to advisers’ disclosures of fees or billing practices.

Adviser Expense Misallocations. OCIE staff has observed advisers to private and registered funds that misallocated expenses to the funds.

OCIE published the Risk Alert to encourage advisers to assess their advisory fee and expense practices and related disclosures to ensure that they are complying with the Advisers Act, the relevant rules, and their fiduciary duty, and review the adequacy and effectiveness of their compliance programs.

In the Risk Alert, OCIE noted that in response to staff’s observations, some advisers have elected to change their practices, enhance policies and procedures, and reimburse clients by the overbilled amount of advisory fees and expenses. OCIE staff also observed advisers that proactively reimbursed clients for incorrect fees and expenses that they identified through the implementation of policies and procedures that provided for periodic internal testing of billing practices.

Advisers should review their practices, policies, and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in the Risk Alert. [Please
login to IA Act UnwrappedTM to view the Risk Alert in its entirety in the Examination Tools Database/2018 Information.]  Top 

Reminder: National Compliance Outreach Seminar for IAs and ICs – Thursday April 12th

The SEC will hold its 2018 compliance outreach program’s national seminar for investment companies and investment advisers on Thursday, April 12th.  The event is intended to help Chief Compliance Officers (CCOs) and other senior personnel at investment companies and investment advisory firms to enhance their compliance programs for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management (IM), and the Asset Management Unit (AMU) of the Division of Enforcement jointly sponsor the National Compliance Outreach Seminar which will be held at the SEC’s Washington, D.C., headquarters from 8:30 a.m. to 5:30 p.m. ET. 

The agenda for the national seminar, shown below, includes discussion of OCIE, IM, and AMU program priorities in 2018, issues related to fees and expenses, portfolio management trends, regulatory hot topics, cybersecurity, compliance, and rulemaking.

The event will also be made available via live on the SEC’s website and as an archived audio webcast.

Compliance Outreach Program National Seminar 2018 (For Investment Adviser and Investment Company Senior Officers) Agenda*

Feb. 13, 2018

National Seminar Agenda (Targeted Discussions for Larger Firms)

April 12, 2018

7:30 am

Registration Opens

8:30 am
to
8:40 am

Welcoming Remarks
SpeakerChairman Jay Clayton

8:40 am
to
9:10 am

Introductory Remarks from SEC Directors
Speakers

*      Dalia Blass, Director, Division of Investment Management

*      Peter Driscoll, Director, Office of Compliance Inspections and Examinations (National Exam Program)

*      Stephanie Avakian, Co-Director, Division of Enforcement

9:10 am
to
10:20 am

Panel I: Insights from SEC Leadership Regarding Program Priorities *

*       Update on certain National Exam Initiatives

*       Fiscal year 2018 priorities

*       Update on certain fiscal year 2017 priorities

Speakers

*       Paul Cellupica, Deputy Director, Division of Investment Management

*       C. Dabney O’Riordan, Co-Chief, Division of Enforcement, Asset Management Unit, Los Angeles Regional Office

*       Kristin Snyder, Co-National Associate Director, National Exam Program, San Francisco Regional Office

10:20 am
to
10:45 am

Question & Answer Session 1
Speakers

*       Ahmed Abdul-Jaleel, Assistant Regional Director, National Exam Program, Chicago Regional Office (Moderator)

*       Brian Blaha, Staff Accountant, National Exam Program, Denver Regional Office

*       Sara Cortes, Assistant Director, Division of Investment Management, Investment Adviser Regulation Office

*       Louis Gracia, Deputy Associate Regional Director, National Exam Program, Chicago Regional Office

*       Barbara Gunn, Assistant Director, Division of Enforcement, Asset Management Unit, Fort Worth Regional Office

*       Michael Spratt, Assistant Director, Division of Investment Management, Disclosure Review Office

10:45 am
to
11:00 am

Break (Q & A Session 1 May Continue Through the Break)

11:00 am
to
12:00 pm

Panel II: Fees and Expenses Impacting Retail Investors

*       Reviewing how the fiduciary standard relates to fees and expenses

*       Disclosing, mitigating and managing conflicts of interest (e.g., allocation and layering of fees and expenses)

*       Operating business models that may create increased risks that investors will pay excessive and/or inadequately disclosed fees, expenses or other charges.

Speakers

*       Louis Gracia, Deputy Associate Regional Director, National Exam Program, Chicago Regional Office (Moderator)

*       Adam Aderton, Assistant Director, Division of Enforcement, Asset Management Unit

*       Jennifer Porter, Branch Chief, Division of Investment Management, Investment Adviser Regulation Office

*       Nicole Tremblay, Senior Vice President and Chief Compliance Officer, Weston Financial

12:00 pm
to
1:15 pm

Lunch Break

1:15 pm
to
2:00 pm

Panel III: Emerging Trends in Portfolio Management

*       Exploring the impact of FinTech (e.g., process automation and big data analytics)

*       Changing wealth management practices (e.g., increased use of portfolio modeling)

*       Embracing risk management frameworks, implementing stress testing methodologies, and managing liquidity

Speakers

*       Carolyn O’Brien, Senior Staff Accountant, National Exam Program, National Exam Program Office (Moderator)

*       Benjamin Alden, General Counsel, Betterment LLC

*       Michelle McCarthy Beck, Chief Risk Officer, TIAA-CREF Investment Management Inc

*       Barbara Gunn, Assistant Director, Division of Enforcement, Asset Management Unit, Fort Worth Regional Office

*       Timothy Husson, Associate Director, Division of Investment Management, Analytics Office

2:00 pm
to
2:30 pm

Question & Answer Session 2
Speakers

*       William Delmage, Assistant Regional Director, National Exam Program, New York Regional Office (Moderator)

*       Ahmed Abdul-Jaleel, Assistant Regional Director, National Exam Program, Chicago Regional Office

*       Adam Aderton, Assistant Director, Division of Enforcement, Asset Management Unit

*       Diane Blizzard, Associate Director, Division of Investment Management, Rulemaking Office

*       Mark Dowdell, Assistant Regional Director, National Exam Program, Philadelphia Regional Office

*       Craig Ellis, Exam Manager, National Exam Program, Denver Regional Office

*       Douglas Scheidt, Chief Counsel, Division of Investment Management Kristin Snyder, Co-National Associate Director, National Exam Program, San Francisco Regional Office

2:30 pm
to
2:45 pm

Break (Q & A Session 2 May Continue Through the Break)

2:45 pm
to
3:45 pm

Panel IV: Regulatory Hot Topics

*       Custody

*       Business continuity (lessons learned from natural disasters)

*       Initial Coin Offerings and cryptocurrencies

*       MiFID

Speakers

Daniel Kahl, Chief Counsel, National Exam Program (Moderator)

*       David Bartels, Senior Special Counsel to the Director, Division of Investment Management

*       Steven Felsenthal, General Counsel & Chief Compliance Officer, Millburn Ridgefield Corp

*       Ryan Hinson, Regulatory Counsel, National Exam Program, Los Angeles Regional Office

*       Corey Schuster, Assistant Director, Division of Enforcement, Asset Management Unit

*       Marshall Sprung, Managing Director & Head of Global Compliance, Blackstone

3:45 pm
to
4:30 pm

Panel V: Cybersecurity

*       Reviewing current cybersecurity threats affecting investment management firms

*       Understanding the legal landscape

*       Highlighting effective industry practices

Speakers

*       David Joire, Senior Special Counsel, Division of Investment Management, Chief Counsel’s Office (Moderator)

*       Keith Cassidy, Associate Director, National Exam Program, Technology Controls Program (TCP)

*       Robert Cohen, Chief, Division of Enforcement, Cyber Unit

*       Shamoil Shipchandler, Regional Director, Fort Worth Regional Office

*       Steven Yadegari, Chief Operating Officer & General Counsel, Cramer Rosenthal McGlynn LLC

4:30 pm
to
5:25 pm

Panel VI: Observations on Ways to Improve Compliance

*       Reviewing recent enforcement cases and lessons learned about firms’ compliance programs

*       Educating and monitoring supervised persons

*       Strengthening disclosures and transparency

*       Keeping up with regulatory and internal reporting

Speakers

*       Donna Esau, Associate Regional Director, National Exam Program, Atlanta Regional Office (Moderator)

*       Marshall Gandy, Associate Regional Director, National Exam Program, Fort Worth Regional Office

*       Martin Kimel, Senior Special Counsel, Division of Investment Management, Enforcement Liaison Office

*       Joseph McGill, Chief Compliance Officer, Lord Abbett & Co LLC

*       Brendan McGlynn, Assistant Director, Division of Enforcement, Asset Management Unit, Philadelphia Regional Office

5:25 pm
to
5:30 pm

Closing Remarks
Speaker

*       Donna Esau, Associate Regional Director, National Exam Program, Atlanta Regional Office

*       Marshall Gandy, Associate Regional Director, National Exam Program, Fort Worth Regional Office

* Sponsored by the SEC’s Office of Compliance Inspections and Examinations, Division of Investment Management and Division of Enforcement
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Three IAs Ordered to Pay $12 Million for Improper Fees


On April 6, 2018, the SEC announced that three investment advisers have settled charges for breaching fiduciary duties to clients and generating millions of dollars of improper fees in the process. 

According to the SEC’s orders, PNC Investments LLC, Securities America Advisors Inc., and Geneos Wealth Management Inc. failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available. The SEC also charged Geneos for failing to identify its revised mutual fund selection disclosures as a “material change” in its 2017 disclosure brochure.  Collectively, the firms will pay almost $15 million, with more than $12 million going to harmed clients.

“These disclosure failures cause real harm to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We strongly encourage eligible firms to participate in the recently announced Share Class Selection Disclosure Initiative as part of an effort to stop these violations and return money to harmed investors as quickly as possible.”

The Share Class Selection Disclosure Initiative gives eligible advisers until June 12, 2018, to self-report similar misconduct and take advantage of the Enforcement Division’s willingness to recommend more favorable settlement terms, including no civil penalties against the adviser.

The SEC’s orders also found that PNCI and Geneos failed to disclose the conflict of interest associated with compensation they received from third parties for investing clients in particular mutual funds, and that PNCI improperly charged advisory fees to client accounts for periods when there was no assigned investment advisory representative.

The SEC’s orders find that PNCI, SAA, and Geneos each violated provisions of the Investment Advisers Act of 1940, including an antifraud provision.  Without admitting or denying the findings, the advisers each consented to a cease-and-desist order and a censure.  The orders require PNCI to pay $6,407,770 in disgorgement and prejudgment interest along with a $900,000 penalty. SAA must pay $5,053,448 in disgorgement and prejudgment interest along with a $775,000 penalty. Geneos must pay $1,558,121 in disgorgement and prejudgment interest along with a $250,000 penalty. [Please
login to IA Act UnwrappedTM to view Release Nos. IA-4878 In the Matter of PNC Investments, LLC; IA-4877 In the Matter of Geneos Wealth Management, Inc.; and IA-4876 In the Matter of Securities America Advisors, Inc.] Top

 


Whistleblower Who First Reported Information to another Federal Agency before SEC Receives Award of Over $2.2 Million

First Award Paid under “Safe Harbor” 120-Day Rule

On April 5, 2018, the Commission announced a whistleblower award of more than $2.2 million to a former company insider whose tips helped the agency open an investigation that led to an enforcement action.  The whistleblower first reported the information to another federal agency and later provided the same information to the SEC. 

This is the first award paid under the “safe harbor” of Exchange Act Rule 21F-4(b)(7), which provides that if a whistleblower submits information to another federal agency and submits the same information to the SEC within 120 days, then the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency. 

The whistleblower voluntarily reported information to a federal agency covered by the rule, which referred the matter to the SEC.  The SEC then opened an investigation.  Within 120 days of the initial report, the whistleblower provided the same information to the SEC and later provided substantial cooperation in the investigation.  Although the SEC report came after the staff had opened its investigation, the SEC treated the submission as though it had been made when the whistleblower provided the information to the other agency.

“Whistleblowers, especially non-lawyers, may not always know where to report, or may report to multiple agencies,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “This award shows that whistleblowers can still receive an award if they first report to another agency, as long as they also report their information to the SEC within the 120-day safe harbor period and their information otherwise meets the eligibility criteria for an award.”   Top

 


SEC to Consider Reliance on Rule 203A-2(e)

Can an IA rely on the rule to be SEC-registered without having an operational interactive website or engaging in business as an IA?

In November, 2016 the SEC’s Division of Investment Management issued a Notice of Intention to Cancel the Registration of Ajenifuja Investments, LLC under Advisers Act Sec. 203(h) (Release No. IA-4576).  Advisers Act Section 203(h) provides, in part, that if the SEC finds that any person registered under Section 203 is no longer in existence, is not engaged in business as an investment adviser, or is prohibited from registering as an investment adviser under Section 203A, the SEC shall cancel the adviser’s registration.

Ajenifuja is registered with the SEC in reliance on Advisers Act Rule 203A-2(e) which provides an exemption from the prohibition on registration for an adviser that provides investment advice to all of its clients exclusively through the adviser’s interactive website, except that the adviser may advise fewer than 15 clients through other means during the preceding 12 months.

The Notice of Cancellation stated the Commission’s belief that the registrant did not, at the time of its Form ADV filings and thereafter, advise clients through an interactive website, and that the registrant is therefore prohibited from registering as an investment adviser under Section 203A.

However, in December, 2016, the registrant submitted a request for an in-person hearing. Ajenifuja raised a material issue of law relevant to issues the SEC must consider in deciding to cancel the registration pursuant to rule 0-5 under the Act – specifically, whether an adviser may rely on rule 203A-2(e) to be registered with the Commission without having an operational interactive website or engaging in business as an investment adviser.

Ajenifuja may file a written statement regarding the potential cancellation of its registration, addressing whether an adviser may rely on Rule 203A-2(e) to be SEC-registered without having an operational interactive website or engaging in business as an investment adviser. Ajenifuja must submit the written statement to the SEC by April 23, 2018.

This process will provide an opportunity for the Commission to fully assess the issues that the registrant raised. Any arguments related to the cancellation of registration that are not discussed in the written statement shall be deemed waived. The SEC has determined that the presentation of facts and legal arguments would not be significantly aided by oral argument, and will therefore make a determination solely on the facts noted in the written statement. [Please
login to IA Act UnwrappedTM to view Release No. IA-4873 In the Matter of Ajenifuja Investments, LLC, Order Granting Hearing on Cancellation and Scheduling Filing of Statements]   Top  


SEC Announces Largest-Ever Whistleblower Awards


On March 19, 2018 the Commission announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million.  The previous high was a $30 million award in 2014.

“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”

The SEC has awarded more than $262 million to 53 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million. As with this case, whistleblowers can report jointly under the program and share an award. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. 
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Division of Investment Management:  Expanded Use of Draft Registration Statement Review Procedures for Business Development Companies

 

On March 16, 2018, the Division of Investment Management posted the following:


ADI 2018 - 01 – Expanded Use of Draft Registration Statement Review Procedures for Business Development Companies

 

The Division of Corporation Finance recently announced that it would expand existing procedures that had been in place for emerging growth companies for nonpublic review of certain draft registration statements. When the Division of Corporation Finance announced the availability of these procedures in 2012, it issued an FAQ noting that business development companies (“BDCs”) could qualify as emerging growth companies, which would allow them to also use these procedures. Following the recent announcement expanding the availability of these procedures, the Division of Investment Management received an inquiry as to whether the Division will similarly expand procedures for the nonpublic review of draft registration statements submitted by BDCs.2 The purpose of this update is to confirm that the Division will accept for nonpublic review draft initial registration statements that are submitted by BDCs under Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The Division also will accept for nonpublic review draft registration statements relating to offerings under the Securities Act of 1933 that are submitted by BDCs within one year of an initial offering or of an initial registration under Exchange Act Section 12(b).

* * * *

The statements in this ADI represent the views of the Division of Investment Management. This update is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content. Future changes in rules, regulations, and/or staff no-action and interpretive positions may supersede some or all of the information in a particular ADI.

 

We hope that this ADI will assist registrants in preparing their filings. We also welcome feedback on this guidance and on the disclosure review process. If you have any questions or feedback, please contact:

 

Disclosure Review and Accounting Office

Phone: 202.551.6921

Email: IMDRAO@sec.gov

 

Endnotes

 

1 See Draft Registration Statement Processing Procedures Expanded, Division of Corporation Finance (updated August 17, 2017), available at https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.

 

2 See Generally Applicable Questions on Title I of the JOBS Act, Division of Corporation Finance (updated December 21, 2015), available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm#fn1.    Top  


Voya Advisers Agree to Repay Clients and Settle Charges that They Failed to Disclose Securities Lending Conflict


On March 8, 2018, the Commission charged two investment adviser subsidiaries of Voya Holdings Inc. with failing to disclose conflicts of interest and making misleading disclosures in connection with their practice of recalling securities on loan so their affiliates could receive tax benefits.

The advisers agreed to pay approximately $3.6 million to settle the charges, including more than $2 million directly to the affected mutual funds for the benefit of their investors.

According to the SEC’s order instituting a settled administrative proceeding, Voya Investments LLC and Directed Services LLC served as investment advisers to certain insurance-dedicated mutual funds offered to annuity and life insurance customers through insurance companies affiliated with the advisers.  In order to generate additional income for the mutual funds and their investors, the Voya advisers lent securities held by the funds to parties looking to borrow the securities.  The Voya advisers recalled loaned securities before their dividend record dates so that the advisers’ insurance company affiliates, who were the record shareholders of the funds’ shares, could receive a tax benefit based on the dividends received.  But, as the order explains, the recall practice caused the funds and their investors to lose securities lending income without receiving any offsetting tax benefit.  The order found that the Voya advisers failed to disclose the conflict of interest to the funds’ board of directors or in the funds’ prospectuses.

“These funds and those investing in them weren’t told that they were losing income so that the Voya advisers could provide a tax benefit to their affiliates.  Now money will be heading back to the funds to help investors,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Investment advisers must not place the interests of their affiliates over those of clients, depriving them of information necessary to make informed investment decisions.”

The Voya adviser affiliates agreed to be censured and consented to the entry of the SEC’s order finding that they willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-8.  The Voya advisers agreed to cease and desist from committing any further violations, and neither admitted nor denied the findings.
[Please login to IA Act UnwrappedTM to view Release No. IA-4868 In the Matter of Voya Investments, LLC and Directed Services, LLC] Top


Fourth Action in SEC’s Enforcement Initiative to Combat Cherry-Picking


On March 8, 2016, the Commission announced settled charges against an Austin, Texas-based investment adviser for defrauding his clients through a “cherry-picking” scheme.  The adviser, Robert Mark Magee, who is the principal, sole owner, and sole employee of Valor Capital Asset Management LLC, has agreed to be banned from the securities industry and pay more than $715,000 to resolve the charges.

According to the SEC’s order, for almost three years, Magee traded securities in Valor’s omnibus account but waited to allocate the trades to client accounts until after the securities’ performance changed over the course of the day.  Magee then “cherry-picked” the trades, disproportionately allocating profitable trades to his accounts and unprofitable trades to his clients’ accounts, reaping substantial profits for himself at his clients’ expense. The SEC’s order found that for most of the three-year period there was less than a one-in-a-trillion chance that the outsized performance of Magee’s personal account, compared to that of his clients’ accounts, was due to chance.

“This case echoes the several actions our office has brought in recent months aimed at protecting unsuspecting retail investors from investment advisers who allegedly cheat their clients by cherry-picking profitable trades,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “The settled order here finds that Magee and Valor cherry-picked trades to their clients’ detriment for almost three years.”

The SEC’s order found that Magee and Valor each violated antifraud provisions of the federal securities laws.  Without admitting or denying the SEC’s findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling $715,871.57. Magee also agreed to be barred from the securities industry.

This is the fourth action arising out of an enforcement initiative to combat cherry-picking led by the SEC’s Los Angeles Regional Office and supported by the agency’s Division of Economic and Risk Analysis (DERA).  The previous actions were announced on Sept. 12, 2017 and Feb. 21, 2018. The investigation was conducted by Manuel Vazquez and supervised by Robert Conrrad.  Data analysis was performed by Scott Walster and Raymond Wolff in DERA. [Please
login to IA Act UnwrappedTM to view Release No. IA-4864 In the Matter of Valor Capital Asset Management, LLC, and Robert Mark Magee]   Top 


Custody Violations for Failure to Disclose Conflicts Created by Arrangement with Third Party


On March 5, 2018, the Commission issued Release No. IA-4863 In the Matter of Financial Fiduciaries, LLC and Thomas Batterman. These proceedings arise out of Respondent Financial Fiduciaries’ non-disclosure of financial conflicts of interest and violations of the “Custody Rule” of the Advisers Act. From early 2012 to mid-2015, Financial Fiduciaries, an investment advisory firm registered with the Commission, failed to disclose to certain of its clients financial conflicts of interest created by Financial Fiduciaries’ arrangement with a third party trust company. Because of these arrangements and the fact that an employee of Financial Fiduciaries’ parent company handled funds of Financial Fiduciaries’ clients, from early 2012 to mid-2014, Financial Fiduciaries had custody over some of its clients’ assets while failing to implement sufficient controls designed to protect those client assets from loss or misappropriation, as required by the Advisers Act. Respondent Thomas Batterman, as a principal of the firm, caused the violations by Financial Fiduciaries.

Batterman is the founder, registered agent, and a principal of Financial Fiduciaries and is the president and majority shareholder of WTC, Inc. (“WTC”), the sole member of Financial Fiduciaries. WTC is a private Wisconsin corporation based in Wausau, Wisconsin. WTC is the sole member of Financial Fiduciaries and manages its payroll.

In December 2011, WTC entered into a trust services agreement with IITC whereby IITC would hire Financial Fiduciaries to provide investment advisory services for IITC’s clients in Wisconsin. Under the 2011 Agreement, among other things, (1) IITC was to act as custodian for the trust assets of Financial Fiduciaries’ clients who utilized IITC as trustee; (2) IITC would maintain a trust services office in WTC’s and Financial Fiduciaries’ Wausau offices; (3) Financial Fiduciaries would be the exclusive provider of investment advisory services for all IITC’s clients requiring such services; (4) one WTC employee in Wausau would serve as a “dual employee” of IITC and WTC; (5) IITC would pay WTC $2,000 per month as part of the dual employee’s compensation; and (6) IITC would pay WTC “variable monthly rent” for providing office space and other office support for the IITC Wisconsin office equal to 50% of the total monthly trust administrative, custody, and base account fees (after reduction for expenses) earned by IITC from Financial Fiduciaries’ clients.

A WTC employee served in the “dual employee” role from approximately January 1, 2012 through mid-June 2014, when she retired. In that role she performed work for both WTC and IITC from WTC’s Wausau office. For WTC, she primarily performed bookkeeping for WTC. For IITC, she performed trust administrative activities on behalf of IITC’s clients in Wausau. This included serving as the primary liaison with IITC’s clients, helping to set up new client accounts and updating account information, assisting with deposits and distributions of trust funds, distributing client correspondence, and court and tax return reporting. Her salary was paid in full by WTC; IITC reimbursed WTC $2,000 per month for her IITC-related compensation. IITC also paid WTC 50% of the trust administrative fees it generated as “variable rent” for the use of WTC office space and other office support services. On average, the “variable rent” amounted to approximately $3,000 per month. Given the financial arrangements between WTC and IITC, Financial Fiduciaries had financial incentives to recommend IITC to its clients who required trust services, and ensure such clients utilized IITC as a trustee.

The WTC “dual employee” had direct access to and control over assets of Financial Fiduciaries’ trust clients by virtue of her also being an employee of IITC. Pursuant to a September 4, 2012, IITC Corporate Resolution, she was authorized to act on behalf of IITC, to include opening/closing client accounts, purchasing and selling securities in the accounts, and transferring funds into and out of such accounts. Further, she had direct check writing authority over an IITC account at a local bank in Wausau. She received and deposited checks into the account from trust clients of Financial Fiduciaries, and wrote checks out of the account to trust beneficiaries. As an employee of WTC, the “dual employee” reported to Batterman, who knew of and approved the above arrangement.

Financial Fiduciaries disclosed in Item 9 of Form ADV Part 1 and Item 15 of Part 2A of its 2012, 2013, and 2014 Forms ADV that it did not have custody of client assets.

However, Financial Fiduciaries had custody of client assets as the “dual employee” of WTC and IITC had direct access to certain Financial Fiduciaries’ clients’ trust assets as an authorized signatory on an IITC local bank account in Wausau. She received and deposited checks into the account from trust clients of Financial Fiduciaries, and wrote checks out of the account to trust beneficiaries. As an employee of WTC, she reported to Batterman. The “dual employee” and WTC were “related persons” to Batterman and Financial Fiduciaries because they were “directly or indirectly … controlled by the adviser, and … under common control with the adviser.” (See Rule 206(4)-2(d)(7).) [Please
login to IA Act UnwrappedTM to view Release No. IA-4863 In the Matter of Financial Fiduciaries, LLC and Thomas Batterman] Top 

LA Regional Office Continues Enforcement Initiative to Combat Cherry-Picking
Cherry-Picking Schemes Uncovered through DERA Data Analysis

In the third action arising out of an enforcement initiative to combat cherry-picking led by the SEC's Los Angeles Regional Office and supported by the SEC’s Division of Economic and Risk Analysis (DERA), the SEC has charged an Orange County IA, president and former CCO in a fraudulent cherry picking scheme.

The Commission filed a complaint against Strong Investment Management and its president and sole owner, Joseph B. Bronson, for operating a "cherry picking" scheme that defrauded Strong's clients. The complaint also alleges that John B. Engebretson, Bronson's brother and the former CCO of Strong, abdicated his compliance responsibilities and ignored numerous "red flags" raised during the course of the fraudulent scheme.

The complaint alleges that for more than four years, Bronson traded securities in Strong's omnibus account but delayed allocating the securities to specific client accounts until he had observed the securities' performance over the course of the day. Bronson reaped substantial profits at his clients' expense by "cherry picking" the trades, allocating the profitable trades to himself and the unprofitable trades to Strong's clients. The complaint also alleges that Strong and Bronson misrepresented their trading and allocation practices in the firm's Forms ADV, including by falsely stating that all trades would be allocated in accordance with pre-trade allocation statements and that the firm did not favor any account, including those of the firm's personnel.

The previous two actions under the enforcement initiative were announced on September 12, 2017.  In the settled 2017 charges, two investment advisers agreed to be banned from the securities industry and were ordered to collectively pay more than $480,000 after the agency uncovered their separate illegal cherry-picking schemes through data analysis.

According to the 2017 orders, Jeremy A. Licht, a California registered investment adviser doing business as JL Capital Management, and Gary S. Howarth, the owner and sole employee of his Oregon-based advisory firm, Howarth Financial Services, LLC, cherry-picked profitable trades for their personal accounts to the detriment of their clients’ accounts.

The SEC’s DERA analysis showed that for a certain time there was less than a one-in-a-trillion chance that the outsized performance of Licht’s personal account, compared to that of his clients’ accounts, was due to chance, and that there was less than a one-in-a-billion chance that the difference between Howarth’s returns and those of his clients was due to chance.

The SEC also found that Licht falsely represented in his Forms ADV that no account would be favored over another as a result of the allocation of orders placed in the omnibus account, and that Howarth admitted in testimony to breaching his fiduciary duty to his clients when making preferential allocations of certain trades.
[Please login to IA Act UnwrappedTM Releases and Enforcement Databases to view LR-24054 SEC v. Strong Investment Management, et al; Release No. IA-4767 In the Matter of Jeremy A Licht d/b/a/ JL Capital Management, and Release No. IA-4768  In the Matter of Howarth Financial Services, LLC and Gary S. Howarth.]   Top 


Supreme Court Limits Protections for Whistleblowers under Dodd-Frank


Wednesday Feb. 21 - The Justices ruled unanimously that employees are not protected from retaliation if they blow the whistle on alleged corporate misdeeds without going to the Securities and Exchange Commission. The whistleblowers are not shielded from being fired unless they have reported the alleged fraud to the SEC.

The case involves Digital Realty Trust Inc.’s appeal of a lower court ruling in favor of a fired executive, Paul Somers, after he complained internally about a supervisor’s alleged misconduct but never reported the matter to the SEC.

Somers, who worked at Digital Realty as a portfolio-management vice president, said he was fired because of allegations that he reported to senior management that his supervisor had eliminated some internal controls, hid major cost overruns and granted unsubstantiated payments to friends.
Somers sued the company in 2014, saying he was protected from retaliation as a whistleblower under Dodd-Frank. Two lower federal courts upheld the SEC's interpretation that the law covers internal whistleblowing, ruling that Congress' intention was to protect such actions.  A federal judge ruled that Dodd-Frank covered a wide array of disclosures by whistleblowers, not just those reported to the SEC, and the 9th U.S. Circuit Court of Appeals upheld the ruling.

Digital Realty appealed to the Supreme Court, and on Wednesday February 21st, the Supreme Court declared the SEC’s interpretation inaccurate. While Congress may have intended to broadly protect whistleblowers, the text of the statute included a narrow definition of who qualified for protection.

Justice Ruth Bader Ginsburg, writing for the Court, said that Congress may have wanted to broadly protect whistleblowers, including those who only reveal problems internally to the company's top executives or its corporate board. But "Dodd-Frank delineates a more circumscribed class" when it defined who was protected from retaliation.

"We find the statute's definition of 'whistleblower' clear and conclusive," Ginsburg said. Its "unambiguous whistleblower definition, in short, precludes the commission from more expansively interpreting that term."

In the 2017 Whistleblower Program Annual Report to Congress, the SEC’s Office of the Whistleblower wrote:

”On June 26, 2017, the United States Supreme Court granted certiorari in Digital Realty Trust, Inc. v. Somers to address a lower court split on the scope of the Dodd-Frank Act anti-retaliation protections. On October 17, 2017, the United States Solicitor General, acting on behalf of the Department of Justice and joined by the Commission, filed an amicus curiae brief in the Supreme Court in support of the whistleblower-respondent. The United States’ amicus curiae brief in Digital Realty continues the Commission’s advocacy efforts and urges the Supreme Court to recognize that Dodd-Frank’s statutory language, its legislative history, and the Commission’s rules require that individuals who internally report potential securities violations at a publicly-traded company are entitled to employment retaliation protection, regardless of whether they have separately reported that information to the Commission.” 

For more information, please refer to pages 21-22 of the SEC's Whistleblower Report, available in IA Act UnwrappedTM Examination Tools Database/2017 Information. Please login to access the information.   Top  

SEC Adopts Statement & Interpretive Guidance on Public Company Cybersecurity Disclosures

The SEC has voted unanimously to approve a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.

“I believe that providing the Commission’s views on these matters will promote clearer and more robust disclosure by companies about cybersecurity risks and incidents, resulting in more complete information being available to investors,” said SEC Chairman Jay Clayton.  “In particular, I urge public companies to examine their controls and procedures, with not only their securities law disclosure obligations in mind, but also reputational considerations around sales of securities by executives.”

The guidance provides the Commission’s views about public companies’ disclosure obligations under existing law with respect to matters involving cybersecurity risk and incidents.  It also addresses the importance of cybersecurity policies and procedures and the application of disclosure controls and procedures, insider trading prohibitions, and Regulation FD and selective disclosure prohibitions in the cybersecurity context.

NOTE: This release does not address the specific implications of cybersecurity to other regulated entities under the federal securities laws, such as registered investment companies, investment advisers, brokers, dealers, exchanges, and self-regulatory organizations. For example, in 2014 the Commission adopted Regulation Systems Compliance and Integrity, applicable to certain self-regulatory organizations, to strengthen the technology infrastructure of the U.S. securities markets. Final Rule: Regulation Systems Compliance and Integrity, Release No. 34-73639 (Nov. 19, 2014) [79 FR. 72252 (Dec. 5, 2014)]. For additional cybersecurity regulations and resources, see the Commission’s website page devoted to cybersecurity issues; see also Cybersecurity Guidance; IM Guidance Update (April 2015), (staff guidance on cybersecurity measures for registered investment companies and investment advisers). [Please login to the IA Act UnwrappedTM Examination Tools Database/2018 Information to access Release Nos. 33-10459; 34-82746 Commission Statement and Guidance on Public Company Cybersecurity Disclosures]  Top 


SEC to Discuss Disclosure at Open Meeting

The Open Meeting scheduled for Feb. 21 was cancelled.

The SEC will hold an Open Meeting on Wednesday, February 21, 2018 at 10:00 a.m. to consider the following three items:

•    whether to approve the issuance of an interpretive release to provide guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents,
•    whether to adopt an interim final rule revising the compliance date for certain provisions of rule 22e-4 under the Investment Company Act of 1940 and related reporting and disclosure requirements, and
•    whether to propose amendments to Form N-PORT and Form N-1A related to disclosures of liquidity risk management for open end management investment companies.   Top 


SEC Opens Registration for National Compliance Outreach Seminar for Investment Companies and Investment Advisers


The SEC announced the opening of registration for its compliance outreach program’s national seminar for investment companies and investment advisers.  The event is intended to help Chief Compliance Officers (CCOs) and other senior personnel at investment companies and investment advisory firms to enhance their compliance programs for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management (IM), and the Asset Management Unit (AMU) of the Division of Enforcement jointly sponsor the compliance outreach program.  The national seminar will be held on April 12 at the SEC’s Washington, D.C., headquarters from 8:30 a.m. to 5:30 p.m. ET.  In-person attendance is limited to 500; a live webcast will be available at www.sec.gov.

The
agenda for the national seminar includes discussion of OCIE, IM, and AMU program priorities in 2018, issues related to fees and expenses, portfolio management trends, regulatory hot topics, cybersecurity, compliance, and rulemaking.

“Regularly hosting this seminar is one of the key ways we work to improve compliance in the industry,” said OCIE Director Peter Driscoll.  “The U.S. capital markets are among the most vibrant, fair, and effective in the world in large part because of the important work that compliance professionals do on a daily basis to ensure risks are addressed, securities laws are followed, and investors are protected.  This event allows us to share our thoughts and observations with these professionals and to listen to the ideas and concerns they want to share with us.”

“Chief Compliance Officers and their teams play an important role in protecting American investors, a goal that the SEC staff shares.  This outreach event is a valuable opportunity to engage and build relationships with these knowledgeable professionals so that we may benefit from their insights as we consider policies affecting investment companies and investment advisers,” said Division of Investment Management Director Dalia Blass.

Investment adviser and investment company senior officers may register online to attend the event in-person. If registrations exceed capacity, investment company and investment adviser CCOs will be given priority on a first-registered basis.  Registration instructions also will be sent to SEC-registered advisers using the e-mail account on the adviser’s most recent Form ADV filing.  The event will also be made available via live and archived audio webcast.  For more information, contact: ComplianceOutreach@sec.gov.  
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SEC Launches Share Class Selection Disclosure Initiative

Encourages Self-Reporting and the Prompt Return of Funds to Investors

The SEC’s Division of Enforcement announced a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors.

Under the Share Class Selection Disclosure Initiative (SCSD Initiative), the Division will agree not to recommend financial penalties against investment advisers who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues and promptly return money to harmed clients.

Section 206 of the Investment Advisers Act of 1940 imposes a fiduciary duty on investment advisers to act in their clients' best interests, including an affirmative duty to disclose all conflicts of interest. A conflict of interest arises when an adviser receives compensation (either directly or indirectly through an affiliated broker-dealer) for selecting a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate. That conflict of interest must be disclosed.

The Commission has long been focused on the conflicts of interest associated with mutual fund share class selection. Differing share classes facilitate many functions and relationships. However, investment advisers must be mindful of their duties when recommending and selecting share classes for their clients and disclose their conflicts of interest related thereto. In the past several years, the Commission has charged nine firms with failing to disclose these conflicts of interest. These actions included significant penalties against the investment advisers, and collectively returned millions of dollars to clients. In addition, the Commission's Office of Compliance Inspections and Examinations has repeatedly cautioned investment advisers and other market participants to examine their share class selection policies and procedures and disclosure practices.

"This focused initiative reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisers to disclose conflicts of interest around share class selection and, importantly, is intended to facilitate the prompt return of money to victimized investors," said Stephanie Avakian, Co-Director of the Division of Enforcement.

"The legal and regulatory requirements in this area are clear, and the Commission will continue to pursue securities violations associated with mutual fund share class selection disclosure failures. We strongly encourage advisers to take advantage of the favorable terms we are offering; these terms will not be available to advisers who do not self-report under this initiative, and we will continue to proactively seek to identify and pursue investment advisers that fail to make the necessary disclosures," said Steven Peikin, Co-Director of the Division of Enforcement.

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available for the advisory clients. Among other things, for eligible advisers that participate in the SCSD Initiative, the Division will recommend settlements that will require the adviser to disgorge its ill-gotten gains and pay those amounts to harmed clients, but not impose a civil monetary penalty. The Division warns that it expects to recommend stronger sanctions in any future actions against investment advisers that engaged in the misconduct but failed to take advantage of this initiative.

"Proper disclosure of conflicts of interest is of utmost importance, and a necessity for any investment adviser to ensure that it is satisfying its obligations as a fiduciary to its clients," said C. Dabney O'Riordan, Co-Chief of the Asset Management Unit in the Division of Enforcement. "This initiative is designed to promote compliance with these obligations with respect to mutual fund share class selection, while at the same time quickly returning money to harmed clients."

Eligibility for the SCSD Initiative is explained in a detailed announcement by the Enforcement Division. Investment advisers must notify the Division of Enforcement of their intent to self-report no later than June 12, 2018, by email to SCSDInitiative@sec.gov  or by mail to SCSD Initiative, U.S. Securities and Exchange Commission, Denver Regional Office, 1961 Stout Street, Suite 1700, Denver, Colorado 80294. The SCSD Initiative is being led by the Asset Management Unit. [Please
login to the IA Act UnwrappedTM Examination Tools Database to view the announcement detailing the SCSD Initiative, and referenced cases in the Releases and Enforcement Databases.]   Top


OCIE 2018 National Exam Program Priorities 

OCIE examined over 2,100 IAs in FY2017, an increase of 46% over FY2016.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2018 examination priorities. OCIE publishes its exam priorities annually to improve compliance, prevent fraud, monitor risk, and inform policy. Of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.

This year, OCIE's examination priorities are broken down into five categories:  (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) cybersecurity; and (5) anti-money laundering programs.

Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. OCIE will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules.

Retail Investors, Including Seniors and Those Saving for Retirement – Protecting Main Street investors continues to be a priority in 2018. OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, and the execution of customer orders in fixed income securities. OCIE will continue to monitor the growth of cryptocurrencies and initial coin offerings and examine registrants involved in their offer and sale to ensure that investors receive adequate disclosures about the risks associated with these investments.

FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA's operations and regulatory programs and the quality of FINRA's examinations of broker-dealers and municipal advisors. OCIE will also examine MSRB to evaluate the effectiveness of select operations and internal policies, procedures, and controls.

Cybersecurity – Each of OCIE's examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.

Anti-Money Laundering Programs – Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.

The published priorities for 2018 are not exhaustive. Further, additional priorities may be added in light of market conditions or as OCIE identifies emerging risks and trends. The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff, who are uniquely positioned to identify the practices, products, and services that may pose significant risk to investors or the financial markets. OCIE staff also seek advice of the Chairman and Commissioners, staff from other SEC Divisions and Offices, the SEC's Investor Advocate, and the SEC's fellow regulators.
[Please
login to the IA Act UnwrappedTM Examination Tools Database/2018 Information to view the 2018 National Exam Program Examination Priorities document in its entirety.]   Top 


SEC IA Act Amendments Effective March 12
th

In Release No. IA-4839, the Commission adopted amendments to Rule 203(l)-1 that defines a venture capital fund, and Rule 203(m)-1 that implements the private fund adviser exemption under the Advisers Act, in order to reflect changes made by sections of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”).

UPDATE: The amendments become effective March 12, 2018.  [Please
login to IA Act UnwrappedTM to view Final Rule Release No. IA-4839 Amendments to Investment Advisers Act Rules to Reflect Changes Made by the FAST Act, and associated changes in the Regulatory Database.]   Top 

SEC Issues Notice of Intent to Cancel Certain IA Registrations

The Commission has issued a notice that it intends to issue an order cancelling the registrations of the forty-five investment advisers whose names appear in the Appendix of Release No. IA-4849.

Each registrant listed in the Appendix either (a) has not filed a Form ADV amendment with the Commission as required by Advisers Act Rule 204-1 and appears to be no longer in business as an investment adviser, or (b) has indicated on Form ADV that it is no longer eligible to remain registered with the Commission as an investment adviser but has not filed Form ADV-W to withdraw its registration.

Accordingly, the Commission believes that reasonable grounds exist for a finding that these registrants are no longer in existence, are not engaged in business as investment advisers, or are prohibited from registering as investment advisers under section 203A, and that their registrations should be cancelled pursuant to section 203(h) of the Act.

Any interested person may, by February 26, 2018, submit to the Commission in writing a request for a hearing on the cancellation of the registration of any listed registrant listed accompanied by a statement as to the nature of such person’s interest, the reason for such person’s request, and the issues, if any, of fact or law proposed to be controverted, and the writer may request to be notified if the Commission should order a hearing. At any time after February 26, 2018, the Commission may issue an order cancelling the registrations.  [Please login to the IA Act UnwrappedTM Releases Database to view the Notice, Release No. IA-4849.]   Top 


SEC Operating Status during Government Shutdown

1/23 Update: The Government Shutdown has ended.

The SEC will remain open for a limited number of days during the federal government shutdown, fully staffed and focused on the agency's mission.

Any changes to the SEC's operational status will be announced on the SEC's website. In the event that the SEC does shut down, the Commission will pursue the agency's plan for operating during a shutdown. As that plan contemplates, the Commission is currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of its mission.

Click HERE to access the SEC's Operations Plan under a Lapse in Appropriations and Government Shutdown
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Robert Jackson and Hester Peirce Sworn In as SEC Commissioners


On January 11, 2018, Robert J. Jackson Jr. and Hester M. Peirce were sworn into office as SEC Commissioners by SEC Chairman Jay Clayton. Mr. Jackson and Ms. Peirce were nominated to the SEC by President Donald Trump, and their nominations were confirmed by the U.S. Senate on Dec. 21.  Both new commissioners participated in today’s inaugural meeting of the SEC’s Fixed Income Market Structure Advisory Committee.   

“I look forward to working with Rob and Hester as we continue our focus on our vital mission and ensuring that our markets are working for the benefit of Main Street investors," Chairman Clayton said. “It is clear to me they will bring energy, commitment, and dedication to our work and have our mission at the front of their minds.”

“I’m honored to join Chairman Clayton and Commissioners Stein, Piwowar and Peirce in the SEC’s critical mission of ensuring that investors are protected, that our markets provide a level playing field for all Americans, and that entrepreneurs have access to the capital they need to create jobs," said Commissioner Jackson.  “The SEC boasts a talented and dedicated staff, and I’ll do all I can to support their efforts to make sure our securities laws keep pace with our ever-changing markets.”

“It is such an honor to return to the SEC to work with my colleagues on the Commission and the staff for the benefit of investors and the American economy,” said Commissioner Peirce.

Commissioner Jackson comes to the SEC from NYU School of Law, where he was a professor of law.  He previously was professor of law and director of the Program on Corporate Law and Policy at Columbia Law School.  He also has served as an adviser at the Treasury Department and in the Office of the Special Master for TARP Executive Compensation.  Commissioner Jackson earned his BA from the University of Pennsylvania, a BS and MBA in Finance from Wharton, an MPP from Harvard University’s Kennedy School of Government, and his JD from Harvard Law School.

Commissioner Peirce comes to the SEC from the Mercatus Center at George Mason University where she served as a Senior Research Fellow and Director of the Financial Markets Working Group.  She previously worked for U.S. Senator Richard Shelby on the Senate Committee on Banking, Housing, and Urban Affairs, and, prior to that, as counsel to then-SEC Commissioner Paul S. Atkins and as a Staff Attorney in the Division of Investment Management.   Commissioner Peirce earned her BA in economics from Case Western Reserve University and her JD from Yale Law School.

Commissioner Jackson fills a term that expires on June 5, 2019, and Commissioner Peirce fills a term that expires on June 5, 2020.  Top 


SEC Amends Rules to Reflect Changes Made by the FAST Act


The Commission has adopted amendments to the rule that defines a venture capital fund (Rule 203(l)-1) and the rule that implements the private fund adviser exemption (Rule 203(m)-1) under the Advisers Act in order to reflect changes made by sections of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”) which amended sections 203(l) and 203(m) of the Advisers Act.

Title LXXIV, section 74001 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to one or more “venture capital funds” in Advisers Act section 203(l) by deeming “small business investment companies” to be “venture capital funds” for purposes of the exemption. Accordingly, the Commission is amending the definition of a venture capital fund to include “small business investment companies” (“SBICs”).

Title LXXIV, section 74002 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to “private funds” with less than $150 million in assets under management in Advisers Act section 203(m) by excluding the assets of “small business investment companies” when calculating “private fund assets” towards the registration threshold of $150 million. Accordingly, the Commission is amending the definition of “assets under management” in the rule that implements the private fund adviser exemption to exclude the assets of “small business investment companies.”

The amendments become
effective March 12, 2018.  [Please login to IA Act UnwrappedTM to view Final Rule Release No. IA-4839 Amendments to Investment Advisers Act Rules to Reflect Changes Made by the FAST Act.]  Top 


Merrill Lynch Charged with Failing to Comply with Anti-Money Laundering Laws


On December 21, 2017, Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and investment adviser headquartered in New York, New York, agreed to settle charges that it failed to file and timely file Suspicious Activity Reports (SARs) for certain transactions.

To help detect potential violations of the securities laws and illegal money laundering, the Bank Secrecy Act (BSA) requires broker-dealers to file SARs to report suspicious transactions that occur through their firms. The BSA and regulations promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) require the filing of a SAR within 30 days after a broker-dealer determines that activity is suspicious. Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) requires broker-dealers to comply with the SAR reporting requirements of the BSA.

Merrill Lynch, in addition to offering its customers the ability to buy and sell securities, offered customers with brokerage accounts various money transfer services, such as ATM cash deposits and withdrawals, wire transfers, journal-entry transfers, check writing, cash advances, and ACH transfers. According to the SEC’s order, by offering these additional money transfer services, Merrill Lynch was susceptible to risks of money laundering and other illicit financial activity associated with these services.

According to the SEC’s order, from at least 2011 to 2015, Merrill Lynch did not file SARs on certain suspicious movements of funds through its customers’ accounts. Merrill Lynch’s failure to file such SARs resulted from not having anti-money laundering policies and procedures that were reasonably designed to account for the additional risk associated with the money transfer services offered by certain of its retail brokerage accounts. Among other things, the SEC’s order finds that Merrill Lynch failed to properly use its automated internal systems to monitor certain brokerage accounts, did not investigate and timely report on certain suspicious transactions flagged by its internal monitoring systems, and failed to adequately monitor continuing suspicious activities.

The SEC’s order instituting a settled administrative and cease-and-desist proceeding finds that Merrill Lynch violated Section 17(a) of the Exchange Act and Rule 17a-8 promulgated thereunder by failing to file SARs as required by the BSA and FinCEN regulations. Without admitting or denying the SEC’s findings, Merrill Lynch consented to a cease-and-desist order, a censure, and a civil penalty of $13,000,000. In a related matter, Merrill Lynch also agreed to pay a $13,000,000 fine to the Financial Industry Regulatory Authority. [Please
login to IA Act UnwrappedTM to access Release No. IA-4831 In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated]  Top  


Marc P. Berger Named Director of New York Regional Office


Marc P. Berger has been named Director of the SEC’s New York Regional Office.  He will join the agency in January 2018.  Mr. Berger is presently global co-head of Ropes & Gray LLP’s Securities and Futures Enforcement Practice.  Before joining Ropes & Gray, Mr. Berger spent 12 years as an Assistant U.S. Attorney in the Southern District of New York, including serving as Chief of that office’s Securities and Commodities Fraud Task Force.  In that role, he supervised the investigation and prosecution of some of the nation’s highest profile financial and investment fraud cases, including the largest crackdown on hedge fund insider trading in U.S. history.  Mr. Berger also has significant experience conducting and investigating violations of the federal securities laws, as well as extensive trial and appellate experience.

Mr. Berger will lead a staff of more than 390 enforcement attorneys, accountants, investigators, and compliance examiners involved in the investigation and prosecution of enforcement actions and the performance of compliance inspections in the New York region.  The New York office has responsibility for the largest concentration of SEC-registered financial institutions, including more than 4,000 investment banks, investment advisers, broker-dealers, mutual funds, and hedge funds. Top 


IA & BD Failed to Supervise Former President

President charged with fraud for stealing nearly $2 million his advisory clients and brokerage customers

On December 11, 2017, Wilmington, Delaware based Coastal Investment Advisors, Inc. and its affiliated broker-dealer, Coastal Equities, Inc., agreed to settle charges that they failed reasonably to supervise their former president, Michael Donnelly. The SEC charged Donnelly in 2015 with fraud for stealing nearly $2 million from his advisory clients and brokerage customers.

An SEC investigation found that from at least 2009 through 2014, Donnelly stole client funds by lying to clients in order to convince them to invest in certain securities. Instead of investing the money as promised, Donnelly used the money for his own personal and business purposes. Donnelly concealed his fraud and theft, in part, by manually inputting fictitious investments into consolidated financial reports which he generated by using a tool available to him through Coastal Equities and Coastal Investment Advisors. Donnelly provided the consolidated reports to clients which falsely led them to believe that he had purchased the securities on their behalf.

Throughout Donnelly’s fraud, Coastal Investment Advisors had no policies governing the creation, use, and review of these consolidated reports and Coastal Equities did not have any such policies in place until 2013.

The SEC’s order finds that Coastal Equities and Coastal Investment Advisors failed reasonably to supervise Donnelly with a view to preventing and detecting Donnelly’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act, and that Coastal Investment Advisors willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the findings in the SEC’s order, Coastal Equities and Coastal Investment Advisors each agreed to a censure and to pay a $40,000 civil penalty. The SEC considered the firm’s self-reporting and cooperation in determining to accept their settlement offers. [Please
login to IA Act UnwrappedTM to view Release No. IA-4826 In the Matter of Coastal Equities, Inc., and Coastal Investment Advisors, Inc.]   Top 


SEC Ratifies Appointment of Administrative Law Judges


On November 30, 2017 the Commission announced that it has ratified its prior appointment of Chief Administrative Law Judge Brenda Murray and Administrative Law Judges Carol Fox Foelak, Cameron Elliot, James E. Grimes, and Jason S. Patil.

On Nov. 29, 2017, the Office of Solicitor General submitted a brief in the Supreme Court in Raymond J. Lucia and Raymond J. Lucia Companies Inc. v. Securities and Exchange Commission (No. 17-130) asking the Court to decide whether the Commission’s ALJs are inferior officers who must be appointed consistent with the Appointments Clause of the Constitution. The Solicitor General’s brief takes the position that the Commission’s ALJs are inferior officers.   By ratifying the appointment of its ALJs, the Commission has resolved any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause. The Commission Order also directs the ALJs to review their actions in all open administrative proceedings to determine whether to ratify those actions. [Please
login to IA Act UnwrappedTM to view Release No. IA-4816 In re: Pending Administrative Proceedings.]  Top  


Cellupica Named Deputy Director of the Division of Investment Management


Paul G. Cellupica has been named Deputy Director of the agency's Division of Investment Management. Mr. Cellupica will oversee a number of the division's strategic, rulemaking, and industry engagement initiatives. He will also serve as a senior advisor to the Director, Dalia Blass.

Mr. Cellupica most recently was Managing Director and General Counsel for Securities Law at Teachers Insurance and Annuity Association of America (TIAA), where his responsibilities included legal support for the TIAA-CREF mutual fund complex. Prior to that he was Chief Counsel for the Americas at MetLife, Inc., where he had responsibility for legal support of MetLife's financial services businesses in the U.S. and Latin America.

Mr. Cellupica served with the SEC between 1996 and 2004 in a number of capacities in the Division of Investment Management and the Division of Enforcement, including as Assistant Director in the Division of Investment Management from 2001 to 2004. He received the SEC's Martha Platt Award in 2002 in recognition of his exceptional dedication, excellence and integrity, and the Law and Policy Award in 2003.   Top  


Enforcement Division Issues Report on Priorities and FY 2017 Results

 
In its ongoing efforts to protect Main Street investors, the SEC’s Enforcement Division issued a report highlighting its priorities for the coming year as well as a review of enforcement actions that took place during FY 2017. 

In the report, Co-Directors Stephanie Avakian and Steven Peikin stated their overall enforcement approach: “Vigorous enforcement of the federal securities laws is critical to combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”

They also stated five core principles that will guide their enforcement decision-making:  focus on the Main Street investor; focus on individual accountability; keep pace with technological change; impose sanctions that most effectively further enforcement goals; and constantly assess the allocation of resources.

“I applaud the excellent work of the men and women of our Enforcement Division. Through their tireless efforts to uncover wrongdoing and hold bad actors accountable, they defend our Main Street investors and support the integrity of our capital markets,” said SEC Chairman Jay Clayton.

“As Enforcement Directors our goal is to continue to protect investors, deter misconduct, punish wrongdoers and keep our markets the safest and strongest in the world,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“The Enforcement Report clearly shows the broad range of the significant enforcement actions, penalties and money returned to investors,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “We will continue to bring enforcement actions involving misconduct that directly harms investors and our markets.”

According to the report, fiscal year 2017 was a successful and impactful year for the Enforcement Division. The Commission brought a diverse mix of 754 enforcement actions, including 446 standalone actions and returned a record $1.07 billion to harmed investors. A significant number of the Commission’s 446 standalone cases concerned investment advisory issues, securities offerings, and issuer reporting/accounting and auditing, each comprising approximately 20 percent of the overall number of standalone actions. The Commission also continued to bring actions relating to market manipulation, insider trading, and broker-dealers, with each comprising approximately 10 percent of the overall number of standalone actions, as well as other areas. And, it obtained judgments and orders totaling more than $3.789 billion in disgorgement and penalties. [Please
login to the IA Act UnwrappedTM Examination Tools Database to view the Report.]  Top 


Senate Banking Committee Approves New SEC Commissioners


On November, 1, 2017 the Senate Committee on Banking, Housing and Urban Affairs unanimously approved Hester Peirce and Robert L. Jackson, Jr. to serve on the Securities and Exchange Commission.

If they are confirmed by the Senate, Ms. Peirce, a Republican, and Mr. Jackson, a Democrat, would give the SEC a full complement of five commissioners for the first time in more than two years.

The SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. The Chairman and Commissioners may continue to serve approximately 18 months after terms expire if they are not replaced before then. To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman, the SEC's top executive.

Ms. Peirce, currently a senior fellow at the conservative Mercatus Center at George Mason University, would replace Daniel Gallagher Jr., who left the SEC in October 2015. Mr. Jackson, currently a law professor at Columbia University, would replace Luis Aguilar, who departed in December 2015.

The Commission currently has only three Commissioners:
Commissioner Kara M. Stein was appointed by President Obama, her term expires in 2017.
Commissioner Michael S. Piwowar, also appointed by President Obama and designated Acting Chairman by President Trump through May 4, 2017, has a term that expires in 2018.
SEC Chairman Jay Clayton, nominated by President Trump, was sworn in on May 4, 2017 following his confirmation by the Senate. His term expires in 2021.  Top 


Peter B. Driscoll Named Director of OCIE


The SEC announced that Peter B. Driscoll has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE).  Mr. Driscoll has served as OCIE’s Acting Director since January 2017.

OCIE is responsible for directing the SEC’s National Examination Program.  National Examination Program staff conduct examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, and transfer agents, among others.  The National Examination Program uses a risk-based approach to fulfill its mission of promoting compliance with the U.S. securities laws, preventing fraud, monitoring risk, and informing policy.   

“Pete has been an exceptional leader of the National Examination Program since taking over as Acting Director of OCIE, including advancing the use of technology to make the Program more effective,” said Chairman Jay Clayton.  “With over 15 years of experience at the SEC as an attorney, examiner, and manager, I am confident that Pete and OCIE’s dedicated staff will continue to advance the interests of investors across the country.”

Mr. Driscoll added, “I am grateful for the opportunity to lead OCIE, and to continue to work with Chairman Clayton, the Commissioners, and our colleagues across the agency to protect investors and ensure market integrity.  It is my privilege to work alongside our talented and dedicated examiners who serve as the eyes and ears of the Commission.”

Mr. Driscoll was named as OCIE’s first Chief Risk and Strategy Officer in March 2016 after previously serving as OCIE’s Managing Executive from February 2013 through February 2016.  He first joined the Commission as a summer legal intern in the Chicago Regional Office in 2000.  He rejoined the SEC in 2001 as a staff attorney in the Division of Enforcement and was later a Branch Chief and Assistant Regional Director in OCIE’s Investment Adviser and Investment Company examination program.

Mr. Driscoll began his career with Ernst and Young LLP and held several accounting positions in private industry.  He earned a B.S. in Accounting as well as a J.D. from St. Louis University.  He is licensed as a certified public accountant and is a member of the Missouri Bar Association.  Top 


Former PE Firm Partner Charged with Secretly Billing Clients for Vacations and Salon Visits


On October 25, 2017, the SEC charged Mohammed Ali Rashid, a former senior partner at Apollo Management L.P., with defrauding his fund clients by secretly billing them for approximately $290,000 in personal expenditures, including his family vacations, visits to a hair salon, and purchases of designer clothing and high-end electronics.  The SEC’s complaint alleges that Rashid falsely claimed that certain individuals accompanied him to dinners to make it appear various personal expenses had a business purpose, and he doctored a receipt in an effort to justify his purchase of a $3,500 suit for his father as a business expense.

“As alleged in our complaint, despite earning millions of dollars, Rashid used client money to fund his lifestyle and personal expenses, including family vacations, designer clothing, and spa services.  Rashid knew what he was doing was wrong because he took active steps to conceal his misconduct,” said Anthony Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s complaint, despite being caught by the firm and told to stop on two occasions in 2010 and 2012, Rashid continued to expense personal items to clients into 2013.  After he was confronted about his expenses for a third time, Rashid admitted that he charged approximately $220,000 in personal expenses.  A forensic accountant then uncovered additional personal expenses that Rashid improperly charged to clients.  The SEC’s complaint alleges that Rashid violated, and in the alternative aided and abetted violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. 
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SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union's MiFID II's Research Provisions

On October 26, 2017, following consultation with European authorities, and in response to concerns that investors could lose access to valuable research, the staff of the U.S. Securities and Exchange Commission issued three related no-action letters. These letters are designed to provide market participants with greater certainty regarding their U.S. regulated activities as they engage in efforts to comply with the European Union’s (EU) Markets in Financial Instruments Directive (MiFID II) in advance of the Jan. 3, 2018, implementation date.

The no-action relief provides a path for market participants to comply with the research requirements of MiFID II in a manner that is consistent with the U.S. federal securities laws. More specifically, and subject to various terms and conditions: (1) broker-dealers, on a temporary basis, may receive research payments from money managers in hard dollars or from advisory clients' research payment accounts; (2) money managers may continue to aggregate orders for mutual funds and other clients; and (3) money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage.

"Today's no-action relief was designed with input from a range of market participants to reduce confusion and operational difficulties that might arise in the transition to MiFID II's research provisions," said SEC Chairman Jay Clayton. "Staff's letters take a measured approach in an area where the EU has mandated a change in the scope of accepted practice, and accommodate that change without substantially altering the U.S. regulatory approach. These steps should preserve investor access to research in the near term, during which the Commission can assess the need for any further action.  Cooperation with European authorities, including the European Commission, has been instrumental to the SEC's efforts, and I welcome the additional guidance the EC published today. We look forward to continued dialogue on this and other important issues."

The temporary no-action relief facilitates compliance with the new MiFID II research provisions while respecting the existing U.S. regulatory structure. It also is intended to provide the staff with sufficient time to better understand the evolution of business practices after implementation of the MiFID II research provisions. During the period of the temporary relief, the staff will monitor and assess the impact of MiFID II's research provisions on the research marketplace and affected participants in order to determine whether more tailored or different action, including rulemaking, is necessary and appropriate in the public interest.

To facilitate the staff's monitoring and assessment efforts with respect to the temporary no-action relief, SEC staff encourages members of the public to make their views known on these matters via webform or e-mail.  In particular, staff invites the public to provide data and other information relating to the impact of MiFID II's research provisions on broker-dealers (including any changes to their business models), investors, and the quantity and quality of research. Comments would be appreciated by one year before the expiration of the period of temporary relief.

FACT SHEET

Division of Investment Management No-Action Relief

Division of Trading and Markets No-Action Relief

The Division of Trading and Markets provided relief to allow money managers to operate within the safe harbor if the money manager makes payments for research to an executing broker-dealer out of client assets alongside payments for execution through the use of an RPA that conforms to the requirements for RPAs in MiFID II, and the executing broker-dealer is legally obligated to pay for the research, provided that all other applicable conditions of Section 28(e) are met.  Top 


Temporary No-Action Relief for BDs Receiving Payments for Research from Investment Managers Subject to MiFID II


The Division of Investment Management has issued temporary no-action relief if a broker-dealer provides research services that constitute investment advice under section 202(a)(11) of the Advisers Act to an investment manager that is required under Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, as implemented by the European Union member states (“MiFID II”), either directly or by contractual obligation (a “Manager”), to pay for the research services from its own money, from a separate research payment account (“RPA”) funded with its clients’ money, or a combination of the two (the “Research Payment”).

The Division's assurances are temporary and will expire thirty (30) months from MiFID II’s implementation date. During the Temporary Period, the Division will not consider a Broker-Dealer to be an Investment Adviser.  The Division noted that it may or may not renew these assurances as appropriate.
[Please login to the IA Act UnwrappedTM No-Action Letters Database to view the Division's No-Action Response to SIFMA and the associated incoming letter.]  Top  

No-Action Relief for Advisers to Aggregate Client Orders

The Division of Investment Management has issued no-action relief under Advisers Act Section 206 and Investment Company Act Sec. 17(d) and Rule 17d-1 thereunder, for an investment adviser that aggregates orders for the sale or purchase of securities on behalf of its clients in reliance on the position taken in SMC Capital while accommodating the differing arrangements regarding the payment for research that will be required by MiFID II (the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, as implemented by the European Union member states). [Please login to the IA Act UnwrappedTM No-Action Letters Database to view the Division's response to the Investment Company Institute and associated incoming letter.]  Top  


SEC Proposes Rules to Implement FAST Act Mandate to Modernize and Simplify Disclosure


On October 11, 2017, the Commission voted to propose amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies and to implement a mandate under the Fixing America's Surface Transportation (FAST) Act. The proposed amendments would make adjustments to update, streamline or otherwise improve the Commission's disclosure framework. The proposal reflects changes based on recommendations in the staff's FAST Act Report and amendments developed as part of a broader review of the Commission's disclosure system.

Fact Sheet
FAST Act Modernization and Simplification of Regulation S-K
SEC Open Meeting, October 11, 2017


Action - The Commission will consider whether to propose amendments to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide all material information to investors. The amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.

Highlights - Among other things, the proposed amendments would:

The proposal also includes parallel amendments to several rules and forms applicable to investment companies and investment advisers, including proposed amendments that would require certain investment company filings to include a hyperlink to each exhibit listed in the exhibit index of the filings and be submitted in HyperText Markup Language (HTML) format.

Background - As mandated by the FAST Act, in November 2016 the staff published a Report on modernizing and simplifying the disclosure requirements in Regulation S-K.  The report provided specific and detailed recommendations on modernizing and simplifying Regulation S-K in a manner that reduces costs and burdens on companies while still providing all material information.  The FAST Act also requires that the Commission issue a proposal to implement the recommendations in the report.  

If approved, the Commission will seek public comment on the proposed rules for 60 days. [Release No. IA-4791]   
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Update on Review of SEC's 2016 Cyber Intrusion


SEC Chairman Jay Clayton has provided an update on the status of the agency’s review and investigation of the 2016 intrusion into the EDGAR system.  In addition to updating previous disclosures, today's announcement also includes additional information on the agency’s efforts to strengthen its cybersecurity risk profile going forward.

The ongoing staff investigation of the 2016 intrusion has now determined that an EDGAR test filing accessed by third parties as a result of that intrusion contained the names, dates of birth and social security numbers of two individuals.  This determination is based on forensic data analysis conducted since the agency's Sept. 20th disclosure of the intrusion which relied on the latest information available at that time.

Chairman Clayton was informed by staff of this new information this past Friday, and staff are reaching out to the two individuals to notify them and offer to provide them with identity theft protection and monitoring services.  Should the agency’s review uncover additional such individuals whose sensitive information may have been accessed, the staff will contact them and offer them identity protection and monitoring as well.

“The 2016 intrusion and its ramifications concern me deeply.  I am focused on getting to the bottom of the matter and, importantly, lifting our cybersecurity efforts moving forward,” said Chairman Clayton.  “While our review and remediation efforts are ongoing and may take substantial time to complete, I believe it is important to provide new information regarding the scope of the 2016 intrusion and provide an update on the steps we are taking to assess and improve the cybersecurity risk profile of our EDGAR system and of the agency’s systems more broadly.”

The agency’s efforts going forward are organized into five principal work streams:

  1. The review of the 2016 EDGAR intrusion by the Office of Inspector General.  Staff have been instructed to provide their full cooperation with this effort
  2. The investigation by the Division of Enforcement into the potential illicit trading resulting from the 2016 EDGAR intrusion
  3. A focused review of and, as necessary or appropriate, uplift of the EDGAR system. The EDGAR system has been undergoing modernization efforts.  The agency has added, and expects to continue to add, additional resources to these efforts, which are expected to include outside consultants, and will increase the focus on cybersecurity matters
  4. The more general assessment and uplift of the agency’s cybersecurity risk profile and efforts that were initiated shortly after the Chairman’s arrival at the Commission this past May, including, without limitation, the identification and review of all systems, current and planned (e.g., the Consolidated Audit Trail or CAT), that hold market sensitive data or personally identifiable information
  5. The agency’s internal review of the 2016 EDGAR intrusion to determine, among other things, the procedures followed in response to the intrusion. This review is being overseen by the Office of the General Counsel and has an interdisciplinary investigative team that includes personnel from regional offices and will involve outside technology consultants

Each of these efforts is moving forward and, as is the nature of matters of this type, will require substantial time and effort to complete.  Chairman Clayton has pledged to keep Congress informed of the ultimate findings and conclusions of the agency’s internal review into the 2016 intrusion.

Looking forward, and to further the efforts discussed above, Chairman Clayton has authorized the immediate hiring of additional staff and outside technology consultants to aid in the agency’s efforts to protect the security of its network, systems and data.  Chairman Clayton also has directed the staff to take a number of steps designed to strengthen the agency’s cybersecurity risk profile, with an initial focus on EDGAR.  This effort includes assessing the types of data the SEC takes in through the EDGAR system, and whether EDGAR is the appropriate mechanism to obtain that data.  Another part of this effort includes reviewing the security systems, processes and controls in place to protect data submitted through EDGAR.

The staff also will conduct similar reviews of other systems in use at the SEC, assessing the types of data the agency keeps and the related security systems, processes and controls.  The staff also will work to enhance escalation protocols for cybersecurity incidents in order to enable greater agency-wide visibility and understanding of potential cyber vulnerabilities and attacks.

More broadly, the agency is evaluating its cybersecurity risk governance structure, which has included the establishment of a senior-level cybersecurity working group and may include additional enhancements to promote the management and oversight of cybersecurity across the SEC’s divisions and offices.

Other initiatives resulting from the general cybersecurity assessment Chairman Clayton initiated in May are ongoing or will commence shortly.  These include internal, Commission-level incident response exercises and continued interaction on cybersecurity efforts with other government agencies and committees, including the Department of Homeland Security, the Government Accountability Office and the Financial and Banking Information Infrastructure Committee.

This update also is being included as part of Chairman Clayton’s written testimony submitted to the U.S. House of Representatives Committee on Financial Services in connection with the Committee’s upcoming hearing titled “Examining the SEC’s Agenda, Operations, and Budget.”  Top 


SEC Provides Regulatory Relief and Assistance for Hurricane Victims

The Commission announced that it is providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, municipal advisors and others affected by Hurricane Harvey, Hurricane Irma, and Hurricane Maria.  The loss of property, power, transportation, and mail delivery due to the hurricanes poses challenges for some individuals and entities that are required to provide information to the SEC and shareholders.

To address compliance issues caused by Hurricane Harvey, Hurricane Irma, and Hurricane Maria, the Commission issued an order that conditionally exempts affected persons from certain requirements of the federal securities laws for periods following the weather events.

The Commission also adopted interim final temporary rules that extend the filing deadlines for specified reports and forms that companies must file pursuant to Regulation Crowdfunding and Regulation A.

The exemptive relief and rules are structured for a broad class of companies and others affected by the hurricanes and their respective aftermaths.  Some companies and other affected persons may require additional or different assistance in their efforts to comply with the requirements of the federal securities laws. The Commission staff will address these and any disclosure-related issues on a case-by-case basis in light of their fact-specific nature.  Those affected by the hurricanes that require additional assistance are encouraged to contact Commission staff for individual relief or interpretive guidance. 

ADDITIONAL INFORMATION

In connection with the relief, issued in an order and interim final temporary rules, the Commission staff will take the following positions under the Exchange Act, the Securities Act, and the Investment Advisers Act:

     For purposes of eligibility to use Form S-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 eligibility), a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements during the applicable relief period if it was current and timely as of the first day of the applicable relief period.  After the applicable relief period, a company will continue to be considered current and timely if it files any required report on or before Oct. 10, 2017 for those relying on the exemptive order due to Hurricane Harvey, Oct. 19, 2017 for those relying on the exemptive order due to Hurricane Irma, and Nov. 2, 2017 for those relying on the exemptive order due to Hurricane Maria
    
     For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive order will be considered current in its Exchange Act filing requirements during the applicable relief period if it was current as of the first day of the applicable relief period.  After the applicable relief period, a company will continue to be considered current if it files any required report on or before Oct. 10, 2017 for those relying on the exemptive order due to Hurricane Harvey, Oct. 19, 2017 for those relying on the exemptive order due to Hurricane Irma, and Nov. 2, 2017 for those relying on the exemptive order due to Hurricane Maria
    
     Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date of Oct. 10, 2017 for those relying on the exemptive order due to Hurricane Harvey, Oct. 19, 2017 for those relying on the exemptive order due to Hurricane Irma, and Nov. 2, 2017 for those relying on the exemptive order due to Hurricane Maria for those reports for purposes of Exchange Act Rule 12b-25.  As such, those companies will be permitted to rely on Rule 12b-25 where they are unable to file the required reports on or before the applicable due date.
    
     During the period from Aug. 25, 2017 to Nov. 1, 2017, a registered open-end investment company and a registered unit investment trust will be considered to have satisfied the requirements of Section 5(b)(2) of the Securities Act to deliver a summary or a statutory prospectus, as applicable, to an investor, provided that:  (1) the sale of shares to the investor was not an initial purchase by the investor of shares of the company or unit investment trust; (2) the investor’s mailing address for delivery, as listed in the records of the company or unit investment trust, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Harvey, Hurricane Irma, or Hurricane Maria, of the type or class customarily used by the company or unit investment trust, to deliver summary or statutory prospectuses; and (3) the company, or unit investment trust, or other person promptly delivers the summary or statutory prospectus, as applicable either (a) if requested by the investor, or (b) by the earlier (i) of Nov. 2, 2017 or (ii) the resumption of the applicable mail service.
    
     A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if:  (1) the registrant’s Form ADV filing deadline falls within the period from Aug. 25, 2017 to Oct. 6, 2017; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Harvey; and (3) the registrant makes the required Form ADV filing by Oct. 10, 2017.
    
     A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if:  (1) the registrant’s Form ADV filing deadline falls within the period from Sept. 6, 2017 to Oct. 18, 2017; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Irma; and (3) the registrant makes the required Form ADV filing by Oct. 19, 2017.
    
     A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if:  (1) the registrant’s Form ADV filing deadline falls within the period from Sept. 20, 2017 to Nov. 1, 2017; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Maria; and (3) the registrant makes the required Form ADV filing by Nov. 2, 2017.
    
     During the period from Aug. 25, 2017 to Nov. 1, 2017, a registered investment adviser will be considered to have satisfied the requirements of Section 204 of the Advisers Act and Rule 204-3(b) thereunder to deliver the written disclosure statements required thereunder to its advisory client, provided that:  (1) the client’s mailing address for delivery, as listed in the records of the investment adviser, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Harvey, Hurricane Irma, or Hurricane Maria, of the type or class customarily used by the adviser to deliver written disclosure statements; and (2) the investment adviser or other person promptly delivers the written disclosure statement either (a) if requested by the client, or (b) at the earlier of (i) Nov. 2, 2017 or (ii) the resumption of the applicable mail service. 
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OCIE “On Track to Deliver a 30% Increase” in IA Exams

15% of All IAs to be Examined This Fiscal Year

In testimony before the Senate Committee on Banking, Housing and Urban Affairs, SEC Chairman Jay Clayton laid out the Commission’s plans for increasing examinations of investment advisers.

“Our examination program is one of many areas where we have doubled down on our focus on doing more with our limited resources.  In this regard, I note that registered investment advisers now manage more than $70 trillion in assets, which is more than triple 2001 levels.  In light of this trend, in 2016, the SEC reassigned approximately 100 OCIE staff to the investment adviser examination unit.  As a result of this shift and the introduction of various enhancements to OCIE processes, advancements in OCIE's use of technology and other efficiencies, the SEC is on track to deliver a 30 percent increase in the number of investment adviser examinations this fiscal year – to approximately 15 percent of all investment advisers.”

“While this has been a very positive step, more needs to be done to continue to increase investment adviser examination coverage levels, while at the same time being careful to avoid decreasing examination quality.  To that end, the SEC will continue to explore additional efficiencies and improvements to our risk-based examination program.  One way to achieve this is through the continued leveraging of data analysis.  We have developed tools that scan an array of data fields to help us analyze and identify potentially problematic activities and firms. This allows us to make better decisions concerning which firms to examine and appropriately scope those examinations, among other things.  I expect that for at least the next several years we will need to do more to increase the agency's examination coverage of investment advisers in light of continuing changes in the markets. “

In fiscal year 2016, OCIE completed nearly 1,450 investment adviser exams, more than it had completed in any of the prior seven fiscal years and 20 percent more investment adviser exams than it completed in fiscal year 2015.  In fiscal year 2017, OCIE completed more than 2,000 investment adviser exams, a significant increase over fiscal year 2016.

Chairman Clayton noted that “in the coming fiscal year, OCIE also plans to increase the number of inspections to assess compliance with Commission rules, such as Regulation Systems Compliance and Integrity (Regulation SCI), to ensure that the cybersecurity infrastructure that is critical to the U.S. securities markets is effective.”  [Please
login to the IA Act UnwrappedTM Examination Tools Database/ 2017 Information to read the full transcript of Chairman Clayton's Testimony.]  Top  


SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats


On September 25, 2017 the Commission announced two new initiatives that will build on its Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors. The creation of a Cyber Unit that will focus on targeting cyber-related misconduct and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors reflect SEC Chairman Jay Clayton’s priorities in these important areas.

Cyber Unit

The Cyber Unit will focus the Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct, such as:

•    Market manipulation schemes involving false information spread through electronic and social media
•    Hacking to obtain material nonpublic information
•    Violations involving distributed ledger technology and initial coin offerings
•    Misconduct perpetrated using the dark web
•    Intrusions into retail brokerage accounts
•    Cyber-related threats to trading platforms and other critical market infrastructure

The unit, which has been in the planning stages for months, complements the Chairman’s initiatives to implement an internal cybersecurity risk profile and create a cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency.

“Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “The Cyber Unit will enhance our ability to detect and investigate cyber threats through increasing expertise in an area of critical national importance.”

Over the past several years, the Enforcement Division has developed substantial expertise in the detection and pursuit of fraudulent conduct in an increasingly technological and data-driven landscape.  The Cyber Unit will consolidate and advance these efforts, and include staff from across the Enforcement Division.

Robert A. Cohen has been appointed Chief of the Cyber Unit.  Since 2015, he and Joseph Sansone have been Co-Chiefs of the Market Abuse Unit.  Mr. Sansone will continue to lead the Market Abuse Unit as its Chief.

Retail Strategy Task Force

The Retail Strategy Task Force will develop proactive, targeted initiatives to identify misconduct impacting retail investors.  The Enforcement Division has a long and successful history of bringing cases involving fraud targeting retail investors, from everything involving the sale of unsuitable structured products to microcap pump-and-dump schemes.

This task force will apply the lessons learned from those cases and leverage data analytics and technology to identify large-scale misconduct affecting retail investors.  The task force will include enforcement personnel from around the country and will work with staff across the SEC, including from the SEC’s National Exam Program and the Office of Investor Education and Advocacy.

“Protecting the welfare of the Main Street investor has long been a priority for the Commission,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “By dedicating additional resources and expertise to developing strategies to address misconduct that victimizes retail investors, the division will better protect our most vulnerable market participants.”

Statement from Chairman Clayton

 “When Stephanie and Steve approached me with these initiatives, I endorsed them wholeheartedly.  They reflect the division’s continual efforts to pursue new forms of misconduct while keeping a watchful eye out for our Main Street investors.”   Top 


SEC Chairman Clayton Issues Statement on Cybersecurity

Discloses SEC's EDGAR System Hacked

Late Wednesday, September 20th, SEC Chairman Jay Clayton issued a statement highlighting the importance of cybersecurity to the agency and market participants, and detailing the agency’s approach to cybersecurity as an organization and as a regulatory body.

The statement is part of an ongoing assessment of the SEC’s cybersecurity risk profile that Chairman Clayton initiated upon taking office in May. Components of this initiative have included the creation of a senior-level cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency.  

The statement provides an overview of the Commission’s collection and use of data and discusses key cyber risks faced by the agency, including a 2016 intrusion of the Commission’s EDGAR test filing system.

In August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading. 

Specifically, a software vulnerability in the test filing component of the Commission’s EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information. It is believed the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. An internal investigation was commenced immediately at the direction of the Chairman. 

“Cybersecurity is critical to the operations of our markets and the risks are significant and, in many cases, systemic,” said Chairman Clayton. “We must be vigilant. We also must recognize—in both the public and private sectors, including the SEC—that there will be intrusions, and that a key component of cyber risk management is resilience and recovery.”

The statement also outlines the management of internal cybersecurity risks, including the incorporation of cybersecurity considerations in disclosure-based and supervisory efforts, coordination with other government entities, and the enforcement of the federal securities laws against cyber threat actors and market participants that do not meet their disclosure obligations.

Chairman Clayton writes, “By promoting effective cybersecurity practices in connection with both the Commission’s internal operations and its external regulatory oversight efforts, it is our objective to contribute substantively to a financial market system that recognizes and addresses cybersecurity risks and, in circumstances in which these risks materialize, exhibits strong mitigation and resiliency.” [Please
login to the IA Act UnwrappedTM Examination Tools Database/2017 Information to access the full text of Chairman Clayton’s Statement.]  Top   


OCIE Publishes Most Frequent Advertising Rule Compliance Issues


OCIE has issued a Risk Alert highlighting the most frequent advertising rule compliance issues identified in OCIE Examinations of investment advisers.  The compliance issues were most frequently identified in deficiency letters sent to SEC-registered IAs as part of an OCIE exam initiative that focused on advisers' use of accolades in their marketing materials (the "Touting Initiative").

The most frequent deficiencies that OCIE staff identified with regard to compliance with the Advertising Rule include:

OCIE launched the Touting Initiative in 2016 to examine the adequacy of disclosures that advisers provided to their clients when touting awards, promoting ranking lists, and/or identifying professional designations in their marketing materials. This Initiative was in response to the regularity with which staff encounters advisers that advertise accolades without disclosing material facts about them.

Touting Initiative findings included: Misleading Use of Third Party Rankings or Awards; Misleading Use of Professional Designations; and Use of Prohibited Testimonials.

In response to OCIE staff’s observations, advisers elected to either remove misleading language from their advertisements, or to add disclosures designed to prevent the advertisements from being misleading. OCIE’s objective in providing this guidance is to encourage advisers to assess the full scope of their advertisements and consider whether those advertisements are consistent with the Advertising Rule, the prohibitions of Section 206, and their fiduciary duties, and review the adequacy and effectiveness of their compliance programs. [Please
login to IA Act UnwrappedTM Examination Tools Database - 2017 Information to view the Risk Alert.]  Top   


SEC Charges Adviser with Defrauding Professional Athlete and His Wife


On August 22, 2017, the Commission charged investment adviser Jeremy Drake with defrauding two clients, a high profile professional athlete and the athlete’s wife, by deceiving them about the investment advisory fees they were paying.  The SEC alleges that Drake went to elaborate lengths to conceal his fraud, including creating and sending false documents and masquerading as another person to corroborate his lies.

The SEC alleges that Drake, then with Los Angeles-based HCR Wealth Advisors, deceived the clients for more than three years, telling them that they paid a special “VIP” annual rate of 0.15 to 0.20 percent of their assets under management when in fact they paid 1 percent.  Drake’s deception led the clients to pay $1.2 million more in management fees than Drake represented.  Drake personally received approximately $900,000 of incentive-based compensation based on the fees paid by the clients during the course of his deception.

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Drake repeatedly lied to the clients and their representatives and sent false and misleading emails, deceptive fee reports, and other fabricated documents.  The complaint alleges that in June 2016, as one of the clients demanded an explanation about the fees, Drake created the persona of “Ron Stenson,” who purportedly corroborated Drake’s story.  Upon discovery, the complaint alleges that Drake admitted to one of the clients that he had been lying and warned her that reporting his misconduct could result in bad publicity for her husband.

“As alleged in our complaint, these two clients trusted Drake to manage their investments, but all the while Drake was lying to them and then tried to conceal his lies by fabricating documents and even acting as an imposter to back up his claims,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC charged Drake with violating and aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940.  The SEC is seeking a permanent injunction, return of Drake’s allegedly ill-gotten gains plus interest, and penalties. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view SEC Complaint 2:17-cv-06204 SEC v. Jeremy Joseph Drake.]   Top  


Hedge Fund Adviser Charged for Inadequate Controls to Prevent Insider Trading


On August 21, 2017, the Commission announced that hedge fund advisory firm Deerfield Management Company L.P. agreed to pay more than $4.6 million to settle charges that it failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of inside information, including information about confidential government decisions.

The case relates to insider trading charges that the SEC recently filed against current and former Deerfield analysts, a political intelligence analyst who passed them information, and an employee at the Centers for Medicare and Medicaid Services (CMS).

According to the SEC’s order, Deerfield conducted extensive research in the health care sector to help inform its investment decisions, and engaged research firms specializing in political intelligence about upcoming regulatory and legislative decisions.  But Deerfield’s policies and procedures required only an initial review of the research firms’ own policies and procedures, and Deerfield otherwise placed the burden on its own employees to police themselves by identifying issues and informing supervisors.

The SEC’s order finds that Deerfield was on notice that the political intelligence analyst might be conveying material, nonpublic information.  An email from the analyst said that he “heard from a reliable cms source” that CMS was about to issue a regulation, and an internal Deerfield email noted that the analyst “has a guy” at a “closed-door” government meeting.  From at least May 2012 to November 2013, Deerfield generated more than $3.9 million in trading profits based on material, nonpublic information from the political intelligence analyst.  Through its management agreements with the hedge funds, including performance-based compensation, Deerfield received approximately $714,110 due to these trades.

“An investment adviser’s policies and procedures must be tailored to address the specific risks presented by its business.  Deerfield relied on political intelligence firms, creating a risk that it would receive and trade on illegal inside information.  As it turns out, that is exactly what happened,” said Robert A. Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.

Without admitting or denying the findings, Deerfield consented to the SEC’s order finding that it violated Section 204A of the Investment Advisers Act of 1940 by failing to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information.  Deerfield is censured and required to pay disgorgement of $714,110 plus interest of $97,585 and pay a penalty of $3,946,267.
[Please login to IA Act UnwrappedTM to view Release No. IA-4749 In the Matter of Deerfield Management Company, L.P.]   Top  


IM Posts New Q&A Regarding the Pay to Play Rule


The Division of Investment Management has updated the FAQs regarding Rule 206(4)-5, the Pay to Play Rule. In a new Q&A the Division offers no- action relief regarding the compliance date for the ban on third-party solicitation for Capital Acquisition Brokers (CABs):

“Until the effective date of any rules subjecting CABs to the FINRA pay to play rules, the Division would not recommend enforcement action to the Commission against an investment adviser or its covered associates under rule 206(4)-5(a)(2)(i) for payment to any person that is a CAB to solicit a government entity for investment advisory services on behalf of the investment adviser or its covered associates.”  [Please
login to IA Act UnwrappedTM to view the updated Q&As under Regulatory Database Rule 206(4)-5 and in the Examination Tools Database -2017 Information.] Top 


IA Settles with SEC for Improperly Allocating Expenses to its Private Equity Fund Clients


A New York-based investment advisory firm has agreed to pay a $275,000 penalty to settle charges that it improperly allocated legal fees and employee expenses to private equity funds it advised.

According to an SEC Order, investment adviser Capital Dynamics Inc. (CDI) improperly had private equity funds it advised pay for over $1.2 million in legal and employee expenses. The SEC’s investigation found that the private equity funds’ organizational documents did not include those legal fees or employee costs among the listed types of expenses that the fund would be responsible for paying. For example, CDI charged the private funds for $797,257 in legal fees incurred when CDI renegotiated an agreement with its own employees. CDI cooperated with the SEC’s investigation and reimbursed more than $1.4 million to the fund.

The SEC’s order further finds that CDI failed to adopt written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and related rules.

The SEC’s order finds that CDI violated Sections 206(2) and 206(4) of the Advisers Act, and Rules 206(4)-7 and 206(4)-8. Without admitting or denying the findings, CDI consented to the SEC’s order and agreed to pay the $275,000 penalty. The SEC considered CDI’s remedial acts and cooperation in reaching the settlement. [Please
login to IA Act UnwrappedTM to view Release No. IA-4746 In the Matter of Capital Dynamics, Inc.]  Top 

Outsourced CCO Sanctioned, Suspended and Fined for False Form ADV Filings
Relied on Estimates from CIO Not Verified for Accuracy

On August 15, 2017, the Commission issued Release IA-4734 In the Matter of David I. Osunkwo, In the Order, the Commission states that in 2010 and 2011, Aegis Capital, LLC and Circle One Wealth Management, LLC, registered investment advisers affiliated because of common control, failed to file timely and accurate reports with the Commission. Aegis Capital failed to file an annual update to its Form ADV for the 2010 fiscal year. Circle One filed an annual amendment to its Form ADV with the Commission in April 2011 that was intended to reflect a merger between the two investment advisers under common ownership and control of the same corporate parent holding company, Capital L Group LLC and control persons, namely the CEO, COO and CIO. That filing materially overstated the assets under management (“AUM”) and total number of client accounts for Aegis Capital and Circle One.

During the relevant time, Aegis Capital and Circle One retained SC Consulting to assist them in performing certain compliance functions as well as to provide an outsourced Chief Compliance Officer (“CCO”) to the Registrants. SC Consulting offered compliance consulting and CCO services to investment adviser firms. Respondent Osunkwo, a principal at SC Consulting, was designated as CCO to both Aegis Capital and Circle One. In this role, Osunkwo assisted Registrants and Firm Management with preparing and filing their Forms ADV. Osunkwo’s actions and inactions with respect to the Forms ADV filings led to Circle One’s inability to file accurate reports with the Commission.

In filing the Form ADV, Osunkwo relied on estimates that the Registrants’ CIO provided him.

Specifically, the CIO sent Osunkwo an email that stated:

“David – . . . I believe AUM was as follows on 12/31 Funds: $36,800,000 Schwab/Fidelity: $96,092,701 (1,179 accounts) (not sure how many customers) Circle One: probably higher than $50m, but hopefully [another employee] told you a number today Total is in the $182.89m range . . . .”

Osunkwo and SC Consulting adopted these estimates, without taking sufficient steps to ascertain their accuracy, when they filed Circle One’s annual amendment to Form ADV. This caused the report to falsely represent that the CIO attested to the accuracy of that information. As a result, Circle One’s Form ADV contained inaccurate information.

Osunkwo is suspended from association for 12 months and ordered to pay a $30,000 civil monetary penalty.
[Please login to IA Act UnwrappedTM to view Release No. IA-4745 In the Matter of David I. Osunkwo; also see Release No. IA-4744 In the Matter of Diane W. Lamm]   Top 

False ADV Filings & Failure to Maintain Books & Records
CCO Responsibilities Outsourced, but Lamm - as COO and CCO's direct supervisor - still liable

On August 15, 2017, the Commission issued Release No. IA-4744 In the Matter of Diane W. Lamm. According to the Order, Aegis Capital, LLC and Circle One Wealth Management, LLC (collectively “Registrants”), while formerly registered with the Commission as investment advisers, failed to file timely and accurate reports with the Commission and to maintain required books and records.

In Forms ADV filed with the Commission, Registrants, affiliated because of common control, materially overstated their assets under management (AUM) and total number of client accounts. As an example, in March 2011, Registrants overstated their AUM by over $119 million and total number of client accounts by at least 1,000 accounts. In addition, Registrants’ books and records were unsegregated and mixed together with affiliated entities at the level of the parent holding company.

Registrants were unable to provide adviser-specific books and records in response to examination staff’s queries in a timely manner, if at all.

Registrants outsourced their compliance responsibilities to Respondent Strategic Consulting Advisors, LLC (“SC Advisors”), a firm that offered compliance consulting and Chief Compliance Officer services to investment management firms. Respondent David I. Osunkwo, an attorney and principal at SC Advisors, was designated as Registrants’ CCO. In this role, he was responsible for preparing, reviewing, and filing Registrants’ Forms ADV.

Osunkwo reported to Diane W. Lamm (who was the Registrants’ Chief Operating Officer/COO) as his drect supervisor and worked closely Lamm, who provided information to Osunkwo to include in Aegis Capital’s Form ADV filings, signed Aegis Capital’s Form ADV, and otherwise was responsible for Registrants’ books and records. As a direct consequence of Lamm’s failures, Registrants failed to file accurate and timely reports with the Commission and failed to make and keep required books and records.   [Please
login to IA Act UnwrappedTM to view Release No. IA-4744 In the Matter of Diane W. Lamm; also see Release No. IA-4745 In the Matter of David I Oswunkwo.]  Top 


Amended Form ADV and Other-Than-Annual Amendments Raise Questions
DIM Issues No Enforcement Action Response

In Release No. IA-4509 Form ADV and Investment Advisers Act Rules, the SEC adopted amendments to Form ADV that have a compliance date of October 1, 2017. As of that date, any adviser filing an initial Form ADV or an amendment to an existing Form ADV will be required to provide responses to the form revisions adopted in the rulemaking.

Commission staff has received inquiries about circumstances in which a filer determines that it must file an other-than-annual amendment to Form ADV on or after October 1, 2017, but before its next annual amendment to the form would be due, such as when a filer is required to obtain a new private fund identification number or update a Form ADV Part 2A brochure on the Investment Adviser Registration Depository (“IARD”) system.

The Division of Investment Management has issued an Information Update addressing the issue.

“Some Form ADV filers have raised questions about how a filer making an unanticipated other-than-annual amendment before the filer’s next annual amendment is due must respond to new or amended items in Item 5 and the related Schedule D sections that would otherwise be required to be filled out on an annual basis. Some filers have noted that, in certain cases, this information may not be available because previously it was not required to be reported on Form ADV. In particular, how should an other-than-annual filer respond if the filer’s books and records did not capture the data necessary to respond completely to new Schedule D, Section 5.K.(2), which asks for the amount of regulatory assets under management and borrowings in a filer’s separately managed accounts that correspond to ranges of gross notional exposure as of the end of the filer’s fiscal year? The IARD system will not allow the submission of filings with incomplete responses.”

“In the circumstances described above, if a filer does not have enough data to provide a complete response to a new or amended question in Item 5 or the Schedule D sections related to Item 5 during the period ranging from October 1, 2017 to the filer’s next annual amendment to the form, the staff would not recommend enforcement action to the Commission under section 207 of the Investment Advisers Act of 1940 if the filer responds “0” as a placeholder in order to submit its Form ADV, with a corresponding note in the Miscellaneous section of Schedule D to identify that a placeholder value of “0” was entered.”  [Please
login to IA Act UnwrappedTM Examination Tools Database to view Information Update IM-INFO-2017-06.] Top 

OCIE Releases Observations from Cybersecurity Examinations

SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a National Exam Program Risk Alert that provides a summary of observations from OCIE’s examinations conducted pursuant to the Cybersecurity Examination Initiative. In general, OCIE staff observed increased cybersecurity preparedness, however there are areas where staff believes compliance and oversight could be improved. 

Most firms conducted periodic risk assessments of critical systems to identify vulnerabilities. All firms utilized some form of system, utility or tool to prevent, detect and monitor data loss as it relates to personally identifiable information. Although firms had a process for ensuring regular system maintenance and software patches, a few firms had a significant number of system patches - including critical security updates - that had not yet been installed.

Information protection programs typically included relevant cyber-related topics such as business continuity planning, Regulation S-P and Regulation S-ID.

Many firms had plans for addressing access incidents, plans for denial of service incidents, and plans for unauthorized intrusions. And, although BDs maintained plans for data breach incidents and customer notification of material events, the vast majority of IAs did not appear to maintain such plans. 

Some of the problem issues that OCIE staff observed included:

•    policies and procedures that were not reasonably tailored because they provided employees with only general guidance;
•    firms that did not enforce policies and procedures, or had policies and procedures that did not reflect the firm’s actual practices;
•    problems surrounding Regulation S-P among firms that did not adequately conduct system maintenance, including stale risk assessments/outdated operating systems that were no longer supported by security patches, and lack of remediation efforts regarding high-risk findings from penetration tests or vulnerability scans.

On the positive side, OCIE staff observed several specific elements that added to robust cybersecurity controls:

•    maintenance of an inventory of date, information and vendors;
•    detailed cybersecurity–related instructions;
•    maintenance of prescriptive schedules and processes for testing data integrity and vulnerabilities;
•    established and enforced controls to access data and systems;
•    mandatory employee training; and
•    engaged senior management.

OCIE noted that cybersecurity remains one of the top compliance risks for financial firms and OCIE staff will continue to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at firms. [Please
login to IA Act UnwrappedTM Examination Tools Database to view the National Exam Program Risk Alert.]   Top 

Investment Management Director David W. Grim to Leave SEC

David W. Grim, Director of the SEC’s Division of Investment Management, will leave the agency next month after more than 20 years of public service.

Mr. Grim, who joined the Division directly from law school and rose to become its leader, has left a legacy of regulatory policy reforms and legal guidance that have shaped the Division and the industry it regulates. He has also dedicated himself to developing the culture of collaboration and professional development that contributed to the Division ranking among the top places to work in the federal government. The Division oversees the $70 trillion dollar asset management industry, which includes mutual funds; exchange-traded funds; closed-end funds; variable insurance products; business development companies and investment advisers.

As Director, Mr. Grim led the Division’s policy-development; legal-interpretation; data-analysis and disclosure-review functions. Key initiatives advanced under Mr. Grim’s leadership as Director included:

•    Commission adoption of a modernized, comprehensive data-reporting regime for investment companies to improve the access and quality of information available to the Commission and the public about fund investments;
•    Commission adoption of rules to enhance liquidity risk management by mutual funds so that funds stand ready to meet investor redemptions while also minimizing the impact of those redemptions on remaining shareholders;
•    Issuance of guidance providing important and timely transparency of staff views on issues including cybersecurity and robo-advisers;
•    Issuance of an interpretation permitting “clean shares,” to further enable the sale of mutual funds at a transparent price subject to market competition;
•    Orderly implementation of money market fund reforms to protect against risks from potential investor runs;
•    Improved integration of data-analysis to better inform policy-development, disclosure-review, and industry oversight related to funds and advisers;
•    Enhanced public disclosure of aggregated data regarding private fund advisers to improve public understanding of those advisers and the funds they manage;  
•    Commission proposal of rules regarding funds’ use of derivatives; electronic delivery of fund shareholder reports; and business continuity and transition plans for investment advisers.

Mr. Grim joined the SEC in 1995 as a Staff Attorney in the Division’s Office of Investment Company Regulation. In 1998, he moved to the Division's Office of Chief Counsel, where he served in a number of positions, including being named Assistant Chief Counsel in 2007. Mr. Grim was appointed as Deputy Director of the Division in 2013, and Director in 2015.   Top 


IA Charged with Failing to Disclose Conflicts of Interest and Custody Rule Violations


On July 28, 2017, Columbia River Advisors, LLC and two of its principals agreed to settle charges that they failed to disclose conflicts of interest to investors in an investment fund they managed. The Tacoma, Washington-based adviser also agreed to settle charges that it failed properly to comply with the SEC’s investment adviser custody rule.

According to the SEC’s order, Columbia River, Benjamin J. Addink and Donald A. Foy failed to disclose to investors in an investment fund they managed that the fund made sizeable investments in a second investment fund that loaned the money back to Columbia River. The SEC found that these investments constituted conflicts of interest, which Columbia River should have disclosed before making the investments. The SEC’s order further finds that Columbia River violated the SEC’s investment adviser custody rule because the auditor it hired to audit the funds’ financial statements was not qualified under the rule, and Columbia River did not timely distribute audited financial statements to the funds’ investors for the 2012 and 2014 fiscal years as required under the rule.

The SEC’s order instituting settled cease-and-desist and administrative proceedings finds that Columbia River, Addink and Foy willfully violated Section 206(2) of the Investment Advisers Act of 1940, that Columbia River willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, and that Foy caused Columbia River’s violations of the custody rule. Without admitting or denying the SEC’s findings, Columbia River, Addink and Foy agreed to censures and must cease and desist from committing or causing further violations of the provisions and rules with which each was charged. In addition, Columbia River agreed to pay an $80,000 penalty, Addink agreed to pay a $25,000 penalty, and Foy agreed to pay a $30,000 penalty. Under the order, Columbia River is required to retain an independent consultant to review its compliance policies and procedures and to provide notice of the SEC’s order to affected investors. [Please
login to IA Act UnwrappedTM to view Release No. IA-4734 In the Matter of Columbia River Advisors, LLC, Benjamin J. Addink and Donald A. Foy]  Top 

 

Headline News

SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Investment Professionals
Read more...

OCIE's Overview of the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers
Read more...

Reminder: National Compliance Outreach Seminar for IAs & ICs - Thursday April 12th
Read more...

Three IAs Ordered to Pay $12 Million for Improper Fees
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Updates

Brightline Solutions updates IA Act UnwrappedTM on a daily basis. Recent updates are listed below. Click HERE for a more detailed summary of the information.

IA-4893 In the Matter of Paul Edward "Ed" Lloyd, Jr., CPA

IA-4892 In the Matter of Mark P. French

IA-4891 In the Matter of Frank H. Chiappone, Andrew G. Guzzetti, William F. Lex, Thomas E. Livingston, Brian T. Mayer, and Philip S. Rabinovich

IA-4890 In the Matter of Steven M. Simmons

IA-4889 Proposed Commission Interpretation Regarding Standard of Conduct for Investment  Advisers; Request for Comment on Enhancing Investment Adviser Regulation

IA-4888 Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles

IA-4887 In the Matter of Saving2Retire, LLC and Marian P. Young

IA-4886 In the Matter of Scott Newsholme

IA-4885 In the Matter of Arlington Capital Management, Inc. and Joseph F. LoPresti

LR-24114 SEC v. Amrit J. S. Chahal

IA-4884 In the Matter of Michael S. Moses

Overview of the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers
National Exam Program Risk Alert (April 12, 2018)
Added to the IA Act UnwrappedTM Examination Tools Database - 2018 Information

LR-24109 SEC v. Capital Cove Bancorp LLC and Christopher M. Lee aka Rashid K. Khalfani

IA-4883 In the Matter of Laura Pendergest-Holt

IA-4882 In the Matter of Troy C. Baldridge

LR-24103 SEC v. Ikenna Ikokwu, et al

IA-4881 In the Matter of Caleb J. Preston

IA-4880 In the Matter of Charles G. Preston

IA-4879 In the Matter of Tobias J. Preston

IA-4878 In the Matter of PNC Investments, LLC

IA-4877 In the Matter of  Geneos Wealth Management, Inc.

IA-4876 In the Matter of Securities America Advisors, Inc.

IA-4875 In the Matter of Clayborne Group, LLC and Dean. A. Heinemann

IA-4874 In the Matter of Joshua D. Mosshart

LR-24094 SEC  v. Michael Scronic

LR-24093 SEC v. Mohammed Ali Rashid

IA-4873 In the Matter of Ajenifuja Investments, LLC

1112 Partners, LLC - Exemptive Request

LR-24089 SEC  v. Kirbyjon Hines Caldwell et al., Shae Yatta Harper

IA-4872 In the Matter of ZPR Investment Management, Inc.

IA-4871 In the Matter of Larry C. Grossman

IA-4870 In the Matter of Howard B. Present

In the Matter of Apollo Management, LP
Added to the IA Act UnwrappedTM Regulatory Database Rule 206(4)-5 NoAction/Exemptive Request Tab

LR-24077 SEC  v. Howard B. Present

LR-24076 SEC v. McKinley Mortgage Co. LLC, et al.

LR-24071 SEC v. Nicholas J. Genovese, Willow Creek Investments, LP, and Willow Creek Advisors, LLC

ICI 2018 Mutual Funds and Investment Management Conference
Dalia Blass - Director, Division of Investment Management Keynote Address

Added to the IA Act UnwrappedTM Examination Tools Database/2018 Information

Division of Investment Management - Expanded Use of Draft Registration Statement Review Procedures for Business Development Companies  
Added to the IA Act UnwrappedTM Examination Tools Database/2018 Information

IA-4869 Regulatory Flexibility Agenda