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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!

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 

IA Charged with Overstating the Value of Two Private Funds

The SEC has announced charges against San Diego-based investment adviser, Enviso Capital, LLC, and two of its principals, Ryan Bowers and Jeffrey LaBerge, for overstating the value of two of Enviso’s private funds, along with other regulatory violations.

According to the SEC’s order instituting administrative and cease-and-desist proceedings, Enviso served as the investment adviser to two private funds, both of which held an interest in a non-publicly traded company, Bluefin Renewable Energy, LLC (Bluefin). Between 2011 and 2014, Bluefin had only one asset – a renewable energy project under development in Tecate, Mexico. Although the Respondents were aware that Bluefin never reached certain milestones necessary to building the project, such as obtaining financing or potential customers, they used unreasonable assumptions when applying the discounted cash flow method to value Bluefin. Specifically, the Respondents unreasonably assumed that Bluefin would sell significant amounts of energy within 24 to 30 months, even though no financing for the project had been obtained, no construction had ever started, and Bluefin had no contracts with potential purchasers of energy. As a result, Respondents overvalued Bluefin in financial statements provided to the private funds’ investors.

The SEC’s order finds that the Respondents willfully violated Sections 206(2) and 206(4) of the Advisers Act, and Rule 206(4)-8 thereunder. The order also finds that Enviso willfully violated, and Bowers and LaBerge caused Enviso’s violation of, Rule 206(4)-2, the custody rule. In addition, the order finds that Enviso willfully violated, and Bowers caused its violations of Section 206(4) of the Advisers Act and Rule 206(4)-7, and Enviso and Bowers willfully violated Section 207 of the Advisers Act.

Without admitting or denying the findings in the SEC’s order, all three Respondents consented to the entry of the cease-and-desist order and agreed to pay civil penalties of $50,000 each. In addition, Enviso agreed to a censure; Bowers and LaBerge agreed to be barred from the securities industry with the right to reapply for reentry after two years; and LaBerge, a CPA, agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. LaBerge may request that the Commission consider his reinstatement after two years.
  [Please login to IA Act UnwrappedTM to view Release No. IA-4731 In the Matter of Enviso Capital, LLC, Ryan Bowers, and Jeffrey LaBerge, CPA]   Top  


IA Charged for Failing to Disclose Conflict of Interest Arising from Revenue Sharing Arrangement and Failure to Seek Best Execution


Seattle-Washington-based KMS Financial Services, Inc. has agreed to settle charges that it failed to disclose to its advisory clients that it received revenue from a third-party broker-dealer and the resulting conflict of interest, and that it failed to seek best execution for advisory clients.

According to the SEC’s order, since at least 2002, KMS participated in a program offered by its clearing broker whereby it agreed to share with KMS revenues it received from certain mutual funds. The SEC found that the payments created a conflict of interest because they provided a financial incentive for KMS to favor the mutual funds in the program over other investments when advising clients. KMS did not disclose the arrangement or the resulting conflict of interest.

The SEC’s order further finds that in 2014, KMS, a dually-registered investment adviser and broker-dealer, negotiated a $1 per trade reduction in the clearance and execution costs charged by the clearing broker when KMS acted as introducing broker. KMS, however, continued to charge advisory clients the same overall brokerage commission and thus did not pass this cost reduction on to its advisory clients, and did not consider whether advisory clients continued to receive best execution in light of the increased portion of the charges KMS kept.

The SEC’s order finds that KMS violated Advisers Act Sections 206(2), 206(4), and 207, and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, KMS consented to a censure, a cease-and-desist order from committing or causing further violations of these provisions, and the payment of disgorgement of $382,568.64 plus prejudgment interest, and a $100,000 penalty.
[Please login to IA Act UnwrappedTM to view Release No. IA-4730 In the Matter of KMS Financial Services, Inc.]   Top  


Wanger’s Application for Consent to Associate is Denied

SEC Concludes the General Unconditional Request Attempts to Attack the Findings in the Bar Order


Eric David Wanger was the owner, Chief Compliance Officer, and president of Wanger Investment Management, Inc. (“WIM”), a formerly SEC-registered investment adviser. In order to settle administrative and cease-and-desist proceedings brought against him, Wanger consented to a Commission order that, among other sanctions, barred him from the securities industry with a right to apply for reentry after one year. He now has filed an application for consent either to (1) associate with any registered or unregistered broker-dealer, investment adviser, or other entity that participates in the securities industry or (2) establish his own entity that provides one or more of those services. He submitted the application under both Rule 193 of the Commission’s Rules of Practice and Advisers Act Section 203(f).

In the Order Denying the Application, the Commission notes that Wanger does not address either of the factors in his application. He does not identify a proposed employer, the terms and conditions of his planned employment, or the supervision, if any, that would be exercised over him in his new position. He does not say what he would be doing, for whom (if anyone) he would be doing it, or how he would be interacting with clients, investors, or other market participants.

Instead, his application seeks Commission consent to “associate with any registered or unregistered broker-dealer, investment adviser, or other entity that participates in the securities industry” or, failing that, to “establish his own entity that provides one or more of those services.”

The Commission response states that such a general, unconditional request is inconsistent with the carefully tailored reentry conditions that Rule 193 contemplates. Wanger’s application offers no evidence that his unidentified future activities would be conducted in a manner designed to “prevent a recurrence of the conduct that led to the imposition of the bar” in the first place, and provides the SEC with no basis on which to conclude that granting his request would be “consistent with the public interest.”

Preliminary Note to Rule 193 makes clear that the Commission “will not consider any application that attempts to reargue or collaterally attack the findings that resulted in the Commission’s bar order.” The SEC has a strong interest in the finality of orders and has consistently applied the principle set out in Rule 193 to reject collateral attacks that seek to undo the underlying proceeding, the findings in the order, or the terms of the settlement. The Commission states that Wanger offers no persuasive reason to deviate from the Rule and the SEC’s precedent.

The Commission concluded that Wanger’s request is functionally equivalent to asking the SEC to vacate the bar entirely and free him from any restrictions or oversight on his future activities; and states that Wanger has failed to show that the proposed terms of reentry would be consistent with the public interest and has therefore denied his application. [Please
login to IA Act UnwrappedTM to view Release No. IA-4728 In the Matter of Eric David Wanger]   Top 


Private Equity Real Estate Fund Adviser Settles Charges for Acting Contrary to Client’s Consent in Conflicted Transaction


Paramount Group Real Estate Advisor LLC (Paramount), a New York-based private equity fund adviser registered with the Commission, has settled negligence-based fraud charges stemming from a transaction in which it owed a fiduciary duty to both sides and breached that duty to one side. Specifically, in the transaction, Paramount failed to cause one fund to reimburse the other fund for certain previously incurred expenses totaling $4.5 million despite Paramount’s commitment that a reimbursement would take place.

According to the SEC’s order instituting administrative and cease-and-deist proceedings, Paramount served as the investment adviser for Paramount Group Real Estate Fund III, L.P. (Fund III) and Paramount Group Residential Development Fund, L.P. (RDF). In March 2014, Paramount caused Fund III to sell a parking garage the fund owned to RDF. In connection with the transaction, Paramount failed to cause RDF to reimburse Fund III for $4.5 million in development expenses that Fund III had incurred ahead of the sale.

This failure took place despite Paramount’s commitment to Fund III’s investment advisory committee (IAC), at the time the IAC approved the sale, that a reimbursement would be made. Paramount failed to seek approval from the Fund III IAC, or Fund III limited partners, to eliminate the reimbursement requirement as a condition of the sale. At the time, Paramount and its affiliates owned 3% of Fund III and 26.7% of RDF.

The SEC order finds Paramount willfully violated Sections 206(2) and 206(4) of the Advisers Act, and Rule 206(4)-8 thereunder. Without admitting or denying the findings of the SEC’s order, Paramount consented to entry of the cease-and-desist order and a censure, and agreed to pay a civil penalty of $250,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-4726 In the Matter of Paramount Group Real Estate Advisor, LLC]  Top


IM Updates FAQs Regarding Mid-Sized Advisers


The Division of Investment Management staff has issued a new Information Update noting changes to the “Frequently Asked Questions Regarding Mid-Sized Advisers” reflecting the enactment of a Wyoming state law regulating investment advisers with a principal office and place of business in that state, including mid-sized advisers with regulatory assets under management of more than $25 million but less than $100 million. By operation of the Wyoming statute, as of July 1, 2017, an investment adviser with a principal office and place of business in Wyoming may not register with the Commission unless it has greater than $100 million in assets under management, advises a registered investment company, or is eligible to rely on one of the exemptions from the prohibition on registration contained in rule 203A-2 under the Investment Advisers Act.

As a result of these changes, the FAQs have been modified to remove the listing of the state of Wyoming as a state in which a mid-sized adviser would not be subject to examination by the state securities authorities and therefore required to register with the Commission. In addition, outdated references in the FAQs have been removed. [Please
login to the IA Act UnwrappedTM Regulatory Database Rule 203A-1, Eligibility for SEC Registration, to view the updated FAQs. The Division’s Information Update IM-Info-2017-05 has been posted in the Examination Tools – 2017 Information.]  Top 


IA & CEO Charged with Multiple Violations under the Advisers Act


On June 30, 2017, the Commission issued Release No. IA-4724 In the Matter of Bantry Bay Capital, LLC and Timothy F. Sexton, Jr., instituting administrative and cease-and-desist proceedings and sanctions against the Respondents.

According to the Order, Bantry Bay, an SEC registered investment adviser, and its CEO, Timothy F. Sexton, Jr., charged their two clients more than $200,000 in excessive advisory fees. In addition, Sexton convinced these clients to wire approximately $250,000 to an account at Bantry Bay for an alleged investment in a purported money market fund. Sexton, however, never invested the clients’ money in any money market fund, and instead he misappropriated the clients’ money for his own personal expenses.

In addition to the fraudulent activity described above, Sexton improperly registered Bantry Bay with the Commission as an investment adviser based on false representations made on Forms ADV. Bantry Bay and Sexton claimed in the “Assets under Management” section of Forms ADV that Bantry Bay had $200 million or more in assets under management and numerous clients. In reality, Bantry Bay had only two advisory clients and had less than $4 million in assets under management. Sexton and Bantry Bay also violated client custody rules and failed to make, keep, and preserve required books and records, or make them available to SEC examiners.
 
Sexton was responsible for Bantry Bay’s compliance with Custody Rule 206(4)-2. Bantry Bay had custody of client funds or securities and failed to have those funds or securities maintained by a qualified custodian. Bantry Bay also failed to provide clients with account statements, and failed to have client funds or securities verified by an independent public accountant as required under the Custody Rule.

In violation of Rule 204-2, Bantry Bay failed to make, keep, and preserve required books and records, or make them available to examiners, including cash receipts and disbursements journals, balance sheets, income statements, check books and cash reconciliations, trial balances, and written agreements. Bantry Bay also failed to make, keep, and preserve required books and records as a custodian of client funds, including trading records, ledgers for each account, and confirmations of transactions. Sexton was responsible for Bantry Bay’s books and records and knew that Bantry Bay failed to maintain these records. [Please
login to IA Act UnwrappedTM to view Release No. IA-4724 In the Matter of Bantry Bay Capital, LLC and Timothy F. Sexton, Jr.]   Top  


IA Sentenced to Prison for Cherry-Picking Scheme

 
On June 21, 2017, Massachusetts-based investment adviser Michael J. Breton was sentenced by U.S. District Judge Allison D. Burroughs to two years in prison, two years of supervised release, and ordered to forfeit $1,326,696 and to pay restitution in the same amount in a criminal action for illegal cherry-picking. Breton pled guilty to one count of securities fraud on March 3, 2017.

The SEC previously charged Breton and his firm Strategic Capital Management, LLC on January 25, 2017. The SEC's complaint alleges that Breton and Strategic Capital defrauded clients out of more than $1.3 million. Breton allegedly placed trades through a master brokerage account and then allocated profitable trades to himself while placing unprofitable trades into the client accounts.

SEC Enforcement Division Market Abuse Unit’s analysis of Breton’s trading showed that he defrauded at least 30 clients during a six-year period as outlined in the SEC’s complaint.  Breton allegedly purchased securities for his own accounts and the client accounts through a block trading or master account on days when public companies scheduled earnings announcements.  He typically delayed allocation of those trades until later in the day after learning the substance of the announcement.

The SEC's litigation against Breton and Strategic Capital continues. On February 17, 2017, the court entered partial judgments by consent against Breton and his firm, enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The court will decide whether to order monetary sanctions at a later date. The SEC's complaint seeks disgorgement plus prejudgment interest and civil penalties.

In a separate proceeding, the SEC barred Breton from the securities industry on March 13, 2017.  [LR-23867 SEC v. Strategic Capital Management, LLC and Michael J. Breton]  Top 


SEC Staff Updates Form ADV FAQs Ahead of Upcoming Changes in 2017


Staff of the SEC’s Division of Investment Management has updated the “Frequently Asked Questions on Form ADV and IARD” to provide additional guidance regarding specific questions of Form ADV - many of which relate to the 2016 amendments in Final Rule Release No. IA-4509. The amendments will be implemented October 1, 2017.

Division Staff has updated an existing FAQ related to Form ADV Item 1.O and added FAQs related to the following items:

Form ADV Item 1.I
Form ADV Item 1.J
Form ADV Item 5.D
Form ADV Item 5.K
Form ADV Item 7.B
Form ADV Schedule R


As described in an additional FAQ relating to Schedule R, Division Staff is withdrawing its response to Question 4 of the Staff’s January 12, 2012 letter to the American Bar Association Business Law Section (“2012 ABA Letter”). This response has been superseded by the 2016 rulemaking and Form ADV amendments that codify umbrella registration for certain advisers to private funds.

[Please
login to IA Act UnwrappedTM to view the updated FAQs, revised No-Action Response and Form ADV Part 1A Summary of Changes (Form ADV Redline Version of Changes) under Regulatory Database Rules 203-1 to 203-1, 204-1 and 204(b)-1. You may access Release No. IA-4509 in the Releases Database, and IM Information Update 2017-04 relating to the FAQs, in the Examination Tools Database.]   Top 


Avakian & Peikin Named Co-Directors of Enforcement


The SEC announced that Acting Director of the Division of Enforcement Stephanie Avakian and former federal prosecutor Steven Peikin have been named Co-Directors of the Division of Enforcement. The Division of Enforcement is the agency's largest unit with more than 1,200 investigators, accountants, trial attorneys, and other professionals.

Ms. Avakian was named Acting Director of the SEC’s Division of Enforcement in December 2016 after serving as Deputy Director of the Division since June 2014.  Before being named Deputy Director, Ms. Avakian was a partner at Wilmer Cutler Pickering Hale and Dorr LLP, where she served as a vice chair of the firm’s securities practice and represented financial institutions, public companies, boards, and individuals in a broad range of investigations and other matters before the SEC and other agencies. Ms. Avakian previously worked in the SEC’s Division of Enforcement as a branch chief in the New York Regional Office, and later served as counsel to former SEC Commissioner Paul Carey.

From 1996 to 2004, Mr. Peikin served as an Assistant U.S. Attorney in the Southern District of New York.  He was Chief of the Office’s Securities and Commodities Fraud Task Force, where he supervised some of the nation’s highest profile prosecutions of accounting fraud, insider trading, market manipulation, and abuses in the foreign exchange market.  As a prosecutor, Mr. Peikin also personally investigated and prosecuted a wide variety of securities, commodities, and other investment fraud schemes, as well as other crimes.

Most recently, Mr. Peikin was Managing Partner of Sullivan & Cromwell’s Criminal Defense and Investigations Group. His practice focused on white-collar criminal defense, regulatory enforcement, and internal investigations. Mr. Peikin also is Adjunct Professor of Law at New York University Law School, where he teaches a class on the criminal enforcement of securities and commodities laws.

Ms. Avakian will continue to work out of the SEC’s Washington, D.C. headquarters.  Mr. Peikin will split his time between the SEC’s headquarters and the agency’s New York Regional Office.   Top  



Commission Issues Stay for Administrative Proceedings in Light of Bandimere Decision


In light of the U.S. Court of Appeals for the Tenth Circuit’s recent decision denying rehearing en banc in Bandimere v. SEC, the Commission has determined that it is prudent to stay all administrative proceedings assigned to an administrative law judge (ALJ) in which a respondent has the option to seek review in the Tenth Circuit of a SEC final order under the following: '33 Act
§9(a), '34 Act §25(a), Investment Company Act §43(a), or Advisers Act §213(a).

The stay is effective immediately and shall remain in effect pending the expiration of time in which the government may file a petition for a writ of certiorari in Bandimere, the resolution of any such petition and any decision issued by the Supreme Court in that case, or further order of the Commission.

The ALJs, in any applicable case, are directed to issue a notice indicating that the proceeding has been stayed. This order does not preclude the SEC from assigning any proceeding pending before an administrative law judge to itself or to any member of the Commission at any time.

The SEC has also elected to stay all administrative proceedings pending before the Commission on review from an initial decision by an ALJ in which a respondent has the option to seek review in the Tenth Circuit of a final order. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-4708 In re: Pending Administrative Proceedings]   Top 


OCIE Issues “Cybersecurity: Ransomware Alert” regarding Widespread WannaCry Attack

Recent OCIE Exams Suggest Vulnerability in Some Firms

Starting on May 12, 2017, a widespread ransomware attack, known as WannaCry, WCry, or Wanna Decryptor, rapidly affected numerous organizations across over one hundred countries. Initial reports indicate that the hacker or hacking group behind the attack is gaining access to enterprise servers either through Microsoft Remote Desktop Protocol (RDP) compromise or the exploitation of a critical Windows Server Message Block version 1 vulnerability. Some networks have also been affected through phishing emails and malicious websites.

To protect against the WannaCry ransomware, broker-dealers and investment management firms are encouraged to (1) review the alert published by the United States Department of Homeland Security’s Computer Emergency Readiness Team — U.S. Cert Alert TA17-132A  and (2) evaluate whether applicable Microsoft patches for Windows XP, Windows 8, and Windows Server 2003 operating systems are properly and timely installed.

OCIE’s National Examination Program staff recently examined 75 SEC registered broker-dealers, investment advisers, and investment companies to assess industry practices and legal, regulatory, and compliance issues associated with cybersecurity preparedness (the “Cybersecurity Initiative”). The staff observed a wide range of information security practices, procedures, and controls across registrants that may be tailored to the firms’ operations, lines of business, risk profile, and size.

The staff observed firm practices during this Initiative that the staff believes may be particularly relevant to smaller registrants in relation to the WannaCry ransomware incident. These practices are outlined in an OCIE National Exam Program’s Cybersecurity: Ransomware Alert. This Risk Alert also highlights the importance of conducting penetration tests and vulnerability scans on critical systems and implementing system upgrades on a timely basis. 

Subscribers are advised to immediately login to the IA Act UnwrappedTM Examination Tools Database and review the OCIE National Exam Program Risk Alert and the U.S. Dept. of Homeland Security’s Computer Emergency Readiness Team — U.S. Cert Alert TA17-132A. The IA Act UnwrappedTM Enforcement Tools Database also contains previous SEC Guidance and Alerts issued regarding Cybersecurity and OCIE's Cybersecurity Initiative.   Top  


New Appointments at the SEC


The Commission announced that Robert B. Stebbins has been named General Counsel of the agency. The General Counsel is the chief legal officer of the agency, providing a variety of legal services to the Commission and staff. Mr. Stebbins has practiced law at Willkie Farr & Gallagher LLP since 1993, first as an associate and beginning in 2001 as a partner.  At Willkie, Mr. Stebbins focused on mergers and acquisitions, private equity and venture capital, investment funds, and capital markets transactions. He also advised clients on SEC compliance issues and corporate governance matters.

Jaime Klima has been named Chief Counsel to SEC Chairman Jay Clayton. As Chief Counsel, Ms. Klima will be senior legal and policy adviser, and will coordinate the rulemaking agenda of the Commission.  She will also serve as the Chairman's representative on the Deputies Committee of the Financial Stability Oversight Council. 
Most recently, Ms. Klima served as SEC co-chief of staff under then-Acting Chairman Michael S. Piwowar, advising on all issues of agency management and policy.  Before that, she was counsel to Commissioner Piwowar and Commissioner Troy A. Paredes. In those roles, Ms. Klima covered a wide range of issues including rulemaking and enforcement matters.

Lucas Moskowitz has been named the agency’s Chief of Staff.  Mr. Moskowitz served as Chief Investigative Counsel of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, where he led the Committee’s investigative and oversight activities in connection with a wide variety of banking, securities, housing, and insurance matters.  Before joining the Senate Banking Committee staff, Mr. Moskowitz served as a counsel on the Financial Services Committee of the U.S. House of Representatives, where he worked on legislative and oversight matters to strengthen U.S. capital markets and promote capital formation. Previously at the SEC, Mr. Moskowitz served as a counsel to former Commissioner Daniel Gallagher, advising him on domestic and international policy issues and regulatory matters. Mr. Moskowitz also served as an attorney in the Division of Enforcement.

Sean Memon has been named Deputy Chief of Staff.  Mr. Memon arrived at the SEC with experience providing advice to public and private companies in both legal and financial roles. Immediately prior to joining the SEC, Mr. Memon practiced law at Sullivan & Cromwell LLP in Washington, D.C., where he advised clients in regulatory and transactional matters, including with respect to capital raisings, mergers and acquisitions and joint ventures. Mr. Memon also advised companies on matters involving financial technology and the development of new products and services. Top 


Barclays to Pay $97 Million for Overcharging Clients

Misrepresented due diligence monitoring of certain third-party managers in its wrap fee programs

On May 10, 2017, the Commission announced an enforcement action requiring Barclays Capital to refund advisory fees or mutual fund sales charges to clients who were overcharged.  In a settlement of more than $97 million, Barclays agreed to settle three sets of violations that resulted in clients being overbilled by nearly $50 million.  The SEC’s order finds that two Barclays advisory programs charged fees to more than 2,000 clients for due diligence and monitoring of certain third-party investment managers and investment strategies when in fact these services weren’t being performed as represented.  Barclays also collected excess mutual fund sales charges or fees from 63 brokerage clients by recommending more expensive share classes when less expensive share classes were available.  Another 22,138 accounts paid excess fees to Barclays due to miscalculations and billing errors by the firm.

"Barclays failed to ensure that clients were receiving the services they were paying for,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Each set of clients who were harmed are being refunded through the settlement.” The SEC’s order finds that Barclays violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7 as well as Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

Without admitting or denying the SEC’s findings, Barclays agreed to create a Fair Fund to refund advisory fees to harmed clients.  The Fair Fund will consist of $49,785,417 in disgorgement plus $13,752,242 in interest and a $30 million penalty.  Barclays will directly refund an additional $3.5 million to advisory clients who invested in third-party investment managers and investment strategies that underperformed while going unmonitored.  Those funds also will go to brokerage clients who were steered into more expensive mutual fund share classes.  [Please
login to IA Act UnwrappedTM to view Release No. IA-4705 In the Matter of Barclays Capital Inc.] Top 


SEC Adopts Technical Amendments to Form ADV & Form ADV-W


The Commission is adopting technical amendments to Form ADV and Form ADV-W under the Advisers Act to correct and update what will be outdated references in those forms to the state of Wyoming due to the enactment by Wyoming of legislation regulating investment advisers, which will be effective as of July 1, 2017.

An investment adviser must register with the Commission unless it is prohibited from registering under section 203A of the Advisers Act or relies on an exemption from registration under section 203.2 Under section 203A(a)(1) of the Advisers Act, an adviser that is regulated or required to be regulated as an investment adviser in the state in which it maintains its principal office and place of business is prohibited from registering with the Commission unless the adviser has assets under management of not less than $25 million, or advises an investment company registered under the Investment Company Act of 1940. Under section 203A(a)(2) of the Advisers Act, an investment adviser with between $25 million and $100 million of assets under management ("mid-sized adviser") is also prohibited from registering with the Commission if that adviser is required to be registered as an investment adviser in the state in which it maintains its principal office and place of business and, if registered, would be subject to examination as an investment adviser. These provisions make the states the primary regulators of smaller advisers and the Commission the primary regulator of larger advisers. However, all investment advisers - regardless of the amount of assets they manage - must register with the Commission if their principal office and place of business is located in a state that has not enacted a statute regulating advisers.

Recently, the state of Wyoming enacted a statute regulating investment advisers that will become effective July 1, 2017. Further, our staff has contacted the state securities authority for the state of Wyoming, the Wyoming Secretary of State Compliance Division, which has advised our staff that mid-sized advisers with a principal office and place of business in Wyoming will be required to be registered with the state and will be subject to examination. As a consequence, by operation of the Wyoming statute, as of July 1, 2017, an investment adviser with a principal office and place of business in Wyoming may not register with the Commission unless it has greater than $100 million in assets under management, advises a registered investment company, or is eligible to rely on one of the exemptions from the prohibition on registration contained in rule 203A-2.

As a result of this Wyoming statute, the Commission is making technical amendments to Form ADV as well as to Form ADV-W to reflect the addition of the state of Wyoming to the group of states with investment adviser regulation. Specifically, any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after July 1, 2017 will not be able to select Item 2.A.(3) of Form ADV, which currently indicates having a principal office and place of business in Wyoming (which does not regulate advisers) as a basis for Commission registration. Further, a checkbox for "WY" will be added to Item 2.C. of Form ADV to enable state notice filings for Commission-registered advisers. Finally, a checkbox for "WY" will also be added to section (b) of Form ADV-W, concerning withdrawals from state investment adviser registration. On October 1, 2017, Item 2.A.(3) will be redesignated as "Reserved." The same change will be made to Schedule R, Section 2.A.(3) for relying advisers. 
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Sanctions for Misrepresenting Degree and Certification

On May 5, 2017, the Commission issued Release No. IA-4702 In the Matter of Source Financial Advisors, LLC and Michelle M. Smith. These proceedings concern material misrepresentations by Michelle M. Smith and Source Financial Advisors, LLC. Smith is the founder, owner, and managing member of Source. Smith holds Series 7, 24, 63, and 65 licenses, is a Certified Divorce Financial Analyst, and previously was associated with several financial services firms from 1986 to 2012.

From 2012 through 2016, Source misrepresented on its Form ADV brochure supplements that Smith earned a marketing degree from Radford University. In fact, Smith attended Radford, but did not graduate. In addition, from 2012 through 2016, Source misrepresented in materials distributed to clients and prospective clients that Smith held the Certified Financial Planner (“CFP”) credential. In fact, Smith took CFP coursework but did not earn the CFP credential. Smith was aware of these misrepresentations as they were made. She and Source corrected the statements after they were contacted by Commission staff in 2016. Through these actions, Source and Smith violated Sections 206(2) and 207 of the Advisers Act. Source and Smith are censured. Smith is ordered to pay a civil monetary penalty of $35,000 and give notice of this Order to her advisory clients. Smith contacted each of Source’s clients and advised them of the misrepresentations regarding her education and CFP credentials.
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Jay Clayton Sworn in as Chairman of SEC

On May 4, 2017, Jay Clayton was sworn into office by U.S. Supreme Court Justice Anthony M. Kennedy as the 32nd Chairman of the Securities and Exchange Commission.

"It is a tremendous honor to lead the SEC and to be sworn in by Justice Kennedy, whom I greatly admire," said Chairman Clayton. "The work of the SEC is fundamental to growing the economy, creating jobs, and providing investors and entrepreneurs with a share of the American Dream. I would like to thank Acting Chairman Piwowar for his leadership, and I look forward to working with my fellow Commissioners and the talented SEC staff to ensure that our markets remain the safest and most vibrant markets in the world."

Mr. Clayton was nominated to chair the U.S. Securities and Exchange Commission on January 20, 2017, by President Donald Trump and confirmed by the U.S. Senate on May 2, 2017.

Prior to joining the Commission, Mr. Clayton was a partner at Sullivan & Cromwell LLP, where for over 20 years he advised public and private companies on a wide range of matters, including securities offerings, mergers and acquisitions, corporate governance, and regulatory and enforcement proceedings. His experience includes counseling companies in various industries and advising market participants on capital raising and trading matters in the United States and abroad, including while resident in Europe for five years.

Mr. Clayton has authored publications on securities law, cybersecurity, and other regulatory issues. From 2009 to 2017, he was an Adjunct Professor at the University of Pennsylvania Law School, teaching "M&A Through the Business Cycle" each spring semester as well as guest lecturing in other classes and at other institutions.

Prior to joining Sullivan & Cromwell, Mr. Clayton served as a law clerk for the Honorable Marvin Katz of the U.S. District Court for the Eastern District of Pennsylvania. A member of the New York and Washington, D.C. bars, Mr. Clayton studied and received degrees in engineering, economics, and law. He earned a B.S. in Engineering from the University of Pennsylvania, where he was the recipient of the Thouron Award for post-graduate study in the United Kingdom, enabling him to earn a B.A. and M.A. in Economics from the University of Cambridge. Mr. Clayton received a J.D. from the University of Pennsylvania Law School.

 

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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-4796 In the Matter of Brandon P. Long

IA-4795 In the Matter of Jeffrey S. Preston

IA-4794 In the Matter of Paul Edward "Ed" Lloyd, Jr., CPA

IA-4793 In the Matter of Mark Megalli

IA-4791 FAST Act Modernization and Simplification of Regulation S-K
Proposing Release added to the IA Act UnwrappedTM Releases Database
Proposed revisions reflected in IA Act UnwrappedTM Regulatory Database Rule 0-6

IA-4792 In the Matter of Sam Sadeghi

IA-4790  In the Matter of Danny S. Hood

IA-4789 Semi-Annual Regulatory Flexibility Agenda

IA-4788 In the Matter of Paul Edward "Ed" Lloyd, Jr., CPA

IA-4787 In the Matter of John Austin Gibson, Jr.

IA-4786 In the Matter of GL Capital Partners, LLC and GL Investment Services, LLC

IA-4785 In the Matter of William D. Bucci

LR-23961 SEC v. Richard G. Cody

IA-4784 In the Matter of Edward D. Jones & Co., L.P. - Exemptive Order

LR-23959 SEC v. Tweed Financial Services, Inc. et al

IA-4783 In the Matter of Paul Leon White, II

IA-4782 In the Matter of Jeffrey Timothy Kluge

IA-4781 In the Matter of Perry H. Beaumont

IA-4780 In the Matter of SIX Financial Information USA, Inc.

LR-23951 SEC  v. Tarek D. Bahgat, Lauramarie Colangelo, and WealthCFO LLC

Information Regarding Regulatory Relief for Hurricane Victims
Added to the IA Act UnwrappedTM Regulatory Database - Rules 204-1 and 204-3 Disclosure & Recordkeeping Tabs

ID-1182 In the Matter of Lynn Tilton; Patriarch Partners, LLC. et al

IA-4779 In the Matter of Avaneesh Krishnamoorthy

Testimony on Oversight of the SEC  
SEC Chairman Jay Clayton - Before the Senate Committee on Banking, Housing and Urban Affairs
Added to the IA Act UnwrappedTM Examination Tools Database - 2017 Information