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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 Provides Regulatory Relief & Assistance for Victims of Hurricane Florence

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 Florence.  The loss of property, power, transportation, and mail delivery due to the hurricane 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 Florence, the Commission issued an order that conditionally exempts affected persons from certain requirements of the federal securities laws for periods following the weather event. 

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.

ADDITIONAL INFORMATION

In connection with the Commission relief, issued in the order and interim final temporary rules, the Commission staff will take the following no-action positions with respect to affected parties’ obligations under the Exchange Act, the Securities Act, and the Investment Advisers Act:

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 and therefore are encouraged to contact Commission staff.  The Commission staff will address these and any disclosure-related issues on a case-by-case basis in light of their fact-specific nature.   Top 


Advertising and Related Code of Ethics Violations


On September 18, 2018, the Commission issued Release No. IA-5035 In the Matter of Creative Planning, Inc. and Peter A. Mallouk. This matter involves violations of the Advisers Act and certain rules thereunder by CPI, a registered investment adviser, that: (i) distributed hundreds of radio advertisements that contained prohibited client testimonials; (ii) failed to enforce the firm’s Code of Ethics with regard to the radio advertisements and the reporting and review of certain securities accounts in which the firm’s president had a beneficial interest; (iii) failed to keep true and accurate books and records; and (iv) failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. Mallouk, the firm’s president and majority owner, caused certain of CPI’s Code of Ethics violations.

In August 2015, CPI engaged a local radio station to air live and pre-recorded radio advertisements regarding CPI through two radio hosts in the Kansas City area. In January 2016, one of the radio hosts became a client of CPI, and shortly thereafter independently began including testimonials regarding his personal experiences with CPI during his live radio endorsements. The live personal testimonials aired until October 2017. In March 2017, the radio station created a prerecorded spot containing a client testimonial that also aired until October 2017. Although CPI’s policies and procedures required the firm to pre-approve and maintain copies of all of its advertisements, CPI did not monitor adequately the live and pre-recorded radio advertisements. CPI did not obtain copies of the live radio spots from August 2015 through October 2017, and did not obtain a copy of the March 2017 pre-recorded radio spot until October 2017.

In addition, from July 2013 through November 2015, Mallouk did not report securities holdings and transactions from three personal securities accounts held for the benefit of his family and over which he exercised control to CPI’s chief compliance officer (“CCO”), in contravention of CPI’s Code of Ethics.

As a result of the conduct described above, CPI willfully violated Sections 204, 204A, and 206(4) of the Advisers Act and Rules 204-2(a)(11), 204A-1, 206(4)-1(a)(1), and 206(4)-7 thereunder, and Mallouk caused CPI’s violations of Section 204A of the Advisers Act and Rule 204A-1 thereunder. [Please
login to IA Act UnwrappedTM to view Release No. IA-5035 In the Matter of Creative Planning, Inc. and Peter A. Mallouk]   Top 


SEC Monitoring Impact of Hurricane Florence on Capital Markets


The SEC is closely monitoring the impact of Hurricane Florence on investors and capital markets.  “The SEC is keeping a close eye on the progress of Hurricane Florence and any effects it may have on investors and capital markets. Dedicated staff stand ready to help ensure investors have access to their securities accounts, to evaluate the need to extend deadlines for filings and other regulatory requirements, and to keep a watchful eye for storm-related scams," said SEC Chairman Jay Clayton. “We encourage everyone in the path of the storm to stay safe by heeding the warnings of local officials.”

The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storm. Entities and investment professionals affected by Hurricane Florence are encouraged to contact Commission staff with questions and concerns:

Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricane are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.

Investors should be vigilant for Hurricane Florence-related securities scams and check the background of anyone offering them an investment by using the free and simple search tool on Investor.gov. The Division of Enforcement will vigorously prosecute those who attempt to defraud victims of the storm. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.  Top 

SEC Charges Hedge Fund Adviser with Short-and-Distort Scheme

The SEC has charged a hedge fund adviser and his investment advisory firm with illegally profiting from a scheme to drive down the price of San Diego-based Ligand Pharmaceuticals Inc., reaping more than $1.3 million of gains for the adviser and the hedge fund.

The SEC’s complaint charges that Gregory Lemelson and Massachusetts-based Lemelson Capital Management LLC issued false information about Ligand after Lemelson took a short position in Ligand in May 2014 on behalf of The Amvona Fund, a hedge fund he advised and partly owned. Short-sellers profit when the price of stock declines. According to the SEC’s complaint, Ligand’s stock lost more than one-third of its value during the course of Lemelson’s alleged scheme. After establishing his short position, the complaint charges that Lemelson made a series of false statements to shake investor confidence in Ligand, lower its stock price, and increase the value of his position.

The SEC’s complaint, filed in federal court in Massachusetts, alleges that Lemelson used written reports, interviews, and social media to spread untrue claims, including that Ligand was “teetering on the brink of bankruptcy” and that Ligand’s investor relations firm agreed with his view that its flagship Hepatitis C drug, Promacta, was going to become obsolete. Lemelson also allegedly misled investors by citing a European doctor’s negative views on the same Ligand drug without revealing the doctor was Amvona’s largest investor and had a significant financial interest in seeing Ligand’s stock price decline.

“While short-sellers are free to express their opinions about particular companies, they may not bolster those opinions with false statements, which is what we allege Lemelson did here,” said David Becker, an Assistant Director in the SEC’s Division of Enforcement.

The SEC’s complaint charges Lemelson and Lemelson Capital Management with fraud and seeks to have them return allegedly ill-gotten gains with interest and pay monetary penalties. The complaint names the Amvona Fund as a relief defendant and seeks to have it return gains it obtained as a result of Lemelson and his firm’s alleged misconduct. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view Litigation Release No. LR-24267 SEC v. Gregory Lemelson, Lemelson Capital Management, LLC, and The Amvona Fund.]  Top  


Statement Regarding Staff Proxy Advisory Letters

DIM withdraws two no-action letters

As recently noted, SEC staff will be hosting a Roundtable on the Proxy Process, tentatively scheduled for November, 2018, as an opportunity to engage with market participants on topics including the voting process, retail shareholder participation and the role of proxy advisory firms.

In developing the Roundtable Agenda, staff has been considering whether prior guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms should be modified, rescinded or supplemented.

Staff of the Division of Investment Management re-examined no-action letters issued in 2004 to Egan-Jones Proxy Services (5/27/04) and Institutional Shareholder Services, Inc. (9/15/04) and has withdrawn these letters, effective September 13, 2018.

In a newly released IM Information Update, staff provided notice of withdrawal of the letters to facilitate discussion at the Roundtable. SEC Staff looks forward to receiving information and feedback from stakeholders with multiple perspectives at the Roundtable, including on the guidance in Staff Legal Bulletin No. 20 (6/30/14). Staff expects to utilize what it learns in any future recommendations to the Commission with respect to proxy advisory firms. [Please
login to IA Act UnwrappedTM to view the full text of the Information Update in the Examination Tools Database/2018 Information, and associated materials under Regulatory Database Rule 206(4)-6 Proxy Voting.]  Top 


SEC Charges Digital Asset Hedge Fund Manager with Misrepresentations and Registration Failures


On September 11, 2018, the SEC announced its first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets.

The SEC entered an order finding that Crypto Asset Management LP (CAM) offered a fund that operated as an unregistered investment company while falsely marketing it as the “first regulated crypto asset fund in the United States.”  According to the SEC’s order, CAM, a California-based hedge fund manager, and its sole principal Timothy Enneking raised more than $3.6 million over a four-month period in late 2017 while falsely claiming that the fund was regulated by the SEC and had filed a registration statement with the agency.  By engaging in an unregistered non-exempt public offering and investing more than 40 percent of the fund’s assets in digital asset securities, CAM caused the fund to operate as an unregistered investment company.  After being contacted by the SEC staff, CAM ceased its public offering and offered buy backs to affected investors.

“Hedge funds seeking to ride the digital asset wave continue to proliferate,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “Investment advisers must be sure that the funds they offer adhere to the applicable registration obligations and must accurately represent their funds’ regulatory status to investors.”

CAM and Enneking agreed to the SEC’s cease-and-desist order and censure without admitting or denying the findings against them, and agreed to pay a penalty of $200,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-5004 In the Matter of Crypto Asset Management, LP and Timothy Enneking.]  Top 


Roisman Sworn in as SEC Commissioner


On September 11, 2018, Elad L. Roisman was sworn into office as an SEC Commissioner by SEC Chairman Jay Clayton.  Commissioner Roisman comes to the SEC from the Senate Banking Committee, where he served as Chief Counsel. He previously served as Counsel to SEC Commissioner Daniel Gallagher and prior to that, as a Chief Counsel at NYSE Euronext. He also worked as an attorney at the law firm of Milbank, Tweed, Hadley & McCloy LLP where he served as an associate in the New York office. Commissioner Roisman earned his bachelor’s degree in History at Cornell University and his J.D. at the Boston University School of Law.  Commissioner Roisman fills a term that expires on June 5, 2023. Top 


IA & Principal Charged with Fraud Relating to Association with Barred Adviser


The Commission has filed charges against a Buffalo, New York, investment advisory firm and its owner for misleading firm clients about its association with a barred investment adviser, who is also being charged for violating the bar. 

The SEC’s complaint alleges that in 2014, Walter Grenda sold his investment advisory assets, including his longstanding client base, to Grenda Group LLC and his son, Gregory Grenda, in anticipation of a negative outcome in an SEC fraud investigation. In 2015, the SEC barred Walter Grenda from association with an investment adviser [Release No. IA-4152], but the SEC alleges that Walter Grenda continued to associate with Grenda Group by meeting with a prospective client and current clients in the firm’s offices, as well as making discretionary changes to clients’ investment accounts. The complaint alleges that Grenda Group and Gregory Grenda permitted Walter Grenda’s association with the firm, failed to disclose his bar to their clients, and made misleading statements to clients who inquired about Walter Grenda’s bar. The SEC further alleges that Walter Grenda impersonated a Grenda Group client on a call to the firm’s broker-dealer and, while subject to the associational bar, Walter Grenda repeatedly impersonated his son on calls to the firm’s broker-dealer, after which the broker-dealer terminated its relationship with Grenda Group. The complaint alleges that Grenda Group and Gregory Grenda later made misleading statements to clients and failed to disclose material facts about the termination.

“Associational bars are designed to protect retail investors from those the SEC has deemed unfit to provide advisory services,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Here, we allege that bar was circumvented, and took action to ensure investors are protected.”

The SEC’s Office of Investor Education and Advocacy (OIEA) recently issued an Investor Alert to encourage investors to check the background of anyone selling or offering them an investment using the free and simple search tool on Investor.gov. Investors can also use the SALI feature to find information about certain people who have had judgments or orders issued against them in SEC court actions or administrative proceedings.

The SEC’s complaint charges Grenda Group, Gregory Grenda, and Walter Grenda with violating Section 203(f) of the Investment Advisers Act of 1940. It also charges Grenda Group and Gregory Grenda with fraud under the Advisers Act, and Walter Grenda for aiding and abetting their fraud. The complaint seeks penalties and permanent injunctions. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view LR-24253 SEC v. Grenda Group, LLC, et al.]  Top 


Transamerica Entities to Pay $97 Million to Investors Relating to Errors in Quantitative Investment Models


On August 27, 2018 the Commission announced charges against four Transamerica entities for misconduct involving faulty investment models and ordered the entities to refund $97 million to misled retail investors.

According to the SEC’s order, investors put billions of dollars into mutual funds and strategies using the faulty models developed by investment adviser AEGON USA Investment Management LLC (AUIM). AUIM, its affiliated investment advisers Transamerica Asset Management Inc. (TAM) and Transamerica Financial Advisors Inc., and its affiliated broker-dealer Transamerica Capital Inc., claimed that investment decisions would be based on AUIM’s quantitative models. The SEC’s order finds that the models, which were developed solely by an inexperienced, junior AUIM analyst, contained numerous errors, and did not work as promised. The SEC found that when AUIM and TAM learned about the errors, they stopped using the models without telling investors or disclosing the errors.

“Investors were repeatedly misled about the quantitative models being used to manage their investments, which subjected them to significant hidden risks and deprived them of the ability to make informed investment decisions,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

Without admitting or denying the SEC’s findings, the four Transamerica entities agreed to settle the SEC’s charges and pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors.

In separate orders, the SEC also found that AUIM’s former Global Chief Investment Officer, Bradley Beman, and AUIM’s former Director of New Initiatives, Kevin Giles, each were a cause of certain of AUIM’s violations. In particular, the Commission found that Mr. Beman did not take reasonable steps to make sure the mutual funds’ models worked as intended and that Mr. Beman and Mr. Giles both contributed to AUIM’s compliance failings related to the development and use of models. Beman and Giles agreed to settle the SEC’s charges without admitting or denying the findings and pay, respectively, $65,000 and $25,000 in penalties that also will be distributed to affected investors. [Please
login to IA Act UnwrappedTM to view Release Nos. IA-4996 In the Matter of AEGON USA Investment Management, LLC, Transamerica Asset Management, Inc., et al; IA-4997 In the Matter of Bradley J. Beman; IA-4998 In the Matter of Kevin A. Giles] Top 


Additional Investor Roundtable Scheduled in Baltimore for Main Street Investors

Clayton Issues Statement Discussing the Roundtables and Proposed Rulemaking

SEC Chairman Jay Clayton announced that an additional investor roundtable to discuss the Commission’s recently proposed rules regarding the obligations of financial professionals to investors will be held in Baltimore on the evening of Sept. 20, 2018.  Commissioners Kara Stein and Robert Jackson are expected to join Chairman Clayton and senior SEC staff at this event.

Six roundtable discussions already have taken place in Houston, Atlanta, Miami, Washington, D.C., Philadelphia, and Denver.  In these roundtables, Main Street investors have had the opportunity to speak directly with Chairman Clayton and senior staff about the SEC’s efforts to enhance retail investor protection and promote choice and access to a variety of investment services and products. 

“These investor roundtables have been incredibly valuable, and I have enjoyed engaging directly with our Main Street investors.  It is important to me that we hear retail investors’ perspectives on how our proposed rules can better align standards of conduct with what they expect of their investment professionals,” said Chairman Clayton.  “We have had many insightful discussions and received some great ideas.  I look forward to speaking with more investors in Baltimore about their experiences.”

Chairman Clayton also issued a statement (available in the IA Act UnwrappedTM Examination Tools Database/2018 Information) discussing his impressions from the earlier investor roundtables.  Investors who have not been able to attend one of the roundtables in-person are invited to share their insights with the SEC by going to www.sec.gov/Tell-Us.

Details about the upcoming investor roundtable in Baltimore can be found below. The event is free and open to the public and the media. Participants should be retail investors who work with, or are considering working with, a financial professional and have no affiliation with the financial services industry.  Please note that the number of participants will be limited.
Location: The Reginald F. Lewis Museum of Maryland African American History & Culture, 830 E. Pratt Street, Baltimore, MD 21202
Date: Sept. 20, 2018
Time: 6:00-7:30 p.m. (ET)
RSVP: outreach@sec.gov

Background

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.  For additional information, see the Commission’s press release, fact sheet and proposed Regulation Best Interest rule here.

On April 24, 2018, Chairman Clayton issued a statement announcing that he had asked SEC staff to put together a series of roundtables focused on the retail investor to be held in different cities across the country.  The roundtables are intended to gather information directly from those investors most affected by the Commission’s rulemaking.

On June 29, 2018, Chairman Clayton issued a press release inviting Main Street investors to ‘Tell Us’ about their investor experience and providing details on the initial series of roundtables.  Transcripts of the prior roundtables are available in the comment file.

For general information about the investor roundtables, contact Suzanne McGovern from the SEC’s Office of Investor Education and Advocacy at: outreach@sec.gov  [Please
login to the IA Act UnwrappedTM Examination Tools Database/ 2018 Information to access Chairman Clayton’s Statement on Investor Roundtables Regarding Standards of Conduct for Investment Professionals Rulemaking.]   Top 


Merrill Lynch Settles SEC Charges of Undisclosed Conflict in Advisory Decision


Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it failed to disclose a conflict of interest arising out of its own business interests in deciding whether to continue to offer clients products managed by an outside third-party advisory firm. 

The SEC’s order finds that the conflict of interest arose in Merrill Lynch’s handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million. According to the order, Merrill put new investments into these products on hold due to pending management changes at the third party, and Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC’s order found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process.

“By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.”

Without admitting or denying the findings, Merrill consented to the SEC’s order, which finds that the firm was negligent in violating the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940. Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.
[Please login to IA Act UnwrappedTM to view Release No. IA-4989 In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated]  Top 


Ameriprise Charged with Failing to Safeguard Client Assets


On August 15, 2018, the Commission announced that Ameriprise Financial Services Inc. will pay $4.5 million to settle charges that it failed to safeguard retail investor assets from theft by its representatives.

According to the SEC’s order, five Ameriprise representatives committed numerous fraudulent acts, including forging client documents, and stole more than $1 million in retail client funds over a four-year period. The SEC found that Ameriprise, a registered investment adviser and broker-dealer, failed to adopt and implement policies and procedures reasonably designed to safeguard investor assets against misappropriation by its representatives.

The five representatives were based in Minnesota, Ohio, and Virginia, and three previously pled guilty to criminal charges. Each of the representatives was terminated by Ameriprise for misappropriating client funds. The SEC’s order found that Ameriprise has implemented a new system to safeguard clients’ money and that Ameriprise reimbursed all impacted clients for the losses they incurred due to the misconduct of the five representatives.

“A critical obligation of an investment adviser is to safeguard investor assets,” said Fuad Rana, an Assistant Director in the SEC’s Division of Enforcement. “Ameriprise failed to meet that obligation and as a consequence was unable to prevent the theft of its clients’ assets.”

The SEC’s order charged Ameriprise with failing to have reasonably designed policies and procedures to prevent its representatives from misappropriating client funds and failing to reasonably supervise the five representatives. Without admitting or denying the findings, Ameriprise agreed to be censured and pay a penalty of $4.5 million. [Please
login to IA Act UnwrappedTM to view Release No. IA-4985 In the Matter of Ameriprise Financial Services, Inc.]  Top 


SEC Charges IA for Compliance Failures Relating to Wrap Fee Programs

On August 14, 2018, the SEC announced an enforcement action against Lockwood Advisors Incorporated, an SEC registered investment advisory firm, for failing to adopt and implement policies and procedures necessary to provide investors with enough information to evaluate the suitability of their investments in the firm's wrap fee programs.

As a sponsor of wrap fee programs, Lockwood offers investors a selection of various subadvisers to choose from, which in turn select investments on their behalf. Those subadvisers typically directly trade through the wrap fee program's participating broker-dealer because the cost of execution is included in the annual wrap fee that each client pays to participate in the program. However, if a subadviser trades away by choosing a different broker-dealer to execute a particular trade, the client often incurs additional transaction costs.

The SEC's order found that Lockwood failed to adopt and implement policies and procedures requiring it to gather information about subadvisers' trading away and requiring it to disclose that information to wrap fee program clients so that they could make informed investment decisions. This is one of a series of actions the SEC has brought against investment advisers relating to trading away in wrap fee programs. Wrap fee programs have been among the SEC's National Exam Program's annual examination priorities in each of the last three years.

The SEC's order finds that Lockwood violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings in the order, Lockwood agreed to settle the charges, to cease and desist from further violations, to pay a $200,000 civil penalty, and to certain undertakings that will improve its policies and procedures. [Please
login to IA Act UnwrappedTM to view Release No. IA-4984 In the Matter of Lockwood Advisors, Incorporated]  Top 

IA Charged with Mispricing Cross Trades between Clients

On August 10, 2018 the Commission announced charges against a New York-based investment adviser charged with engaging in cross trading that favored certain advisory client accounts over others.

According to the SEC’s order, Hamlin Capital Management, LLC executed over 15,000 cross trades of thinly traded, tax exempt municipal bonds, moving them from one client account to another. But Hamlin arranged that its cross trades be executed at the securities’ bid price, instead of the midpoint between the bid and the ask price, resulting in the undisclosed allocation of all market savings on these trades to Hamlin’s buying clients. As a result of this conduct, Hamlin deprived its selling clients of $414,672 in market savings.

The SEC’s order also finds that Hamlin persuaded certain broker-dealers to adjust their price quotations for seven municipal bonds held in client portfolios to levels substantially above where the bonds had most recently traded in the market. Hamlin did not document any rationale for these upward adjustments. Hamlin subsequently executed approximately 21 cross trades in these seven bonds at these inflated levels, causing buying advisory clients in these transactions to overpay for the bonds by $194,500.

The SEC’s order finds that Hamlin violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder. Without admitting or denying the findings, Hamlin agreed to reimburse $609,172, plus interest, to its affected clients and pay a $900,000 penalty to the SEC. Hamlin also agreed to a censure and cease-and-desist order. [Please
login to IA Act UnwrappedTM to view Release No. IA-4983 In the Matter of Hamlin Capital Management, LLC]  Top 


SEC Charges U.S. Congressman and Others with Insider Trading


On August 8, 2018, the Commission announced the filing of insider trading charges against Congressman Christopher Collins, the U.S. Representative for New York’s 27th Congressional District, his son, Cameron Collins, and a third individual, Stephen Zarsky. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced related criminal charges.

Christopher Collins, who served as an independent director of an Australian biotech company, Innate Immunotherapeutics Ltd., is charged with tipping Cameron Collins after receiving confidential information about negative clinical trial results for Innate’s multiple sclerosis drug. Cameron Collins and his girlfriend’s father, Stephen Zarsky, are charged with trading and tipping others on the basis of the material, nonpublic information. 

The SEC’s complaint alleges that Christopher Collins learned of the negative clinical trial results on the evening of June 22, 2017 in an email from Innate’s CEO to the board of directors, which stated that the CEO had “extremely bad news” indicating that drug trial results “pretty clearly indicate ‘clinical failure’.” The SEC alleges that Christopher Collins replied to the CEO’s email within minutes, expressing his surprise at the results, and then called and spoke to his son minutes later.

According to the SEC’s complaint, later that same evening, Cameron Collins drove to Stephen Zarsky’s home and tipped him. The next morning, almost two hours prior to the market opening, Cameron Collins and Zarsky allegedly entered orders to sell Innate shares, which were executed just after the market opened. Over the next two trading days, Cameron Collins allegedly sold a total of nearly 1.4 million Innate shares. According to the complaint, a few hours after the last of these sales, Innate publicly announced the negative results of the clinical trial. The company’s stock price then plummeted by more than 92 percent.  Through their sales, Cameron Collins and Zarsky avoided losses of more than $700,000. The complaint also alleges that they contacted other friends and family members who also sold Innate shares in advance of the negative announcement.

“We allege that Christopher Collins breached his duty of confidentiality to Innate’s shareholders, exploiting his access to nonpublic information about the company’s clinical trial results so that his son could avoid significant financial losses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. “Our laws are designed to prevent and punish such misconduct, which undermines investors’ trust in the fairness and integrity of our markets.”

“In the hours and days after learning of the drug trial results, Christopher Collins, his son, and their associates exchanged a flurry of calls,” said Steven Peikin, Co-Director of the Enforcement Division. “The investigation yielded a detailed footprint left by the defendants, revealing their frantic efforts to sell shares and warn others before Innate announced bad news.”    

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges Christopher Collins, Cameron Collins, and Stephen Zarsky with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.  It also seeks an officer and director bar against Christopher Collins. 

The SEC also announced settled charges today against Lauren Zarsky, Cameron Collins’ girlfriend, and her mother, Dorothy Zarsky, for trading on the basis of material, nonpublic information. Lauren Zarsky and Dorothy Zarsky consented to the entry of final judgments without admitting or denying the charges that they sold their shares of Innate based on tips they received from Cameron Collins. Lauren Zarsky agreed to disgorge her ill-gotten gains of $19,440, plus prejudgment interest of $839, and pay a civil penalty of $19,440.  Dorothy Zarsky agreed to disgorge her ill-gotten gains of $22,600, plus prejudgment interest of $975, and pay a civil penalty of $22,600. The final judgments, which require court approval, would enjoin Lauren Zarsky and Dorothy Zarsky from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Lauren Zarsky, a CPA, has also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Zarsky to apply for reinstatement after five years.
[Please login to the IA Act UnwrappedTM Enforcement Case Database to view LR-24231 SEC v. Christopher Collins, et al.]  Top 


SEC Updates List of Firms Using Inaccurate Information to Solicit Investors


The Commission has updated its list of unregistered firms that use misleading information to primarily solicit non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and nine bogus regulators.

The updates by the SEC Division of Enforcement’s Office of Market Intelligence, in coordination with the SEC’s Office of Investor Education and Advocacy and the Office of International Affairs, are part of the agency’s continuing effort to protect retail investors.

The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud.  The latest additions are firms that the SEC staff found were providing inaccurate information about their affiliation, location, or registration.  Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and recordkeeping requirements.

In addition to alerting investors to firms falsely claiming to be registered, the PAUSE list flags those impersonating registered securities firms and bogus “regulators” who falsely claim to be government agencies or affiliates.  Inclusion on the PAUSE list does not mean the SEC has found violations of U.S. federal securities laws or made a judgment about the merits of any securities being offered. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2018 information to view the updated list.]  Top 


SEC Chairman Clayton Announces Roundtable on the Proxy Process

Chairman Jay Clayton
July 30, 2018


Shareholder engagement is a hallmark of our public capital markets, and the proxy process is a fundamental component of that engagement. In 2010, the Commission issued a concept release seeking public comment on whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and companies should expect.[1] In light of the many changes in our markets, technology, and how companies operate since then, SEC staff will host a roundtable this fall to hear from investors, issuers, and other market participants about whether the SEC’s proxy rules should be refined.

The SEC’s rules governing the proxy process are at the center of investor participation in, and influence over, corporate governance at U.S. public companies. For example, our proxy rules specify the requirements for information companies must provide to shareholders and how votes may be solicited. Since the 2010 concept release, we have seen a dramatic increase in the number of U.S. companies reporting shareholder engagement, with 72% of S&P 500 companies reporting engagement with shareholders in 2017, compared to just 6% in 2010.[2] The scope of topics subject to shareholder engagement also has increased. Consistent with the Commission’s mission, we must regularly review whether our existing rules are achieving their objectives effectively in light of changes in our marketplace. The SEC staff roundtable is intended to facilitate that type of assessment with respect to the proxy process and shareholder engagement.

SEC staff will announce the roundtable agenda items shortly. Chairman Clayton has presented potential topics for consideration by the staff.  Click HERE to access the text of the Chairman's full statement and topics for consideration.  Top   


Snyder Named Deputy Director of OCIE


Kristin Snyder has been named Deputy Director of the agency’s Office of Compliance Inspections and Examinations (OCIE). Ms. Snyder has been with the SEC for 15 years.  She has served as the Co-National Associate Director of OCIE’s Investment Company/Investment Adviser examination program since August 2016 and as the Associate Regional Director for Examinations in the SEC’s San Francisco office since November 2011.  She will continue in both of these roles while also assuming this additional leadership role in OCIE.  As Deputy Director, Ms. Snyder will oversee many of the office’s strategic initiatives and serve as the regional advisor to OCIE Director Peter B. Driscoll.

Ms. Snyder joined the SEC in 2003 and spent eight years as a Branch Chief and a Senior Counsel in the San Francisco office’s enforcement program.  Prior to joining the SEC, Ms. Snyder practiced law at Sidley Austin Brown & Wood LLP in San Francisco.  She received her law degree from the University of California Hastings College of the Law and her bachelor’s degree from the University of California at Davis. Top


IA Settles Charges for Custody Rule Violations

IA Advises Two Private Equity Funds

On July 17, 2018, New York-based investment advisory firm New Silk Route Advisors LP (NSR) agreed to settle charges that the firm violated the custody rule each and every year since it registered with the SEC in 2012.

Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-2 thereunder, commonly referred to as the "custody rule," are designed to protect advisory clients from the misuse or misappropriation of their assets. The custody rule requires an adviser who has custody of its client's funds or securities to ensure that such client assets are verified by actual examination each year by an independent public accountant at a time chosen by the accountant without prior notice or announcement to the adviser. The custody rule also provides an alternative to this "surprise examination" requirement for certain advisers if the adviser "distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year" and the audits are conducted by a PCAOB-registered independent public accountant.

An SEC investigation revealed that NSR, which was not subjected to an annual surprise examination at any time, failed to distribute annual audited financial statements to the limited partners in certain funds it managed within the required timeframes in every year since it registered with the Commission in 2012. The SEC investigation further revealed that, despite missing the audited financial statement distribution deadline each year, NSR failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.

Without admitting or denying the SEC's findings, NSR agreed to be censured and to cease and desist from committing or causing any violations and future violations of Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder, and to pay a civil penalty of $75,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-4970 In the Matter of New Silk Route Advisors, LP under Regulatory Database Rules 206(4)-2 & 206(4)-7 Risks/Significant Cases.]   Top 


Most Frequent Best Execution Issues Cited in Adviser Exams


The Office of Compliance Inspections and Examinations (“OCIE”) has issued a risk alert to provide investment advisers,  investors and other market participants with information concerning many of the most common deficiencies that the staff has cited in recent examinations of advisers’ compliance with their best execution obligations under the Advisers Act.

Most Frequent Best Execution Issues Cited in Adviser Exams:

- Not performing best execution review;
- Not considering relevant factors during best execution review;
- Not seeking comparisons from other brokers;
- Disclosure issues;
- Soft dollar issues; and
- Weak policies and procedures.

Advisers should reflect upon their practices, policies and procedures in light of their best execution obligations under the Investment Advisers Act of 1940 and make improvements in their adviser compliance programs.  [Please
login to the IA Act UwnrappedTM Examination Tools Database/2018 Information to view the Risk Alert]   Top 


IAs and Reps Charged for Violating Testimonial Rule Using Social Media & the Internet

On July 10, 2018, the Commission instituted five separate settled proceedings against two SEC-registered investment advisers, three investment adviser representatives, and a marketing consultant who committed and/or caused violations of the Testimonial Rule under the Investment Advisers Act of 1940 through their use of social media and the internet.

According to the SEC’s orders, registered investment advisers HBA Advisors, LLC and Romano Brothers & Company, investment adviser representatives Jaime Enrique Biel, William M. Greenfield and Brian S. Eyster, and marketing consultant Leonard S. Schwartz published testimonial advertisements on the internet in violation of the Testimonial Rule. The Rule prohibits registered investment advisers from publishing, circulating, or distributing any advertisement that refers to any testimonial concerning, among other things, the investment adviser. The SEC found that HBA, Biel, Greenfield and Eyster hired Schwartz and his company Create Your Fate, LLC to solicit testimonials from their clients and publish them on various public social media websites. In addition, the SEC found that Romano Brothers created and published two videos containing client testimonials on its public website and on YouTube.com. The published testimonials all contained information about the firms or representatives and the advice and services they rendered to their clients.

The SEC’s orders found that Romano Brothers and HBA each violated and that Biel, Greenfield, Eyster and Schwartz each caused violations of Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) thereunder. Without admitting or denying the findings in the SEC’s orders, Romano Brothers, HBA, Biel, Greenfield, Eyster and Schwartz agreed to the entry of cease-and-desist orders and to pay civil penalties of $35,000 for Schwartz, $15,000 each for Romano Brothers and HBA, and $10,000 each for Biel, Greenfield and Eyster.

The SEC’s orders arise from examination referrals and additional research conducted by the SEC’s Chicago Regional Office.  [Please
login to IA Act UnwrappedTM Regulatory Database Rule 206(4)-1 Advertising Rule Risks/Significant Cases to view Release Nos. IA-4965 In the Matter of Romano Brothers & Company; IA-4964 In the Matter of Leonard S. Schwartz; IA-4963 In the Matter of HBA Advisors, LLC, and Jaime Enrique Biel; IA-4962 In the Matter of Brian S. Eyster; and IA-4961 In the Matter of William M. Greenfield]   Top 


SEC Charges Charles Schwab with Failing to Report Suspicious Transactions

Failed to file SARs on suspicious transactions of independent investment advisers

Charles Schwab & Co., Inc., a registered broker-dealer, has agreed to settle charges that it failed to file Suspicious Activity Reports (SARs) on the suspicious transactions of independent investment advisers that it terminated from using Schwab to custody their client accounts.

To help detect potential violations of the securities laws, the Bank Secrecy Act (BSA) requires broker-dealers to report suspicious transactions that occur through their firms. The SEC's complaint alleges that in 2012 and 2013, Schwab terminated 83 independent investment advisers for engaging in activity that Schwab determined violated its internal policies and presented risk to Schwab or its customers. The complaint further alleges that at least 47 of the terminated advisers engaged in transactions through Schwab that it knew, suspected, or had reason to suspect were suspicious and required the filing of a SAR. Schwab failed to file SARs on the suspicious transactions of 37 of these terminated advisers.

Schwab failed to file SARs where it suspected or had reason to suspect that the terminated adviser had engaged in a range of suspicious transactions not involving the outright misappropriation or misuse of client funds, including: (1) transactions involving possible undisclosed self-dealing or conflicts of interest; (2) charging client accounts excessive advisory fees; (3) potentially fraudulent transactions in client accounts; (4) posing as a client to effect or confirms transactions in the client account; and (5) executing client trades and/or collecting advisory fees without being properly registered as an adviser. Moreover, Schwab failed to file SARs where it suspected or had reason to suspect that the terminated adviser had misused client funds but the client had not complained.

The SEC's complaint charges Schwab with violating Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. Schwab has agreed to settle the action by consenting, without admitting or denying the allegations of the complaint, to the entry of a permanent injunction and the payment of a $2.8 million civil penalty. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view LR-24189 SEC v. Charles Schwab & Co., Inc.]   Top 


AML Compliance Officer Charged with Compliance Failures


On July 6, 2018, the Commission issued Release No. IA-4956 In the Matter of Eugene Terracciano. This matter involves anti-money laundering (“AML”) compliance failures at Aegis Capital Corporation by Terracciano, who served as the firm’s AML Compliance Officer (“AML CO”) from September 2013 to approximately September 2015.

From September 2013 through early 2014, all while Terracciano was serving as Aegis’ AML CO, Aegis failed to file Suspicious Activity Reports (“SARs”) on hundreds of transactions when it knew, suspected, or had reason to suspect that the transactions involved the use of the broker-dealer to facilitate fraudulent activity or had no business or apparent lawful purpose. Many of the transactions involved red flags of potential market manipulation, including high trading volume in companies with little or no business activity during a time of simultaneous promotional activity. Aegis did not file SARs on these transactions even when it specifically identified AML red flags implicated by these transactions in its written supervisory procedures.

Under Aegis’ written supervisory procedures, the firm’s AML CO (Terracciano) was responsible for filing SARs on the firm’s behalf. Throughout the relevant period, Terracciano became aware of transactions that exhibited numerous AML red flags through alerts from Aegis’ clearing firms (“AML Alerts”). Terracciano was the primary point of contact for the clearing firms as it related to suspicious activity. Although the AML Alerts raised many red flags – including many red flags listed in Aegis’ written supervisory procedures as examples of suspicious activities – Terracciano did not file SARs on Aegis’ behalf regarding these transactions and did not produce a written analysis or otherwise demonstrate that he had considered filing SARs for these transactions.

As a result of the foregoing, Terracciano willfully aided and abetted and caused Aegis’ violations of Exchange Act Section 17(a) and Rule 17a-8 thereunder.
Terracciano is ordered to pay a $20,000 civil monetary penalty.  [Please login to IA Act UnwrappedTM to view Release No. IA-4956 In the Matter of Eugene Terracciano.]  Top 


New Fund Disclosure Website


On July 6, 2018, the Division of Investment Management’s Disclosure Review and Accounting Office (DRAO) posted a “Disclosure” tab on the Division’s website. This tab includes three webpages. The first, “Fund Disclosure at a Glance,” briefly explains DRAO’s responsibilities and core disclosure principles and provides contact information. The second, “Accounting and Disclosure Information,” is intended to be an aid to practitioners and others who are interested in the law and interpretations concerning disclosure. Its intent is to gather in a single place various fund disclosure resources. The third, “Disclosure Reference Material,” contains Disclosure Resources, which include the Plain English Handbook and Common Fund Disclosure Forms.

Of particular note, under “Disclosure News,” which appears on the right side of all three pages, ADIs 2018-02 through 2018-06 discuss various filing and review issues. These are newly released ADIs.  Click HERE to access the Disclosure webpage.  Top 


Regulation of Investment Advisers by the U.S. Securities and Exchange Commission 


Proskauer has announced the latest edition of Regulation of Investment Advisers by the U.S. Securities and Exchange Commission. Authored by Bob Plaze, Partner at Proskauer Rose, LLP, this edition has been updated to reflect the most up-to-date changes in the Advisers Act and related rules, interpretations and enforcement actions, including changes to:

[Links to source documents within the electronic version of the document are provided by Brightline Solutions. The document is available on the Proskauer website and also in the Brightline Solutions' IA Act UnwrappedTM Examination Tools Database/2018 Information & linked to IA Act UnwrappedTM Regulatory Database Plain English Description Tabs. Please login to IA Act UnwrappedTM to access the information.]  Top 


Venture Capital Fund Adviser Charged for Failing to Offset Consulting Fees


On June 29, 2018, the Commission announced findings that a New York-based venture capital fund adviser failed to offset certain consulting fees it received against management fees paid by funds it advised.  The adviser, Aisling Capital LLC, has agreed to pay a $200,000 penalty to settle the charges.

According to the SEC's order, Aisling received $1.2 million in consulting fees from two portfolio companies held by venture capital fund clients. The funds' organizational documents required Aisling to offset a specified percentage of consulting and other transaction fees it received against the management fees paid by the funds. However, Aisling failed to offset the $1.2 million in consulting fees, resulting in the funds and their limited partners overpaying $759,870 in management fees. Aisling reimbursed its clients the amounts it failed to offset, plus interest.

The SEC's order finds Aisling violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. Without admitting or denying the findings, Aisling consented to the SEC's order and agreed to pay a $200,000 penalty. The SEC considered Aisling's remedial acts and cooperation in reaching the settlement. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-4951 In the Matter of Aisling Capital LLC]  Top 

SEC Proposes Whistleblower Rule Amendments

On June 28, 2018, the Commission voted to propose amendments to the rules governing its whistleblower program.  The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the Commission and help the agency detect wrongdoing and better protect investors and the marketplace.

The Commission’s whistleblower program has made significant contributions to the effectiveness of the agency’s enforcement of the federal securities laws.  Original information provided by whistleblowers has led to enforcement actions in which the Commission has ordered over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.

After nearly seven years of experience administering the whistleblower program, the SEC has identified various ways in which the program might benefit from additional rulemaking.  The proposed rules would, among other things, provide the Commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.  

“Whistleblowers have made significant contributions to the SEC’s enforcement efforts, and the value of our whistleblower program is clear,” said SEC Chairman Jay Clayton.  “The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.  I look forward to public feedback and encourage everyone with an interest to give us their ideas on the proposed rules.”

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

FACT SHEET
SEC Open Meeting
June 28, 2018

Background


Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions.  Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected.  Congress established a separate fund at the Treasury Department, called the Investor Protection Fund (IPF), from which whistleblower awards are paid.  Since the program’s inception, the Commission has ordered over $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly, whose information and cooperation assisted the Commission in bringing successful enforcement actions.

The proposed whistleblower rule amendments would make certain modifications and clarifications to the existing rules, as well as several technical amendments.

Highlights

Additional Tools in Award Determinations

• Allowing awards based on deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into by the U.S. Department of Justice (“DOJ”) or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws:  This proposed amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission, DOJ, or a state attorney general acting in a criminal case may elect to pursue.  Currently, the Commission’s whistleblower rules do not address whether the Commission may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding.  Under the proposed amendment, the Commission would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.
 
• Additional considerations for small and exceedingly large awards:

   ?Historically, over 60% of the awards given out in our whistleblower program have been less than $2 million.  In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million.   In exercising its discretion to increase an award under this provision, the Commission would consider whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.
 
?The proposing release also includes a general inquiry for public comment regarding whether the Commission could establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly available information, or where the monetary sanctions collected are de minimis.
 
?Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.[1]  In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.  However, in no event would the award be adjusted below $30 million.  This proposed amendment is intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.

• Elimination of potential double recovery under the current definition of “related action”:  This proposed amendment would prevent the irrational result that could occur if a whistleblower could receive multiple recoveries for the same information from different whistleblower programs.  The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a “related action” if the Commission determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.

Uniform Definition of “Whistleblower”

In addition to the foregoing recommendations, the Commission proposes rule amendments in response to the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers.  In that decision, the Court held that the whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the Commission in order to qualify for protection against employment retaliation under Section 21F.  The Court thus invalidated the Commission’s rule interpreting Section 21F’s anti-retaliation protections to apply in cases of internal reports.

The proposed rules would modify Rule 21F-2 so that it comports with the Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F—i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections.  For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing”.  To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the Commission’s online tips portal would remain in place.

Increased Efficiency in Claims Review Process

Two further proposed changes are designed to help increase the Commission’s efficiency in processing whistleblower award applications.

• Proposed new subparagraph (e) to Exchange Act Rule 21F-8 would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the Commission, as well as to afford the Commission with the ability to bar individuals who repeatedly make frivolous award claims in Commission actions.  To prevent repeat submitters from abusing the award application process, the proposed rule would permit the Commission to permanently bar any applicant from seeking an award after the Commission determines that the applicant has abused the process by submitting three frivolous award applications. 
 
• Proposed new Exchange Act Rule 21F-18 would afford the Commission with a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the Commission in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation.  The proposed summary disposition procedures would help facilitate a more timely resolution of such relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims.  As under current rules, Claimants would have an opportunity to contest a preliminary denial of their claim before the Commission makes its final determination.

Clarification and Enhancement of Certain Policies and Procedures

The proposed amendments would clarify and enhance certain policies, practices, and procedures in implementing the program.  These recommendations include the items listed below.

• Proposed revisions to Exchange Act Rule 21F-4(e) to clarify the definition of “monetary sanctions” so that it codifies the Commission’s current understanding and application of that term.
 
• Proposed revisions to Exchange Act Rule 21F-9 to provide the Commission with additional flexibility to modify the manner in which individuals may submit Form TCR (Tip, Complaint or Referral).
 
• Proposed revisions to Exchange Act Rule 21F-8 to provide the Commission with additional flexibility regarding the forms used in connection with the whistleblower program.
 
• Proposed amendment to Exchange Act Rule 21F-12 to clarify the list of materials that the Commission may rely upon in making an award determination.
 
• Proposed amendment to Rule 21F-13 to clarify the materials that may comprise the administrative record for purposes of judicial review.

Interpretive Guidance

In addition to the foregoing proposed rule amendments, the Commission is publishing proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications.  Under the proposed guidance, in order to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.  

What’s Next?

The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program.  After careful review of the comments, the Commission will consider what further action to take on the proposal.

Endnote

[1] Whenever the reserve in the Commission’s Investor Protection Fund (“IPF”) falls below $300 million, the Commission by law must replenish the IPF with any collected monetary sanctions that are not paid to the victims of the violations.  These funds otherwise would be directed to the United States Treasury, where they could be made available for use in funding other valuable public programs.
[Release No. 34-83557 Amendments to the Commission's Whistleblower Program Rules]   Top 


Division of Investment Management Updates Custody Rule FAQs


The Division of Investment Management staff has updated the “Staff Responses to Questions About the Custody Rule” to provide additional guidance regarding specific questions relating to custody arising out of IM Guidance Update 2017-01 “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority”. The staff added two new FAQs under the “Definition of Custody; Scope of the Rule” section.

Question II.11

Q: In February 2017, the staff of the Division of Investment Management issued IM Guidance Update 2017-01 "Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority" ("Guidance Update," available at: https://www.sec.gov/investment/im-guidance-2017-01.pdf) in which the staff expressed its view that, depending on the facts and circumstances, certain custodial agreements could impute investment advisers with custody they otherwise did not intend to have ("Inadvertent Custody"). Specifically, the Guidance Update described circumstances where a custodial agreement between a client and qualified custodian, to which the client's adviser is not a party, might permit the adviser to instruct the custodian to disburse, or transfer, funds or securities. We are an advisory firm that does not know whether any of our clients' custodial agreements would give our firm Inadvertent Custody. Are we now required to comply with the custody rule for those client accounts?

A: An adviser that does not have a copy of a client's custodial agreement, and does not know, or have reason to know whether the agreement would give the adviser Inadvertent Custody, need not comply with the custody rule with respect to that client's account if Inadvertent Custody would be the sole basis for custody. The Division of Investment Management would not recommend enforcement action to the Commission under the custody rule or under Section 207 of the Advisers Act against any such investment adviser if that adviser neither complied with the requirements of the custody rule nor indicated it has custody in its Form ADV filing. We note, however, that this relief is not available where the adviser recommended, requested, or required a client's custodian. (Posted June 5, 2018)

Question II.12

Q: We are an advisory firm with 100 clients, and we have check-writing authority on 60 of our clients' accounts. Of the remaining 40 accounts, we deduct our advisory fee from 10 accounts. We do not know (or have reason to know) whether any of our clients' custodial agreements would give our firm Inadvertent Custody, as described in Question II.11 above, because, among other things, our firm does not have copies of our clients' custodial agreements and we did not recommend, request, or require the clients to use their chosen custodians. We have no basis for having custody other than the check-writing authority and fee deduction. We currently comply with the custody rule with respect to the 60 client accounts for which we have check-writing authority, and we rely on the exception from the surprise examination requirement for the 10 accounts from which we deduct our advisory fee. Should we comply with the custody rule for the remaining 30 client accounts?

A: Under the facts you posed, the Division would not recommend enforcement action for not complying with the custody rule or the custody-related ADV reporting requirements for the 30 accounts, consistent with the response to Question II.11 above. The Division would not recommend enforcement action to the Commission under the custody rule or under Section 207 of the Advisers Act if the adviser proceeded to rely on the exception in the custody rule for fee deduction, and completed Form ADV accordingly, for the 10 accounts from which the adviser deducts its advisory fee. In addition, the Division would, therefore, expect you to continue to comply with the custody rule with respect to the 60 client accounts for which you have check-writing authority, and we would expect you to continue to comply with all but the surprise examination requirement with respect to the 10 client accounts from which you deduct fees. (Posted June 5, 2018)

[Please login to the IA Act UnwrappedTM Regulatory Database to view the updated FAQs under Rule 206(4)-2.]


SEC Charges Investment Adviser and Two Former Managers for Misleading Retail Clients


On June 4, 2018, the Commission announced that New York-based investment adviser deVere USA, Inc. (“DVU”) agreed to pay an $8 million civil penalty related to its failure to disclose conflicts of interest to its retail clients. The settlement will result in the establishment of a Fair Fund for distribution of the penalty to affected clients. The SEC also announced the filing of a litigated action against two deVere USA investment adviser representatives, one of whom was the CEO of the firm. 

These proceedings arise out of DVU’s failure to make full and fair disclosure to clients and prospective clients of material conflicts of interest regarding compensation obtained from third-party product and service providers.  DVU’s clients are primarily U.S. residents or citizens who held U.K. defined benefit and defined contribution pensions. DVU provided investment advice to its clients in connection with the transfer of these U.K. pension assets to overseas retirement plans that qualified under the U.K. tax authority’s regulations as a Qualifying Recognised Overseas Pension Scheme (“QROPS”).

According to the SEC’s order, deVere USA failed to disclose agreements with overseas product and service providers that resulted in compensation being paid to deVere USA advisers and an overseas affiliate.  The SEC order finds that the undisclosed compensation—including an amount equivalent to 7% of the pension transfer value—created an incentive for deVere USA to recommend a pension transfer and particular product or service providers that were obligated to make payments.  The order also finds that deVere USA made materially misleading statements concerning tax treatment and available investment options.

In addition, DVU’s policies and procedures were not reasonably designed because they were not tailored to DVU’s actual business. In particular, prior to at least December 2015, DVU did not have policies and procedures to address its QROPS business and the conflicts of interest posed by the receipt of compensation from third parties in connection with its QROPS-related recommendations. Furthermore, DVU did not follow or implement many of its existing policies and procedures. In fall 2015, DVU hired an outside compliance consultant to conduct a review of DVU’s compliance policies and procedures.

The SEC separately filed charges against the former deVere USA CEO, Benjamin Alderson, and a former manager, Bradley Hamilton.  The SEC’s complaint, filed in federal district court in Manhattan, alleges that Alderson and Hamilton misled clients and prospective clients about the benefits of pension transfers while concealing material conflicts of interest, including the substantial compensation that Alderson and Hamilton personally stood to receive.

“Investment advisers have an obligation to disclose direct and indirect financial incentives,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “deVere USA brushed aside this duty while advising retail investors about their retirement assets, and today’s settlement will result in a Fair Fund distribution to deVere USA’s retail clients who were deprived of important information.”

Without admitting or denying the SEC’s findings, deVere USA consented to the SEC’s order, which finds that the firm violated the Investment Advisers Act of 1940, including the antifraud provisions, and imposes remedies that include an $8,000,000 penalty and engaging an independent compliance consultant. The SEC’s complaint against Alderson and Hamilton alleges that they violated the Investment Advisers Act and seeks an injunction, disgorgement plus interest, and civil money penalties. [Please
login to IA Act UnwrappedTM to view Release No. IA-4933 In the Matter of DeVere USA, Inc.]   Top 

IA Settles Charges for Failing to Disclose Conflict of Interest Arising from Side Letter with Third Party Advisers

On June 4, 2018, the Commission announced charges against a New York-based investment adviser for failing to disclose a conflict of interest surrounding its receipt of fees from two affiliated third-party advisers with whom it placed client assets for investment. The adviser, Lyxor Asset Management, Inc. (“Lyxor”) has agreed to settle the charges and will be censured and ordered to pay a civil penalty.

This matter concerns a failure to disclose conflicts of interest by Lyxor Asset Management, Inc. (“Lyxor”), an investment adviser, to certain of its clients arising from an agreement (the “Side Letter”) between Lyxor and two affiliated outside asset managers (the “Third Party Advisers”). The Side Letter called for the Third Party Advisers to make payments to Lyxor based on the total amount of Lyxor client assets placed or maintained in certain funds advised by the Third Party Advisers (the “Funds”). Lyxor initially sought to negotiate an economic benefit for its clients in early drafts of the Side Letter, but the Third Party Advisers would not agree, and Lyxor agreed to a final version of the Side Letter that called for payments to be made directly to Lyxor. Pursuant to the Side Letter, Lyxor received approximately $648,000 in fees from July 2012 through September 2014. Lyxor failed to disclose the agreement or the payments, which were in contravention of investment management agreements with two of Lyxor’s clients.

Lyxor also lacked policies and procedures reasonably designed to detect and prevent such conflicts, and failed to account on its books and records for the amounts owed and ultimately paid. Lyxor ultimately reimbursed its clients the funds it received pursuant to the agreements, plus interest.

The SEC’s order finds Lyxor willfully violated Sections 204(a), 206(2) and 206(4) of the Advisers Act, and Rules 204-2(a)(2) and 206(4)-7 promulgated thereunder. Without admitting or denying the findings in the SEC’s order, Lyxor consented to the entry of a cease-and-desist order and a censure, and agreed to pay a civil penalty of $500,000
. [Please login to IA Act UnwrappedTM to view Release No. IA-4932 In the Matter of Lyxor Asset Management, Inc.]  Top 


Elad Roisman Nominated for SEC


Elad Roisman, currently serving as Chief Counsel at United States Senate Committee on Banking, Housing, and Urban Affairs, has been selected by President Trump to replace Commissioner Michael Piwowar’s Republican seat at the SEC. Commissioner Piwowar announced his intention to resign by July 7th.  Senate Banking Committee Chairman Mike Crapo (R-Idaho) said in a statement that “Elad is exceptionally well-qualified for this important position at the SEC, and I congratulate him on this announcement.”

Roisman was Counsel to former SEC Commissioner Daniel Gallagher and previously an associate at the law firm of Milbank, Tweed, Hadley & McCloy LLP. He will be nominated for a five-year term, and his appointment is subject to Senate confirmation. Commissioner Kara Stein, a Democrat whose term expired in 2017, is also set to leave the Commission this year.  Top 


SEC Charges 13 Private Fund Advisers for Repeated Filing Failures


On June 1, 2018, the Commission announced settlements with 13 registered investment advisers who repeatedly failed to provide required information that the agency uses to monitor risk. According to the SEC’s orders, the advisers failed to file annual reports on Form PF informing the agency about the private funds they advise, including the amount of assets under management, fund strategy, performance, and use of borrowed money and derivatives.  Private fund advisers managing $150 million or more of assets have been required to make annual filings on Form PF since 2012.  The orders found that the 13 advisers were delinquent in their filings over multi-year periods. 

“These advisers’ repeated reporting failures deprived the SEC of important information they were required by law to provide,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “We encourage investment advisers to take a fresh look at whether they are meeting their reporting obligations and adjust their compliance programs accordingly.”

The SEC uses Form PF data to monitor industry trends, inform rulemaking, identify compliance risks, and target examinations and enforcement investigations.  The SEC publishes quarterly reports with aggregated information and statistics derived from Form PF data to inform the public about the private fund industry.  It also provides Form PF data to the Financial Stability Oversight Council to help it evaluate systemic risks posed by hedge funds and other private funds.

The SEC’s orders find that the advisers violated the reporting requirements of the Investment Advisers Act of 1940.  Without admitting or denying the findings, the advisers agreed to be censured, to cease and desist, and to each pay a $75,000 civil penalty.  During the course of the SEC’s investigation, the advisers also remediated their failures by making the necessary filings. 

The SEC’s investigation was conducted by Oreste P. McClung and Lisa M. Candera of the Enforcement Division’s Asset Management Unit with assistance from the Private Funds Unit in the Office of Compliance Inspections and Examinations and the Analytics Office in the Division of Investment Management.  Brendan P. McGlynn supervised the investigation.

Please
login to IA Act UnwrappedTM to view the SEC’s orders:
IA-4931 In the Matter of Veteri Place Corporation
IA-4030 In the Matter of Rose Park Advisors
IA-4929 In the Matter of RLJ Equity Partners, LLC
IA-4928 In the Matter of Prescott General Partners LLC
IA-4927 In the Matter of HEP Management Corporation
IA-4926 In the Matter of Elm Partners Management LLC 
IA-4925 In the Matter of Ecosystem Investment Partners LLC 
IA-4924 In the Matter of Cherokee Investment Partners LLC 
IA-4923 In the Matter of CAI Managers & Co., L.P. 
IA-4922 In the Matter of Bristol Group, Inc. 
IA-4921 In the Matter of Brahma Management, Ltd. 
IA-4920 In the Matter of Biglari Capital LLC 
IA-4919 In the Matter of Bachrach Asset Management Inc. 
Top 


Five SEC Commissioners & Staff are Heading to Atlanta for Interactive Event


The five-member Securities and Exchange Commission and staff from across the agency will be in Atlanta on June 13 for an interactive event with investors at Georgia State University College of Law. The event is an opportunity for all Main Street investors—from those who just started their first job to those approaching retirement—to hear directly from, and share feedback with, the SEC’s leaders on topics that directly affect their personal finances and the regional and national economies.

“With its dynamic population, innovative ideas, and thriving economy, Atlanta is an ideal place for us to discuss the work we do and hear directly from the people we serve,” said SEC Chairman Jay Clayton, who will be joined in Atlanta by Commissioners Kara Stein, Michael Piwowar, Robert Jackson, and Hester Peirce.

The Commissioners will kick the day off with a town hall-style event covering a range of topics from choosing a financial professional, to initial coin offerings and digital assets, to cybersecurity. Directly after the town hall, attendees are invited to join the Commissioners and SEC staff at one of the interactive breakout sessions to gain greater insight into some of the most requested topics before the SEC today.

Breakout session topics:

“As anyone in the Atlanta Regional Office can tell you, this area has no shortage of people with great ideas, and I know their input will make this event a meaningful learning opportunity both for our agency and the region,” said Richard Best, Director, SEC Atlanta Regional Office.

Seating is first come, first served and attendants are encouraged to RSVP via the SEC’s Atlanta Regional Office’s webpage, which has event details. There is convenient parking and a MARTA Station nearby. The event is free and open to the public and the media.   Top 


NASAA Releases First Annual Report on State-Registered Investment Advisers


The North American Securities Administrators Association (NASAA) has released its first annual report identifying the contours of the state-registered investment adviser population and the related regulatory activities of state securities regulators.

“This report provides for the first time a snapshot of the state-registered investment adviser population in the United States and also showcases the tremendous amount of activity and resources state securities regulators bring to help these small- and mid-size businesses continue to succeed and both understand and comply with state securities law,” said Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission.

The NASAA 2018 Investment Adviser Section Annual Report also spotlights the initiatives that NASAA’s Investment Adviser Section Committee and related Project Groups have completed over the course of the past year.

Included in the report are highlights of the important regulatory policy work, education and training, and coordination efforts of NASAA’s Investment Adviser Section Committee and Project Groups. Two major undertakings discussed in the report are the 2017 Coordinated Exams overseen by the Section’s Operations Project Group and the Cybersecurity Checklist for Investment Advisers prepared by the Section’s Cybersecurity and Technology Project Group.

“Both of these efforts were specifically designed to provide free and direct aid to smaller investment adviser shops. With these two reports in hand, state-registered investment advisers can quickly identify common examination deficiencies of concern to our member regulators and develop stronger cybersecurity policies, procedures, and practices. Both of those outcomes go a long way in protecting the assets of Main Street investors, one of NASAA’s chief missions,” said Andrea Seidt, Ohio Securities Commissioner and chair of NASAA’s Investor Adviser Section.

In addition, the Report discusses NASAA’s recently adopted amendment to NASAA’s model rule on the unethical business practices of investment advisers, investment adviser representatives, and federal covered advisers, prohibiting advisers from improperly using client passwords to access accounts. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2018 Information to view the NASAA Report in its entirety.] Top 


Hedge Fund Firm Charged for Asset Mismarking and Insider Trading

CFO Charged with Failing to Supervise Portfolio Managers

On May 8, 2018, the SEC announced the hedge fund advisory firm Visium Asset Management LP has agreed to settle charges related to asset mismarking and insider trading by its privately managed hedge funds and portfolio managers.  Separately, the firm’s CFO agreed to settle charges that he failed to respond appropriately to red flags that should have alerted him to the asset mismarking.

The SEC’s order finds that two portfolio managers of New York-based Visium falsely inflated the value of securities held by hedge funds it advised, causing the funds to falsely inflate returns, overstate their aggregate net asset value, and pay approximately $3.15 million in excess fees to Visium.  The order also finds that certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration (FDA).  The trades were based on confidential information received from a former FDA official working as a paid consultant to Visium.  Trades were also made in the securities of home healthcare providers in advance of a proposed cut to certain Medicare reimbursement rates by the Centers for Medicare and Medicaid Services (CMS), based on confidential information received from a former CMS employee working as a paid consultant to Visium. 

In a separate order, the SEC finds that Visium’s CFO Steven Ku failed reasonably to supervise the two portfolio managers, Christopher Plaford and Stefan Lumiere, who perpetrated the asset mismarking scheme, by failing to respond appropriately to red flags that should have alerted Ku to their misconduct. 

The SEC previously charged Plaford and Lumiere, and the former FDA official, among others, for their misconduct, in an enforcement action filed in June 2016.  The former CMS employee was charged for other misconduct in May 2017.  Earlier this year, the SEC barred Lumiere from the securities industry based on a final judgment entered against him in the SEC’s case as well as his conviction in a parallel criminal case.  The SEC’s case against Plaford has been stayed pending the completion of a parallel criminal case.

“Advisory firms must create a culture of zero tolerance when it comes to unlawful conduct, and supervisors at those firms must take reasonable measures necessary to detect and prevent securities law-related violations by their personnel,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Here Visium’s portfolio managers engaged in illegal asset mismarking and insider trading, and Ku failed to act in the face of red flags that should have exposed the asset mismarking scheme.”

Visium agreed to settle the SEC’s charges by, among other things, disgorging illicit profits totaling more than $4.7 million plus interest of $720,711, and paying a penalty of more than $4.7 million.  Ku agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months.  Visium and Ku each consented to the applicable SEC order without admitting or denying the findings. 
[Please login to IA Act UnwrappedTM to view Release No. IA-4909 In the Matter of Visium Asset Management, LP and Release No. IA-4910 In the Matter of Steven Ku]  Top 


SEC Commissioner Piwowar Submits Resignation to President Trump


May 7, 2018  Statement of Michael S. Piwowar –“ Today, I sent a letter to President Trump informing him that I intend to resign my position on the earlier of July 7, 2018 or the swearing in of my successor. The text of the letter is below.  Over the next two months, I will continue to work steadfastly with my fellow commissioners and SEC staff to advance our important mission of protecting investors, maintaining fair, orderly, and efficient markets, and promoting capital formation.”

Michael S. Piwowar was first appointed to the SEC by President Barack Obama and was sworn in on August 15, 2013. Dr. Piwowar was designated Acting Chairman of the Commission by President Donald Trump from January 23, 2017, to May 4, 2017.

* * *

May 7, 2018

The Honorable Donald J. Trump
President of the United States of America
The White House
Washington, DC 20500

Dear Mr. President:

As you are aware, my term as a commissioner at the Securities and Exchange Commission officially ends on June 5, 2018. I write to inform you that I intend to resign my position on the earlier of July 7, 2018 or the swearing in of my successor.

It has been an honor to serve the American people at such a respected agency and work with such dedicated and talented staff. I began my career in public service at the SEC 16 years ago as a visiting academic scholar and later as a senior financial economist. It was privilege to return to the SEC in August 2013 as a commissioner. I am grateful to former President Barack Obama, Senate Majority Leader Mitch McConnell, Senator Richard Shelby, and Senator Mike Crapo for the opportunity to serve in this role.

I am especially grateful to you for the trust you placed in me to serve as acting chairman at the beginning of your Administration. We accomplished a great deal for the “forgotten investor” in a short period of time.

Sincerely,

Michael S. Piwowar
Commissioner
Top


Accountants Charged with Custody & Compliance Rules Violations


On May 4, 2018 the Commission issued Release No. IA-4906 In the Matter of Winter, Kloman, Moter & Repp, S.C., Curtis W. Disrud, CPA, and Paul R. Sehmer, CPA. This matter involves misconduct by Respondents in completing audits pursuant to Section 206(4) of the Advisers Act and the Custody Rule 206(4)-2. For 2014 and 2015, Winter, Kloman, Moter & Repp, S.C. (“WKMR”) was engaged by Voit Fund GP, LLC, an affiliate of Voit & Company, LLC (“Voit”), an SEC-registered investment adviser, to audit the financial statements in accordance with generally accepted accounting principles (“GAAP”) of six pooled investment vehicles that Voit advised. Voit Fund GP also engaged WKMR to audit the Funds. Voit and Voit Fund GP took these steps to in an effort to enable Voit to comply with the Custody Rule because Voit had custody of client assets invested in the Funds.

Unbeknownst to Voit, WKMR, and two partners on the engagements, Curtis W. Disrud and Paul R. Sehmer, CPA, failed to meet the requirements of the Custody Rule in conduct their audits of the Funds. First, WKMR, Disrud, and Sehmer were not independent accountants because: (1) they prepared the Funds’ 2014 and 2015 Financial Statements which they audited; and (2) WKMR had a direct business relationship with Voit because a WKMR affiliate, WKMR Financial Group, LLC referred advisory clients to Voit in return for a fee. Second, WKMR was not subject to regular inspection by the Public Company Accounting Oversight Board (the “PCAOB”) at the time of the audits. As a result, Respondents WKMR and Disrud caused and willfully aided and abetted Voit’s 2014 and 2015 violations of the Custody Rule within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, and Respondent Sehmer caused Voit’s 2015 violations of the Custody Rule.

In addition, the Respondents engaged in improper professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by: WKMR and Disrud failing to design and implement an appropriate response to the risk of material misstatement and failing to obtain sufficient appropriate audit evidence; WKMR failing to ensure that the engagement team had adequate technical training and proficiency and failing to establish sufficient quality control standards; WKMR and Sehmer failing to conduct the necessary engagement quality reviews and receive concurring approvals; and WKMR, Disrud and Sehmer failing to exercise due professional care. [Please
login to IA Act UnwrappedTM to view Release No. IA-4906 In the Matter of Winter, Kloman, Moter & Repp, S.C., Curtis W. Disrud, CPA, and Paul R. Sehmer, CPA under Regulatory Database Custody Rule 206(4)-2 Risks/Significant Cases ]  Top  

SEC Launches SALI - Action Lookup for Individuals
“SALI” Tool Will Allow Investors to Identify Individuals Subject Enforcement Action Orders or Judgments


On May 2, 2018, the Commission announced the launch of an additional online search feature that enables investors to research whether the person trying to sell them investments has a judgment or order entered against them in an enforcement action. The new tool is intended to assist the public in making informed investment decisions and avoiding financial fraud. 

The SEC Action Lookup for Individuals – or SALI – will help identify registered and unregistered individuals who have been parties to past SEC enforcement actions and against whom federal courts have entered judgments or the SEC has issued orders. 

“Our Main Street Investors themselves are a key line of defense in detecting and preventing fraud. One of the SEC’s most important tasks is to arm our investors with the tools necessary to identify potential fraudsters. An important risk factor is whether the person you are dealing with has a disciplinary history with the SEC or other regulators,” said SEC Chairman Jay Clayton. “SALI provides Main Street investors with an additional tool they can use to protect themselves from being victims of fraud and other misconduct.”

The new tool’s results are not limited to registered investment professionals, as with many existing online search functions. Instead, SALI allows the public to identify individuals who have settled, defaulted, or contested an enforcement action brought by the SEC, provided that a final judgment or order was entered against them in a federal court or an administrative proceeding. 

SALI supplements existing SEC-provided investor education resources available on Investor.gov, including a free investment professional search tool, that provides access to information on investment adviser representatives as well as individuals listed in FINRA’s BrokerCheck system. Investors are encouraged to take advantage of the considerable resources, such as Investor Alerts and Bulletins, planning tools and answers to frequently asked questions, provided by the Office of Investor Education and Advocacy on Investor.gov.

Currently, SALI search results include parties from SEC actions filed between October 1, 2014 and March 31, 2018.  The SEC will update the search feature periodically to add parties from newly-filed actions and actions filed prior to October 1, 2014.

For more information, see:
SEC Action Lookup for Individuals - "SALI" -
available at https://www.sec.gov/litigations/sec-action-look-up
Check Your Investment Professional -
available at https://www.sec.gov/check-your-investment-professional
Information for Individual Investors
- available at https://www.sec.gov/check-your-investment-professional
Top 


SEC Enforcement Division Issues FAQs for Share Class Selection Disclosure Initiative


The SEC's Division of Enforcement has issued answers to frequently asked questions (FAQs) on the Share Class Selection Disclosure Initiative, providing additional information about adviser eligibility, disgorgement, and the distribution of funds to clients.  The Share Class Selection Disclosure (SCSD) Initiative, announced on February 12, seeks to protect advisory clients from and return money to those affected by undisclosed conflicts of interest.

“It appears that many investment advisers are working diligently to evaluate whether they can take advantage of the initiative and we believe that providing these FAQs will help them make that determination,” said C. Dabney O’Riordan, Co-Chief of the Division of Enforcement’s Asset Management Unit.  “The initiative provides a framework to quickly and efficiently resolve these issues with self-reporting advisers and return money to their clients.”

The SCSD Initiative applies to conduct by investment advisers (i.e., those entities that meet the definition of “investment adviser” under Advisers Act Section 202(a)(11)) with respect to advisory clients, irrespective of the type of account in which an advisory client’s mutual fund investment is held. If the entity was not acting as an investment adviser in recommending, purchasing, or holding 12b-1 fee paying share classes when a lower-cost share class of the same fund was available, then that portion of the entity’s business would not be eligible for the SCSD Initiative.

Investment advisers that did not explicitly disclose in applicable Forms ADV (i.e., brochure(s) and brochure supplements) the conflict of interest associated with the 12b-1 fees the firm, its affiliates, or its supervised persons received for investing advisory clients in a fund's 12b-1 fee paying share class when a lower-cost share class was available for the same fund should consider self-reporting to the Division to take advantage of the SCSD Initiative.

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisers who 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.  In such cases the Enforcement Division will recommend settlements that do not impose a civil monetary penalty while requiring participating advisers to return ill-gotten gains to harmed advisory clients.

The Division of Enforcement notes that advisers considering a self-report may wish to consult with counsel if they have questions about whether to self-report. For advisers that would have been eligible for the terms of the SCSD Initiative but did not participate, the Division cautions that it expects in any proposed enforcement action to recommend additional charges, if appropriate, and the imposition of penalties. 

To be eligible for the SCSD Initiative, an investment adviser must notify the Division of Enforcement of their intent to self-report no later than 12:00 am EST on June 12, 2018.

[Please login to the IA Act UnwrappedTM Examination Tools Database to view the Share Class Selection Disclosure Initiative FAQs, updated information regarding the Share Class Selection Disclosure Initiative, the Share Class Selection Disclosure Initiative Questionnaire for Self-Reporting Advisers and Attachment.]  Top  


SEC Proposes New Rules and Forms under the Advisers Act and Reaffirms Advisers’ Fiduciary Duty

Form ADV Part 3: Form CRS Relationship Summary; Required Disclosures in Retail Communications; and Restrictions on the use of Certain Names or Titles

The SEC has proposed new and amended rules and forms under both the Advisers Act and the Exchange Act to require registered investment advisers and registered broker-dealers to provide a brief relationship summary to retail investors to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events. 

The proposed rules and rule amendments would require advisers and broker-dealers to deliver their relationship summaries to retail investors, to file them electronically with the Commission, and to post them electronically on their public websites (if they have a public website). If they do not have a public website, they would be required to include in their relationship summary a toll-free number that retail investors may call to request documents.

Retail investors would receive a relationship summary on new Form CRS (which will be Part 3 of Form ADV) at the beginning of a relationship with a firm, and would receive updated information following a material change. Proposed new Rule 204-5 under the Advisers Act would require an investment adviser to deliver the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory agreement (even if the adviser’s agreement with the retail investor is oral) as well as to existing clients one time within a specified time period after the effective date of the proposed amendments. The proposal includes associated amendments to Advisers Act Rules 203-1, 204-1, and 204-2.

The SEC has also proposed new rules to reduce investor confusion in the marketplace for firm services, specifically: (i) a new rule under the Exchange Act that would restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term “adviser” or “advisor” in specified circumstances, and (ii) new rules under the Exchange Act and Advisers Act (proposed new Rule 211h-1) to require broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, to disclose, in retail investor communications, the firm’s registration status with the Commission and an associated natural person’s and/or supervised person’s relationship with the firm. 

In Release No. IA-4889, 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. 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.

Comments on the two proposals must be received by August 7, 2018.

[Please login to the IA Act UnwrappedTM Releases Database to view Release No. 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, and Release No. IA-4889 Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, and associated information.

Proposing Release IA-4888, proposed new Rules 204-5 and 211h-1 and proposed amendments to Rules 203-1, 204-1 and 204-2 are reflected in the IA Act UnwrappedTM Regulatory Database.]   Top  


IA Charged for Breach of Fiduciary Duty

Failed to Disclose Conflicts of Interest to Private Equity Clients

On April 24, 2018, the Commission announced charges against a New York-based investment adviser for failing to disclose to its private equity clients conflicts of interest surrounding its receipt of compensation from a company that provided services to fund portfolio companies.  The adviser, WCAS Management Corporation (WCAS), has agreed to settle the charges and will be censured and ordered to pay disgorgement, prejudgment interest, and a civil penalty.

According to the SEC’s Order Instituting Proceedings, WCAS entered into an agreement (Agreement) with a company that provided services to portfolio companies owned by the private equity funds WCAS managed.  Under the Agreement, WCAS received a share of the revenue the service provider received as a result of the WCAS portfolio companies’ purchases.  Further, while negotiating the Agreement, the service provider suggested it would enter into the Agreement if one of WCAS’s portfolio companies signed a separate agreement to purchase services from the provider’s affiliate.

WCAS did not disclose these conflicts of interest to the fund investors, and could not effectively consent on behalf of its private equity fund clients.  WCAS received $623,035 under the Agreement, and voluntarily stopped receiving fees after the SEC began its investigation.

The SEC order finds WCAS willfully violated Sections 206(2) and 206(4) of the Advisers Act, and Rule 206(4)-8 thereunder.  Without admitting or denying the findings in the SEC’s order, WCAS consented to entry of the cease-and-desist order and a censure, and agreed to pay disgorgement of $623,035, prejudgment interest of $65,784, and a civil penalty of $90,000.
[Please login to IA Act UnwrappedTM to view Release No. IA-4896 In the Matter of WCAS Management Corporation] Top

Altaba, Formerly Known as Yahoo!, Charged With Failing to Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million

On April 24, 2018, the SEC announced that the entity formerly known as Yahoo! Inc. has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts.

According to the SEC’s order, within days of the December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts.  Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.  The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications, Inc. 

 “We do not second-guess good faith exercises of judgment about cyber-incident disclosure.  But we have also cautioned that a company’s response to such an event could be so lacking that an enforcement action would be warranted.  This is clearly such a case,” said Steven Peikin, Co-Director of the SEC Enforcement Division.

Jina Choi, Director of the SEC's San Francisco Regional Office, added, “Yahoo’s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach.  Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors.”

The SEC’s order finds that when Yahoo filed several quarterly and annual reports during the two-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications.  Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches.  In addition, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings.  Finally, the SEC’s order finds that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure.

Verizon acquired Yahoo’s operating business in June 2017.  Yahoo has since changed its name to Altaba Inc. Yahoo neither admitted nor denied the findings in the SEC's order, which requires the company to cease and desist from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15.

The SEC’s investigation, which is continuing, has been conducted by Tracy S. Combs of the Cyber Unit and supervised by Jennifer J. Lee and Erin E. Schneider of the San Francisco office.  Earlier this year, the SEC adopted a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.  Top 


SEC 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 

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
Top
  


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. 
  Top 


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.  
Top 


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 

 

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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-5045 In the Matter of Todd Wortman

IA-5044 In the Matter of Dawn Roberts

IA-5043 In the Matter of MAry A. Faher

IA-5042 In the Matter of Cory Ryan Williams

LR-24285 SEC v. Hope Advisors, LLC, et al.

LR-24283 SEC v. Jason W. Galanis, et al.

IA-5041 In the Matter of Ophrys, LLC

IA-5040 In the Matter of Joel N. Burstein

Sixth action arising out of enforcement initiative to combat cherry-picking led by the SEC's Los Angeles Regional Office:
LR-24278 SEC v. World Tree Financial, LLC, et al.

IA-5039 In the Matter of Travis A. Branch

IA-5038 In the Matter of Karen Bruton, CPA and Hope Advisors, LLC

Orders vacating bars:
IA-5032 In the Matter of Wing F. Chau
IA-5031 In the Matter of Terry M. Deru
IA-5030 In the Matter of Evan Andrew Zarefsky
IA-5029 In the Matter of Anthony Scolaro
IA-5028 In the Matter of James R. Holdman
IA-5027 In the Matter of Matthew G. Teeple
IA-5026 In the Matter of James E. Putman
IA-5025 In the Matter of Walter J. Clarke
IA-5024 In the Matter of Enrica Cotellessa-Pitz
IA-5023 In the Matter of Paul T. Mannion, Jr. and Andrew S. Reckles
IA-5022 In the Matter of Phillip Dennis Murphy
IA-5021 In the Matter of Karl Motey
IA-5020 In the Matter of Daniel Moshe Naeh
IA-5016 In the Matter of Frank R. Peperno
IA-5015 In the Matter of Matthew Crisp
IA-5014 In the Matter of John J. Bravata and Antonio M. Bravata

IA-5037 In the Matter of Susan E. Walker

IA-5036 In the Matter of Jennifer R. Johnson

IA-5035 In the Matter of Creative Planning, Inc. and Peter A. Mallouk
Added to the IA Act UnwrappedTM Releases Database and to Significant Cases under Regulatory Database Rule 204A-1 Code of Ethics & Rule 206(4)-1 Advertisements

LR-24270 SEC v. Thomas J. Caufield

IA-5034 In the Matter of Heidi Wivolin

IA-5033 In the Matter of John L. Gathright, Jr.

Orders vacating bars from association:
IA-5019 In the Matter of Douglas F. Whitman
IA-5018 In the Matter of I. Joseph Massoud
IA-5017 In the Matter of Brian Scott Zwerner
IA-5013 In the Matter of Matthew Adam Rothman
IA-5012 In the Matter of Frances M. Guggino
IA-5011 In the Matter of Edward L. Maggiacomo, Jr.