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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!

OCIE Issues Risk Alert Highlighting IA/BD Compliance Issues Related to Reg S-P

On April 16, 2019, OCIE released a list of compliance issues related to Regulation S-P, the primary SEC rule regarding privacy notices and safeguard policies of investment advisers and broker-dealers. These issues were identified in recent examinations of SEC-registered investment advisers and brokers and dealers. The information in the Risk Alert is intended to assist advisers and broker-dealers in providing compliant privacy and opt-out notices, and in adopting and implementing effective policies and procedures for safeguarding customer records and information, under Regulation S-P. Examples of the most common deficiencies or weaknesses identified by OCIE staff in connection with the Safeguards Rule include:


Privacy and Opt-Out Notices.  OCIE staff observed registrants that did not provide Initial Privacy Notices, Annual Privacy Notices and Opt-Out Notices to their customers.

Lack of policies and procedures.  OCIE staff observed registrants that did not have written policies and procedures as required under the Safeguards Rule.

Policies not implemented or not reasonably designed to safeguard customer records and information, including:

• Personal devices.  Policies and procedures that did not appear reasonably designed to safeguard customer information on personal devices.
• Electronic communications.  Policies and procedures that did not address the inclusion of customer personally identifiable information (“PII”) in electronic communications.
• Training and monitoring.  Policies and procedures that required customer information to be encrypted, password-protected, and transmitted using only registrant-approved methods were not reasonably designed because employees were not provided adequate training on these methods and the firm failed to monitor if the policies were being followed by employees. 
• Unsecure networks.  Policies and procedures that did not prohibit employees from sending customer PII to unsecure locations outside of the registrants’ networks.
• Outside vendors. Registrants failed to follow their own policies and procedures regarding outside vendors.
• PII inventory.  Policies and procedures that did not identify all systems on which the registrant maintained customer PII.
• Incident response plans.  Written incident response plans that did not address important areas, such as role assignments for implementing the plan, actions required to address a cybersecurity incident, and assessments of system vulnerabilities
• Unsecure physical locations.  Customer PII that was stored in unsecure physical locations, such as in unlocked file cabinets in open offices.
• Login credentials.  Customer login credentials that had been disseminated to more employees than permitted under firms’ policies and procedures.
• Departed employees.  Instances where former employees of firms retained access rights after their departure and therefore could access restricted customer information.

The Risk Alert is intended to highlight for firms risks and issues that OCIE staff has identified.  In addition, the Risk Alert describes risks that firms may consider to (i) assess their supervisory, compliance, and/or other risk management systems related to these risks, and (ii) make any changes, as may be appropriate, to address or strengthen such systems. [Please login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to access the OCIE Risk Alert.] Top 


SEC Names Deputy Chief Counsels of the Division of Investment Management


Sara Cortes and David P. Bartels have been named Deputy Chief Counsels of the Division of Investment Management. As Deputy Chief Counsels, Ms. Cortes and Mr. Bartels will join a leadership team and staff that are responsible for responding to requests for legal and policy guidance, evaluating applications for exemptive relief, coordinating international and legislative technical assistance, and running the division’s enforcement liaison program. Ms. Cortes will oversee the exemptive applications program and Mr. Bartels will oversee the enforcement liaison program. They will share responsibility for staff legal guidance by the Chief Counsel’s Office.

Ms. Cortes has been a member of the division’s Rulemaking Office since 2013, serving most recently as Assistant Director and head of the Investment Adviser Regulation Office. In that capacity, she has led the development of recommendations for rulemaking and other policy initiatives under the Advisers Act of 1940.

Mr. Bartels has served in a number of capacities in the Division of Investment Management, most recently as Senior Policy Advisor to Director Dalia Blass. His work has encompassed rulemaking, applications for exemptive relief, and requests for legal and policy guidance across diverse subjects under the Investment Company Act and the Advisers Act of 1940.

"I am excited for Sara and David to take on these new leadership roles. I have worked with both of them for many years and I am delighted that the Chief Counsel’s Office will benefit from their extensive experience, deep knowledge of the 1940 Acts and thoughtful leadership skills. They are highly respected by their peers and will be a fantastic addition to the division’s senior leadership team,” said Dalia Blass, Director of the Division of Investment Management.

“I have had the opportunity to work closely with both Sara and David since my return to the Commission. Each is an excellent lawyer with a breadth of experience and demonstrated good judgment. They will be tremendous assets to the important work of the Chief Counsel’s Office on behalf of investors,” said Paul G. Cellupica, Deputy Director and Chief Counsel of the Division of Investment Management.

"The staff of the Chief Counsel’s Office is remarkably talented, and it’s an honor to be part of such a dedicated team,” said Ms. Cortes and Mr. Bartels. “We’re excited about this opportunity to continue serving Main Street investors while working on the kinds of innovative requests that have helped make the U.S. asset management markets vibrant.”

Before joining the Division of Investment Management, Ms. Cortes was Counsel and Senior Adviser to Chairman Elisse Walter. She first joined the agency in the Legal Policy Group of the Office of General Counsel in 2009, advising the Commission on enforcement matters. In 2017, Ms. Cortes received the Commission’s Exceptional Service Award for her leadership on the Commission’s Investment Company Reporting Modernization initiative. Prior to joining the SEC, Ms. Cortes was Counsel in the Legal Division of the Board of Governors of the Federal Reserve System as an enforcement and litigation attorney. Ms. Cortes began her legal career in private practice at Cleary Gottlieb Steen & Hamilton LLP. Ms. Cortes earned her J.D. and Master of Science of Foreign Service, magna cum laude, from Georgetown University and her bachelor’s degree in international studies and French from Rhodes College in Memphis, Tennessee.

Mr. Bartels joined the division in 2010, starting in the Investment Adviser Regulation Office, where he received the Commission’s Law and Policy Award for work on private fund adviser reporting. Mr. Bartels was Branch Chief in the Exemptive Applications and Chief Counsel’s Offices from 2011-2016, focusing on exchange-traded funds, business development companies, funds of funds, and affiliated transactions. Mr. Bartels also served as counsel to Commissioner Kara M. Stein, advising on a wide range of matters under the federal securities laws and supporting the Commission’s Diversity Council. Prior to joining the Division, Mr. Bartels worked in the corporate practice at Sullivan & Cromwell LLP, where he advised clients on securities offerings, mergers and acquisitions, and other corporate transactions. Mr. Bartels received his law degree from Yale Law School and his bachelor’s degree from SUNY Buffalo.  Top

New SEC Campaign Educates Investors on Where and How to Get Answers

On April 8, 2019 the SEC unveiled a public service campaign to empower Main Street investors to take control of their financial future. The public service announcement (PSA) encourages investors to use the free tools and unbiased information available on the SEC’s online resource for investor education−Investor.gov−to get answers to their questions about investing.

“Main Street investors around the country have consistently told me two things: one, that they wish they were better informed about investing, and two, they wish they had started investing earlier. Asking the right questions of yourself and of those who provide financial services is key to getting started and staying on the right track,” said SEC Chairman Jay Clayton. “Whether you’re an experienced investor or new to the market, Investor.gov can help you identify questions and find answers.”

“This campaign is another way to maximize our education efforts to make investors aware of the information they need to make smart saving and investing decisions,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “Starting early and creating a financial plan is the best way to secure your financial future, and Investor.gov is a great place to start.”

The PSA highlights people from various walks of life asking questions about investing topics, such as planning for retirement, reading a 10-K, checking out the background of an investment professional, and understanding fees, IPOs, hedge funds, 529 plans, compound interest, and more. It concludes with asking the question, “Where do I start?” encouraging investors to go to Investor.gov to get answers to their most commonly asked questions.

Additional information on the PSA can be found at: https://www.investor.gov/additional-resources/specialized-resources/public-service-campaign

More than 12 million new users have accessed Investor.gov since it launched in October 2009.  The SEC expanded its outreach program in 2016 to include PSAs to reach and educate more investors.  Top  

COO Fraudulently Caused Advisory Firm to Overbill Clients
Inflated salary by hundreds of thousands of dollars per year

The SEC filed charges against the former Chief Operating Officer (COO) of a Commission-registered investment adviser for aiding and abetting the advisory firm's actions to overbill its clients as part of a fraudulent scheme to improperly inflate his own pay.

According to the SEC's complaint, between 2011 and December 2018, former COO Richard T. Diver, a resident of Spring Lake, New Jersey, engaged in an illicit scheme to steal approximately $6 million from his employer. Diver, whose duties included managing the advisory firm's payroll and client billing functions, allegedly inflated his salary by hundreds of thousands of dollars per year. As part of this scheme, Diver defrauded investors by causing the investment adviser to overbill more than 300 investment advisory client accounts by approximately $750,000, for the purpose of generating additional revenue. As alleged in the complaint, Diver used this revenue to finance his inflated salary and when confronted by the investment adviser's CEO in December 2018, Diver confessed to having carried out the scheme.

The SEC's complaint, filed in federal district court in Manhattan, charges Diver with aiding and abetting the investment adviser's violations of the antifraud provisions in Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking a judgment ordering permanent injunctive relief, disgorgement plus prejudgment interest thereon and civil monetary penalties against Diver.

Separately, the United States Attorney's Office for the Southern District of New York announced criminal charges against Diver.

The SEC's investigation has been conducted by Gerald Gross, James Hanson, and Paul Gizzi of the New York Regional Office, and the litigation will be handled by Messrs. Gizzi and Hanson. The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the United States Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service. [Please
login to IA Act UnwrappedTM Enforcement Case Database to view Litigation Release No. LR-24434 SEC v. Richard T. Diver]   Top 


IA Charged with Stealing Millions from Private Fund


On March 28, 2019 the SEC revoked the registration of a Seattle area-based registered investment adviser and barred its principal from the securities industry for stealing money from a private fund the adviser managed. The remaining assets will be liquidated and placed in a fund for distribution to harmed investors.

According to the SEC’s order, Dennis Gibb, the owner of Sweetwater Investments Inc., stole more than $3 million from Sweetwater Income Flood LP, a private fund Sweetwater managed, to pay for personal expenses, including his mortgage and car payments, and to keep Sweetwater’s business afloat. To hide his theft and convince investors to put even more money into the fund, he sent fraudulent account statements and tax documents to investors. The false documents showed, in the aggregate, that there was $7.8 million in the fund, when there was actually only about $1.8 million. Gibb also falsely reported in SEC filings that Income Flood had been audited, and that Sweetwater had over a billion dollars in assets under management, when it really had only $73 million. Gibb failed to hire an independent auditor or have a surprise verification of the fund’s assets conducted. Gibb’s fraud was discovered by the SEC’s San Francisco Office of Compliance Inspections and Examinations staff when they conducted an examination of Sweetwater.

“The diligence of the SEC’s regional examination staff was critical in uncovering Gibb’s fraud,” said Erin Schneider, Associate Director for the SEC’s San Francisco Regional Office. “As a result, the remaining funds will be preserved and returned to harmed investors.”

The settled order finds that Gibb and Sweetwater violated the anti-fraud and custody provisions of the federal securities laws and made false statements in SEC filings. The SEC’s order also finds that Gibb and Sweetwater are liable for disgorgement of money stolen, plus prejudgment interest.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington announced that Gibb pleaded guilty to criminal charges. [Please
login to IA Act UnwrappedTM to view Release No. IA-5215 In the Matter of Dennis Gibb and Sweetwater Investments, Inc.] Top 


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


On March 20, 2019, the Commission voted to adopt amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. These amendments are expected to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information. 

The amendments, consistent with the Commission’s mandate under the Fixing America’s Surface Transportation (FAST) Act, are based on recommendations in the staff’s FAST Act Report as well as a broader review of the Commission’s disclosure rules. The amendments are intended to improve the readability and navigability of company disclosures, and to discourage repetition and disclosure of immaterial information. Specifically, the amendments will, among other things, increase flexibility in the discussion of historical periods in Management’s Discussion and Analysis, allow companies to redact confidential information from most exhibits without filing a confidential treatment request, and incorporate technology to improve access to information on the cover page of certain filings.

“Investors will benefit from the SEC staff’s exemplary work to improve disclosure,” said SEC Chairman Jay Clayton. “The amendments adopted today demonstrate our focus on modernizing our disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens.”

The amendments relating to the redaction of confidential information in certain exhibits will become effective April 2, 2019. The rest of the amendments will be effective May 2, 2019, except that the requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, and the requirement that certain investment company filings be made in HTML format and use hyperlinks will be effective for filings on or after April 1, 2020.

FACT SHEET
FAST Act Modernization and Simplification of Regulation S-K
March 20, 2019

Action


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

Highlights


Among other things, the amendments:

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

What’s Next?

The amendments will be effective May 2, 2019, except that the amendments relating to the redaction of confidential information in certain exhibits will become effective April 2, 2019. The requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, depending on the nature of the filer. All investment company registration statement and Form N-CSR filings made on or after April 1, 2020 must be made in HTML format and comply with the rule and form amendments pertaining to the use of hyperlinks.  Top 


SEC Charges IA and Former COO with Defrauding Client


On March 15, 2019, the SEC charged Talimco LLC, a registered investment adviser, and Grant Gardner Rogers, the former chief operating officer of the firm, with manipulating the auction of a commercial real estate asset on behalf of one client for the benefit of another.  

According to the SEC’s order, in or about April 2015 while selling a commercial real estate asset on behalf of a collateralized debt obligation client, Talimco and Rogers were aiming to acquire the asset for another client, a private fund.  Talimco and Rogers owed its selling client a fiduciary duty, which included an obligation to take steps to use its best efforts to maximize the price obtained for the asset by identifying willing bidders.  However, rather than seek out multiple bona fide bidders, the order finds that Rogers used the firm’s affiliated private fund client for one bid and convinced two unwilling bidders to participate in the auction by giving assurances that the bidders would not win the auction.  As a result of this manipulation, Talimco’s private fund client was the highest bidder and acquired the asset, only to then later sell it for a substantial profit.  Talimco and Rogers’s conduct deprived the selling client of the opportunity to obtain multiple bona fide bids for the asset and maximize their profit. 

“By rigging the auction, Talimco and Rogers failed to fulfill their fiduciary duty to their client,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Investment adviser firms are expected to have controls in place to detect and disclose conflicts of interest.  This action evidences the vigilance of the SEC’s exam and enforcement staff in identifying investments advisers that exploit client relationships and harm investors.”

The settled orders find that Talimco and Rogers violated Section 206(2) of the Investment Advisers Act.  Without admitting or denying the findings in the order, Talimco consented to a cease-and-desist order, a censure, disgorgement of its fees of $74,000 plus prejudgment interest of $8,758.80 and a penalty of $325,000.  Rogers, who also did not admit nor deny the findings, consented to a cease-and-desist order, a 12-month industry suspension, and a $65,000 fine. [Please
login to the IA Act UnwrappedTM Releases Database to view Release Nos. IA-5202 In the Matter of Talimco, LLC and IA-5201 In the Matter of Grant Gardner Rogers]  Top


Engaging on Non-DVP Custodial Practices and Digital Assets


On March 12, 2019, the Division of Investment Management issued a letter to Karen Barr, President of the Investment Adviser Association. The Division invites input from all interested parties on application of Custody Rule 206(4)-2 to digital assets and related compliance questions. The staff believes that questions surrounding Non-DVP trading, as well as additional questions and issues the staff has identified regarding the Custody Rule over the past 15 years, should be considered by the Commission. As such, amendments to the Custody Rule are on the SEC’s long-term unified agenda.

To inform future steps and in light of growth in the variety and complexity of the types of securities and other assets commonly utilized by registered investment advisers that settle on a Non-DVP basis, the staff, through the Division’s Analytics Office, has launched an initiative to gather information on Non-DVP practices.

In the March, 2019 Letter to the IAA, the Division suggests that investment advisers should refer back to 2009 amendments of the Custody Rule (Release No. IA-2968) and the accompanying Interpretive Release (Release No. IA-2969) to reduce the risk of misappropriation, and reminds advisers of their obligation to safeguard clients’ assets. The Division notes that IAs should review their internal controls to reduce the risk of misappropriation or loss and address these issues in their compliance policies and procedures.

In February 2017, the Division of Investment Management issued Guidance Update 2017-01: Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority, which discussed the Custody Rule. Following that Guidance Update, investment advisers and other market participants raised issues regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment (“Non-DVP”) basis.

The staff is welcoming engagement from advisers, other market participants, and the public on these issues, as well as on questions regarding the application of the Custody Rule to digital assets, and whether revisions to the Custody Rule could be helpful in addressing any of the above topics.

Division staff is concerned about the risks of misappropriation inherent in Non-DVP arrangements. Where trading or settlement does not occur through a delivery versus payment arrangement, there is a heightened risk that an investment adviser could misappropriate funds or securities in its client’s custodial account. The Commission has noted that “[a]n [investment] adviser that holds clients’ stock certificates or cash, even temporarily, puts those assets at risk of misuse or loss.” The lack of a corresponding transfer of securities or client funds into the custodial account reduces the effectiveness of the custodian as an independent safeguard.

Apart from the Custody Rule, investment advisers have an obligation to safeguard clients’ assets. Accordingly, registered investment advisers also have an obligation to review internal controls to reduce the risk of misappropriation or loss, and should address this risk in their compliance policies and procedures required by Rule 206(4)-7 under the Advisers Act.

In complying with these obligations, investment advisers who issue instructions to a broker-dealer or a custodian to effect or to settle trades through Non-DVP arrangements may find it useful to look to the procedures and controls set forth in the 2009 amendments to the Custody Rule and accompanying interpretive release to reduce the risk of misappropriation described above.

Please
login to IA Act UnwrappedTM Regulatory Database Custody Rule 206(4)-2 to access the full text of the Letter to the IAA, IA Guidance Update 2017-01, all Adopting, Amending and Interpretive Releases and associated information. Top   

SEC Share Class Initiative Returning More Than $125 Million to Investors
79 IAs Who Self-Reported Agree to Compensate Investors Promptly, Ensure Adequate Fee Disclosures

The SEC announced settled charges against 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors.  The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers.  The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures.  The orders issued today address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.  Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.  According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

History of Share Class Selection-Related Violations of the Federal Securities Laws

Investment advisers, as fiduciaries, have an obligation to make full and fair disclosure to clients and prospective clients concerning their material conflicts of interest, including conflicts arising from financial incentives, and to act consistently with those disclosures.  This principle is reflected in Form ADV, which reminds advisers of their general obligation to fully disclose material facts relating to their advisory business and specifically requires disclosure concerning the compensation and fees that advisers and their supervised persons receive, including from asset-based charges and service fees.

In light of these obligations, since at least 2013, the Commission has charged investment advisers with failing to disclose conflicts of interest and failing to implement reasonably designed policies and procedures relating to mutual fund share classes, in violation of the Investment Advisers Act.  In those cases, the Commission generally required the investment advisers to pay disgorgement and penalties, and to distribute the funds to harmed clients.  In 2016, the Commission’s Office of Compliance Inspections and Examinations issued a Risk Alert specifically addressing share class disclosure and cautioning investment advisers to examine their policies and procedures.  FINRA has similarly addressed share class selection issues with brokers, imposing censures and fines on brokers that failed to provide adequate disclosures.

Division of Enforcement’s Share Class Selection Disclosure Initiative


In February 2018, the SEC’s Division of Enforcement announced the creation of the Share Class Selection Disclosure Initiative to address ongoing concerns that, despite the fiduciary duty imposed by the Advisers Act, an OCIE risk alert, Form ADV reminders, and numerous individual Commission enforcement actions, investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices.  These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes.  The initiative, which was managed by the Asset Management Unit, enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents.  To assist advisers evaluating their eligibility for the initiative, the Division of Enforcement issued answers to frequently asked questions, which provided detailed information about the eligibility of advisers to participate, calculation of disgorgement, and other aspects of the initiative.

The SEC staff is continuing to evaluate self-reports that were received from investment advisers prior to the initiative cut-off date.

Comments of Chairman Jay Clayton and Enforcement Co-Directors Stephanie Avakian and Steven Peikin

“The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

“The initiative leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.”

“Investment advisers play a vital and trusted role in our markets.  They offer a wide array of products and services to our retail investors, ranging from one-time advice on a model investment portfolio to comprehensive planning combined with continuous investment advice and other services.  Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” said SEC Chairman Jay Clayton.  “I am pleased that so many investment advisers chose to participate in this initiative and, more importantly, that their clients will be reimbursed.  This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure.  Also, I am once again proud of our Division of Enforcement for their vigorous and effective pursuit of matters that substantially benefit our long-term, retail investors.”

Summary of Settlement Terms

The SEC’s orders found that the settling investment advisers violated Section 206(2) and, except with respect to state-registered only advisers, Section 207 of the Investment Advisers Act of 1940 by:

• Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
• Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.

Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisers, Section 207.  The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients.  Each adviser has also undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary.  Consistent with the terms of the initiative, the Commission has agreed not to impose penalties against the investment advisers.

The Share Class Selection Disclosure Initiative is being led by the Division of Enforcement’s Asset Management Unit under the direction of Dabney O’Riordan, AMU’s Chief, and is being coordinated by SEC Assistant Director Jason Burt, attorneys Ronnie Lasky and Brian Basinger, and industry expert John Farinacci.  The settlements announced today were coordinated by SEC attorneys Stephen Donahue, Michael Adler, Robert Baker, Cynthia Baran, Michael Moran, William Donahue, Paul Montoya, David Benson, Anne Blazek, Emlee Hilliard-Smith, Michelle Munoz Durk, Andrew Shoenthal, Kara Washington, John Mulhern, Barbara Gunn, Frank Goodrich, Adam Aderton, Corey Schuster, Melissa Robertson, Jessica Neiterman, Donna Norman, Janene Smith, Ivonia Slade, Charles Davis, Max Polonsky, Kate Zoladz, Payam Danialypour, Adam Schneir, Al Tierney, Panayiota Bougiamas, Karen Willenken, Brendan McGlynn, Oreste McClung, Christine R. O’Neil, Jeremy Pendrey, Jessica Chan, Heather Marlow, and Ariana Torchin, and industry expert Dan Pines.  The Division appreciates the substantial assistance provided by the Office of Compliance Inspections and Examinations, which has for years identified deficiencies on these issues; and the Division of Investment Management.

Firms Charged (Release Nos. IA-5123 through IA-5199)

•Ameritas Investment Corp.
•AXA Advisors LLC
•BB&T Securities LLC
•Beacon Investment Management LLC
•Benchmark Capital Advisors LLC
•Benjamin F. Edwards & Co. Inc.
•Blyth & Associates Inc.
•BOK Financial Securities Inc.
•Calton & Associates Inc.
•Cambridge Investment Research Advisors Inc.
•Cantella & Co. Inc.
•Client One Securities LLC
•Coastal Investment Advisors Inc.
•Comerica Securities Inc.
•Commonwealth Equity Services LLC
•CUSO Financial Services LP
•D.A. Davidson & Co.
•Deutsche Bank Securities Inc.
•EFG Asset Management (Americas) Corp.
•Financial Management Strategies Inc.
•First Citizens Asset Management Inc.
•First Citizens Investor Services Inc.
•First Kentucky Securities Corporation
•First National Capital Markets Inc.
•First Republic Investment Management Inc.
•Hazlett, Burt & Watson Inc.
•Hefren-Tillotson Inc.
•Huntington Investment Company, The
•Infinex Investments Inc.
•Investacorp Advisory Services Inc.
•Investmark Advisory Group LLC
•Investment Research Corp.
•J.J.B. Hilliard, W.L. Lyons LLC
•Janney Montgomery Scott LLC
•Kestra Advisory Services LLC
•Kestra Private Wealth Services LLC
•Kovack Advisors Inc.
•L.M. Kohn & Company
•LaSalle St. Investment Advisors LLC
•Lockwood Advisors Inc.
•LPL Financial LLC
•M Holdings Securities Inc.
•MIAI Inc.
•National Asset Management Inc.
•NBC Securities Inc.
•Next Financial Group Inc.
•Northeast Asset Management LLC
•Oppenheimer & Co. Inc.
•Oppenheimer Asset Management Inc.
•Park Avenue Securities LLC
•PlanMember Securities Corporation
•Popular Securities LLC
•Principal Securities Inc.
•Private Portfolio Inc.
•ProEquities Inc.
•Provise Management Group LLC
•Questar Asset Management Inc.
•Raymond James Financial Services Advisors Inc.
•Raymond Lawrence Lent (d/b/a The Putney Financial Group, Registered Investment Advisors)
•RBC Capital Markets LLC
•Robert W. Baird & Co. Incorporated
•Ryan Financial Advisors Inc.
•SA Stone Investment Advisors Inc.
•Santander Securities LLC
•Select Money Management Inc.
•Silversage Advisors
•Sorrento Pacific Financial LLC
•Spire Wealth Management LLC
•SSN Advisory Inc.
•Stephens Inc.
•Stifel, Nicolaus & Company Incorporated
•Summit Financial Group Inc.
•Syndicated Capital Inc.
•TIAA-CREF Individual & Institutional Services LLC
•Transamerica Financial Advisors Inc.
•Trustcore Financial Services LLC
•Wells Fargo Clearing Services LLC
•Wells Fargo Advisors Financial Network LLC
•Woodbury Financial Services Inc.

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BB&T to Return More Than $5 Million to Retail Investors and Pay Penalty Relating to Directed Brokerage Arrangements


The Commission announced that BB&T Securities has agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired misled its advisory clients into believing they were receiving full service brokerage services in-house at a discount while significantly less expensive options were available externally.

According to the SEC’s order, Valley Forge Asset Management used misleading statements and inadequate disclosures about its brokerage services and prices to convince customers to choose the in-house broker.  Despite promises of a high level of service at a low cost, the SEC’s order finds that Valley Forge did not provide any additional services to advisory clients using its in-house brokerage than it did to advisory clients who chose other brokerages with significantly lower commission rates.  According to the order, Valley Forge charged commissions averaging roughly 4.5 times more than what clients would have paid using other brokerage options, and the firm obscured the price difference by claiming that it was giving clients a 70 percent discount off of its supposed retail commission rate.

“Valley Forge put its own interests ahead of its advisory clients, causing them to spend more money unnecessarily by portraying inaccurate costs and benefits of using its in-house brokerage,” said Kelly L. Gibson, Associate Director of Enforcement in the SEC’s Philadelphia Regional Office.  “Dual registrants and advisers with affiliated broker-dealers must accurately disclose all conflicts of interest arising from their brokerage arrangements.  The SEC’s examination and enforcement programs will continue to identify these types of violations and return money to harmed retail investors as quickly as possible.”

The SEC’s order finds that BB&T Securities as the successor in interest to Valley Forge violated Sections 206(2) and 207 of the Investment Advisers Act of 1940.  Without admitting or denying the findings, BB&T Securities consented to a cease-and-desist order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected current and former clients through a Fair Fund, as well as a $500,000 penalty.  BB&T Securities has ended Valley Forge’s existing directed brokerage program by amending its cost structure and its disclosures. [Please
login to IA Act UnwrappedTM to view Release No. IA-5119 In the Matter of BB&T Securities, LLC, as successor-in-interest to Valley Forge Asset Management, LLC ]  Top 

 


SEC Names Gabriel Benincasa as Its First Chief Risk Officer

Strengthens SEC’s Risk Management & Cybersecurity Efforts

Gabriel Benincasa has been named the Commission’s first Chief Risk Officer.  This position was created by SEC Chairman Jay Clayton to strengthen the agency’s risk management and cybersecurity efforts. As Chief Risk Officer, Mr. Benincasa will coordinate the SEC’s continued efforts to identify, monitor, and mitigate key risks facing the Commission.  Working within the SEC’s Office of the Chief Operating Officer, he will also serve as a key adviser on other matters related to enterprise risks and controls.  Julie Erhardt, who had been serving as Acting Chief Risk Officer while the SEC completed its recruitment efforts, will return to her role as Deputy Chief Accountant for Technology and Innovation in the Commission’s Office of the Chief Accountant.

“Establishing the Chief Risk Officer position at the SEC is an important step forward in our continuing efforts to strengthen the agency’s risk management program,” said Chairman Jay Clayton.  “Gabe is an experienced senior leader with deep risk, legal, compliance, and financial markets expertise.  I am certain we will benefit from his advice and insights.  I also want to thank Julie for giving us a running start on this initiative.”

“I look forward to working with Gabe to maintain a robust risk management program at the agency,” said Ken Johnson, the SEC’s Chief Operating Officer.  “Gabe’s strong background in risk management positions him well to help the SEC continue to evaluate a wide range of current and emerging challenges, whether related to our markets, cybersecurity, or our own operations.”

Mr. Benincasa added, “It is an honor to serve America’s investors and markets as the SEC’s first Chief Risk Officer.  I look forward to joining the team and building upon existing programs to help the agency tackle current and future challenges.”

Mr. Benincasa brings to the SEC significant experience in senior leadership roles in risk and compliance in the financial sector. He began his legal career as an attorney at Davis Polk & Wardwell before working for Morgan Stanley and other financial firms. He has served in roles including as Director of Enterprise Risk Management and Vice Chair of the Risk Control Committee for a financial services holding company; Deputy Global Head of Operational Risk Management for an investment bank; General Counsel and Chief Compliance Officer for an institutional asset management company; and Global Head of Compliance for a financial technology company. Mr. Benincasa is an attorney and a Certified Public Accountant. He earned his J.D. from Fordham Law School and a Bachelor’s in Business Administration from Baruch College.  Top 

SEC Names Vanessa Countryman Acting Secretary

The Commission announced that Vanessa Countryman has been named Acting Secretary.  Ms. Countryman will replace Brent Fields, who is stepping down as Secretary effective March 11, 2019, to accept a position in the Commission's Division of Investment Management.

For the past five years, Ms. Countryman has served as Chief Counsel in the Division of Economic and Risk Analysis (DERA), where she has actively participated in numerous significant rulemakings, ensuring the effective use of economic analysis across the agency. Between 2010 and 2012, Ms. Countryman served as Counsel to two SEC Commissioners, where she provided legal advice on regulatory and enforcement matters.

Within the SEC, the Office of the Secretary plays a central role in ensuring the effective processing of Commission business.  Office staff, among other things, review all documents submitted to the Commission, track documents submitted to the Commission, schedule Commission meetings in accordance with the Government in the Sunshine Act, maintain records of official Commission actions, and provide public notice of those actions on the SEC.gov website and in the Federal Register.

"I appreciate Vanessa's willingness to step into the role of Acting Secretary during this time," said SEC Chairman Jay Clayton. "Her deep knowledge of agency procedures and strong relationships with Commissioners and senior staff across the divisions and offices will help ensure the Commission continues to run smoothly."

Ms. Countryman added, "It is a great honor to be asked to serve in this role. I look forward to working with and supporting the Office of the Secretary's exceptional team to carry out the Commission's work on behalf of investors."

Prior to joining the SEC, Ms. Countryman practiced law at Gibson, Dunn & Crutcher LLP, representing clients in regulatory matters. Ms. Countryman earned her J.D. from the University of Chicago.  She earned a Master's degree from Oxford University and a B.A. from Columbia University.  Top 


SEC Cancels Registration - Firm Has Not Met Conditions of the Internet Adviser Exemption under the Advisers Act


Ajenifuja Investments, LLC is registered with the SEC in reliance on rule 203A-2(e) (the “Internet adviser exemption”) under the Advisers Act. An investment adviser must register with the Commission unless it is prohibited from doing so under section 203A of the Advisers Act or is exempt from registration under section 203 of the Act. Rule 203A-2 provides exemptions from the prohibition on Commission registration in section 203A of the Act, including the “Internet adviser exemption.”

An adviser is eligible for registration under the Internet adviser exemption if the adviser 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.

Ajenifuja has not met the conditions of the Internet adviser exemption, as Ajenifuja has not had an interactive website for the more than three years during which it has been registered as an Internet adviser, and has not otherwise been engaged in business as an investment adviser.

Section 203(h) of the Advisers Act permits the Commission to cancel the registration of an adviser that is prohibited from registering with it or is not engaged in business as an investment adviser. Having provided notice to Ajenifuja of the intended cancellation and granted Registrant’s request for a hearing, the Commission has determined to cancel Registrant’s registration with the Commission pursuant to section 203(h) of the Act.

In addition, the Commission finds that Ajenifuja may not claim eligibility pursuant to the Internet adviser exemption to forestall deregistration.  [Please login to IA Act UnwrappedTM to view Release No. IA-5110 Ajenifuja Investments, LLC; Order Cancelling Registration Pursuant to Section 203(h) of the Investment Advisers Act of 1940, Feb. 12, 2019]   Top 


Court Dismisses Appeal Filed by Former F-Squared CEO -
Affirms SEC’s Judgment

On January 15, 2019 the United States Court of Appeals for the First Circuit dismissed the appeal filed in May 2018 by Howard B. Present, co-founder and former CEO of investment management firm F-Squared Investments. In March 2018, a federal judge ordered Present to pay over $13 million after a federal jury returned a verdict against him for making false and misleading statements to investors as the public face of F-Squared.

The SEC charged Present and F-Squared in 2014 with misleading investors about the AlphaSector strategy, the flagship product of F-Squared which Present launched in the wake of the financial crisis. F-Squared agreed to pay $35 million and admit wrongdoing to settle the agency's charges, but Present opted to contest the SEC's charges. After a three-and-a-half week trial, the jury deliberated for less than one day before finding Present liable on all of the agency's charges against him.  [Please
login to IA Act UnwrappedTM to view Litigation Release LR-24384 SEC v. Howard B. Present (01/28/2019) and Release No. IA-3988 In the Matter of F-Squared Investments, Inc. (12/22/2014)]   Top 

Division of Investment Management Announcement Regarding Recommencement of Operations

The Division of Investment Management is resuming normal operations. We anticipate addressing filings, exemptive and guidance requests based on when an item was amended or initially filed. In other words, absent compelling circumstances, we expect to address matters in the order in which they were received.  If your filing or other request has become more urgent, please contact the relevant office noted below:

Exemptive applications and staff guidance—Chief Counsel’s Office: 202-551-6825 or IMOCC@sec.gov
Disclosure filings—Disclosure Review Office: 202-551-6921 or IMDRAO@sec.gov
Accounting Issues—Office of the Chief Accountant: 202-551-6918 or IMOCA@sec.gov

If your question is with respect to the status of a pending Investment Adviser Registration (Form ADV), please contact the Office of Compliance Inspections and Examinations at OCIERegistrationsinquiries@sec.gov or 202-551-7250.

The Division is resuming responses to questions and guidance requests, including with respect to investment adviser interpretive issues (IARDLIVE email box), Form PF (FORMPF email box), accounting matters (IMOCA email box), and general interpretive questions (IMOCC email box).  During the lapse in funding, we received a number of requests in each of these boxes which the staff has yet to review. Our response time for pending and new inquiries may be longer than ordinary.  If such a request has become more urgent, please feel free to contact us again and include the reason why you believe expedited treatment is necessary. Otherwise, we will generally respond to requests in the order received.

We are resuming normal review of filings by investment companies, including post-effective amendments, proxy statements and Form N-14 filings.  During our transition to normal operations, staff may require more time in delivering comments to registrants. 

Consistent with the Division’s Questions and Answers in connection with its statement regarding Actions During a Lapse in Appropriations and Government Shutdown, some registrants may have omitted or removed delaying amendments from their registration statements. We will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20-day period and acceleration is appropriate.  In cases where we believe it would be appropriate for a registrant to amend to include a delaying amendment, we will notify that registrant.   

The Division’s normal activities include providing no-action guidance under Exchange Act Rule 14a?8 with respect to shareholder proposals.   We generally expect to respond to these requests in the order received.  We recognize that companies may have impending print deadlines or that negotiations may have changed the need for the staff’s views. Please notify the staff at IMshareholderproposals@sec.gov as soon as possible of any timing constraints or changes in circumstances that could help us prioritize our responses.  Top 

OCIE Announcement Regarding Recommencement of Operations

The Office of Compliance Inspections and Examinations (OCIE) is returning to normal operations.  During the agency’s lapse in appropriations, OCIE maintained staff available to respond to emergency situations involving market integrity and investor protection, and to continue to monitor critical market infrastructure entities for system disruptions, intrusions and compliance issues in the interest of protecting property.   

In general, OCIE anticipates resuming examinations, including those that were in-progress prior to, as well as those that were postponed during, the lapse in appropriations.

OCIE also anticipates addressing filings, submissions and requests for staff action based on when an item was submitted, including initial registrations of an entity with the Commission.  OCIE generally expects to address matters, particularly new registrations, in the order in which they were received.

OCIE staff members will be communicating with registrants about rescheduling postponed examinations as well as completing in-progress examinations in the coming weeks.  OCIE staff members are available to answer questions relating to examinations, filings and other federal securities law matters, but their response time may be longer than ordinary.  If you require assistance on an expedited basis, please submit your request, contact information and the reason you believe expedited treatment is necessary to OCIEemergency@sec.gov.    Top 

SEC Resumes Normal Operations

The Securities and Exchange Commission is currently open, fully staffed and focused on its mission. A statement from SEC Chairman Jay Clayton can be found below. Additional information from certain SEC Divisions and Offices regarding their transition to normal operations will be posted on the SEC's website in coming days.

Information for Contractors - With a short term Continuing Resolution signed into place, all contracts are now in full performance (no suspension) and should be back to normal operations as soon as possible. Contractors should contact their CORs and CO's to renew normal operations and find solutions to problems caused by the lapse in appropriation. Thank you for your continued support of the SEC.

Statement Regarding Recommencement of Normal Operations
Chairman Jay Clayton
Jan. 26, 2019


The Securities and Exchange Commission has resumed normal staffing levels and is returning to normal operations.

Over the past 30 days, with a limited staff, we followed our Operations Plan Under a Lapse in Appropriations and Government Shutdown.  This plan focused on monitoring the functioning of our markets and, as necessary to prevent imminent threats to property, taking action.  I commend our staff for their dedication to this task.  They performed admirably and, as always, with a keen focus on the interests of our Main Street investors.

Our approximately 4,500 employees are now returning to their posts in our Washington, D.C. home office and our 11 regional offices.  The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations.  Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans. These statements regarding our transition to normal operations will be available at www.sec.gov.

In closing, a personal note:  I have noted in the past that our people are our greatest asset.  They bring experience, expertise and commitment to work every day for the benefit of our economy, our markets and, most importantly, our investors.  The past 30 days have underscored just how true that is.  It is my privilege to welcome back the full team.    Top



Lapse in Appropriations Forces Stays in All Pending Administrative Proceedings


The SEC has experienced a lapse in appropriations. Absent an appropriation, SEC Staff is prohibited from performing the ongoing, regular functions of government except in very limited circumstances, including “emergencies involving the safety of human life or the protection of property." Effective immediately, the Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5101 In re: Pending Administrative Proceedings] Top

In the Midst of Gov't Shutdown SEC Brings Charges in EDGAR Hacking Case

The SEC announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015.

The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.

“International computer hacking schemes like the one we charged today pose an ever-present risk to organizations that possess valuable information,” said Enforcement Division Co-Director Stephanie Avakian. “Today’s action shows the SEC’s commitment and ability to unravel these schemes and identify the perpetrators even when they operate from outside our borders.”

“The trader defendants charged today are alleged to have taken multiple steps to conceal their fraud, including using an offshore entity and nominee accounts to place trades,” said Enforcement Division Co-Director Steven Peikin. “Our staff’s sophisticated analysis of the defendants’ trading exposed the common element behind their success, providing overwhelming evidence that each of them traded based on information hacked from EDGAR.”

The SEC’s complaint alleges that Ieremenko circumvented EDGAR controls that require user authentication and then navigated within the EDGAR system. Ieremenko obtained nonpublic “test files,” which issuers can elect to submit in advance of making their official filings to help make sure EDGAR will process the filings as intended. Issuers sometimes elected to include nonpublic information in test filings, such as actual quarterly earnings results not yet released to the public. Ieremenko extracted nonpublic test files from SEC servers, and then passed the information to different groups of traders.

The SEC’s complaint alleges that the following traders received and traded on the basis of the hacked EDGAR information:

• Sungjin Cho, Los Angeles, California
• David Kwon, Los Angeles, California
• Igor Sabodakha, Ukraine
• Victoria Vorochek, Ukraine
• Ivan Olefir, Ukraine
• Andrey Sarafanov, Russia
• Capyield Systems, Ltd. (owned by Olefir)
• Spirit Trade Ltd.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced related criminal charges.

The SEC’s complaint charges each of the defendants with violating the federal securities antifraud laws and related SEC antifraud rules and seeks a final judgment ordering the defendants to pay penalties, return their ill-gotten gains with prejudgment interest, and enjoining them from committing future violations of the antifraud laws. The SEC also named and is seeking relief from four relief defendants who profited from the scheme when defendants used the relief defendants’ brokerage accounts to place illicit trades. Top 

Custody Violations – Auditors Failed to Have Relevant Knowledge, Training & Experience

On January 9, 2019, the Commission issued Release No. IA-5100 In the Matter of Katz, Sapper & Miller, LLP, and Scott C. Price, CPA.  This matter involves improper professional conduct by Respondents in completing audits pursuant to Section 206(4) of the Advisers Act and Custody Rule 206(4)-2. In January 2013, Mohlman Asset Management Fund, LLC (“MAMF”), a former SEC-registered investment adviser, engaged KSM to audit the financial statements of two pooled investment vehicles MAMF advised, Mohlman Asset Management Fund 2010, LLC (“Fund I”) and Mohlman Asset Management Fund II, LLC (“Fund II”) (collectively, “the Funds”). The first engagement in 2013 covered Fund I from its inception in 2010 and Fund II from its inception in 2011 to December 31, 2012, which is the Funds’ fiscal year-end.

MAMF engaged KSM to audit the Funds in 2014, 2015, and 2016, covering the Funds’ fiscal years ending on December 31, 2013, 2014, and 2015. The first engagement in 2013 and the second in 2014 also included KSM drafting the Funds’ 2012 and 2013 year-end financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States. The audits were supposed to be conducted in accordance with generally accepted auditing standards (“GAAS”) in the United States established by the AICPA Auditing Standards Board. MAMF engaged KSM to conduct the audits in an effort to enable MAMF to comply with an exception to the Custody Rule because MAMF had custody of client assets invested in the Funds. Audits performed pursuant to the Custody Rule exception require SEC independence.

Unbeknownst to MAMF, KSM and Price, the audit partner on all of the engagements, failed to meet the requirements of the Custody Rule in conducting their audits of the Funds. KSM was not independent because it prepared the Funds’ 2012 and 2013 year-end financial statements and then audited them. As a result, Respondents KSM and Price caused MAMF’s 2012 and 2013 violations of the Custody Rule.

KSM and Price also 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 failing to: (a) have relevant knowledge, training and experience; (b) issue a modified opinion with respect to Fund II’s 2013 and 2014 year-end financial statements, even though they should have been aware of a related party transaction and a loan that had not been properly disclosed in the financial statements; and (c) exercise due professional care. In addition, KSM failed to establish sufficient quality control standards.

In determining to accept the Offers, the Commission considered remedial acts undertaken by Respondents and cooperation afforded the Commission staff. KSM already has taken steps to improve its policies, procedures, and training, including hiring an Audit Director to provide oversight and training for KSM’s Custody Rule audits; revising its quality control policies and procedures – including client acceptance – and requiring SEC-specific training, twice yearly for all Financial Services Group members. Price played a significant role in KSM’s remediation efforts, including, but not limited to, standardizing workpapers and procedures for fund audits and engagements performed under the Custody Rule and drafting new policies and procedures. Price is also the person who discovered the SEC independence standards applied to the Funds’ audits and caused the engagement team to apply those standards to the audits performed for the Funds in 2015 and 2016.
[Please login to IA Act UnwrappedTM to view Release No. IA-5100 In the Matter of Katz, Sapper & Miller, LLP, and Scott C. Price, CPA]  Top 


OCIE Status during Government Shutdown

 
During the shutdown, the processing of registrations and all non-emergency examinations and other work will be deferred and staff will be unavailable.  A very limited number of personnel will be able to respond to emergency situations involving market integrity and investor protection, including law enforcement.  If you have an OCIE-related emergency you may contact OCIE at: OCIEemergency@sec.gov or 202-551-6200. Top 

Division of Investment Management Unavailable during Government Shutdown
Limited Staff Available to Answer Questions Relating to Fee Calculations for Filings


“Due to the government shutdown, the Division of Investment Management will not be available to respond to any questions about pending matters. Please understand that regulations require us to cease our regular activities and our ability to respond to questions may be limited by those regulations. In case of an emergency, please send an email to IMemergency@sec.gov or call 202-551-6720."

"During the shutdown, the Division will not be in a position to act upon any requests for acceleration of the effective date of a pending registration statement or qualification of a pending offering statement until the SEC receives appropriations to fund its operations. Investment companies can continue to make filings on EDGAR during this time. A significant percentage of filings submitted by registered investment companies are in the form of post-effective amendments to registration statements. Many of these filings, pursuant to rules promulgated under the 1933 Act (e.g., Rule 485 for open-end funds), become effective automatically either immediately upon filing or following the passage of a certain number of days. These filings will become effective automatically after the entire time period set forth in the applicable rules until the SEC returns to open and operational status."

"A limited number of staff members are available to answer questions relating to fee calculations for filings. If you require assistance in calculating a fee for a filing you will make during the shutdown period, submit your request and contact information to IMEmergency@sec.gov.

We will follow the procedures set forth by the Division of Corporation Finance described here, as applicable, with regard to the acceleration of initial registration statements and other types of filings made by registered investment companies during the federal government shutdown. Please direct questions about individual filings to Bill Kotapish (202-551-6756) from Dec. 27 – Jan. 4 and Christian Sandoe (202-551-6949) after Jan. 4.” [From the Divison of Investment Management webpage on www.sec.gov.] "

The IARD (Investment Adviser Registration Depository) continues to accept new or pending investment adviser applications but they will not be processed. The system also will continue to accept annual Form ADV filings.

No interpretive guidance or exemptive relief will be issued by the Division of Investment Management during the shutdown. 

Click HERE to read about the SEC Operational Plan in place during the Government Shutdown.Top 


SEC Charges Two Robo-Advisers with False Disclosures

SEC's first enforcement actions against robo-advisers

On December 21, 2018, the Commission instituted settled proceedings against two robo-advisers for making false statements about investment products and publishing misleading advertising.  The proceedings are the SEC’s first enforcement actions against robo-advisers, which provide automated, software-based portfolio management services.

An SEC order found that Redwood City, California-based Wealthfront Advisers LLC (formerly known as Wealthfront Inc.), a robo-adviser with over $11 billion in client assets under management, made false statements about a tax-loss harvesting strategy it offered to clients.  Wealthfront disclosed to clients employing its tax-loss harvesting strategy that it would monitor all client accounts for any transactions that might trigger a wash sale – which can diminish the benefits of the harvesting strategy – but failed to do so. Over a period of more than three years during which it made this disclosure, wash sales occurred in at least 31 percent of accounts enrolled in Wealthfront’s tax loss harvesting strategy. The SEC’s order also found that Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

A separate SEC order found that New York City-based Hedgeable Inc., a robo adviser which had approximately $81 million in client assets under management, made a series of misleading statements about its investment performance.  According to the order, from 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgable’s clients with those of two robo-adviser competitors.  The performance comparisons were misleading because Hedgeable included less than 4 percent of its client accounts, which had higher-than-average returns.  Hedgable compared this with rates of return that were not based on competitors’ actual trading models.  The SEC’s order also found that Hedgeable failed to maintain required documentation and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit.  “Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.”  A bulletin published by SEC’s Office of Investor Education and Advocacy contains additional information about robo-advisers.

The SEC’s order against Wealthfront found that the adviser violated the antifraud, advertising, compliance, and other provisions of the Investment Advisers Act of 1940.  Without admitting or denying the SEC’s findings, Wealthfront consented to the entry of the SEC’s order censuring it, requiring it to cease and desist from further violations, and imposing a $250,000 penalty.

The SEC’s order against Hedgeable found that the adviser violated the antifraud, advertising, compliance, and books and records provisions of the Investment Advisers Act of 1940.  Without admitting or denying the SEC’s findings, Hedgeable consented to the entry of the SEC’s order censuring it, requiring it to cease and desist from further violations, and imposing an $80,000 penalty. [Please
login to IA Act UnwrappedTM to view Release Nos. IA-5087 In the Matter of Hedgeable, Inc., and IA-5086 In the Matter of Wealthfront Advisers' also refer to the IA Act UnwrappedTM Examination Tools Database for reposts of the following related information: Robo-Advisers IM Guidance Update 2017-02 (originally published 02/23/17); Investor Bulletin: Robo-Advisers SEC Investor.gov (originally published 02/23/17).]    Top 


SEC Operational Status in the Event of a Government Shutdown


In the event of a federal government shutdown, the SEC will remain open for a limited number of days, fully staffed and focused on the agency's mission. Any changes to the SEC's operational status will be announced on the SEC's website in accordance with the agency's plan for operating during a shutdown. The operations plan describes the SEC's plan for operating in the event of a lapse in appropriations that results in an SEC shutdown. This plan addresses a total shutdown, not a partial shutdown due to the Agency having funds available, but not enough to maintain full operations over a full quarter. In the event of an actual shutdown where SEC is required to implement this general guidance, supplemental government-wide guidance issued by the Office of Management and Budget (OMB), the Office of Personnel Management (OPM), and the General Services Administration (GSA) will also apply. As that plan contemplates, The SEC is currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of its mission. The SEC's operations plan is available at: https://www.sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf. 


Division of Investment Management Actions in Advance of a Potential SEC Shutdown

The Division of Investment Management will follow the procedures set forth by the Division of Corporation Finance (described below) as applicable, with regard to the acceleration of initial registration statements and other types of filings made by registered investment companies in advance of any federal government shutdown.

A significant percentage of filings submitted by registered investment companies are in the form of post-effective amendments to registration statements. Many of these filings, pursuant to rules promulgated under the 1933 Act (e.g., Rule 485 for open-end funds), become effective automatically either immediately upon filing or following the passage of a certain number of days.

While these filings may continue to be filed on EDGAR and will become effective automatically as set forth in the rules, in the event of a change in the SEC’s operating status, we will not be in a position to review and process any acceleration requests for such filings during such time. Accordingly, those filings will be required to wait the entire time period set forth in the rules until the SEC returns to open and operational status.

Please direct questions about individual filings to the identified contacts below:
Michael Spratt (202) 551-6743
Christian Sandoe (202) 551-6949
William Kotapish (202) 551-6756

Division of Corporation Finance Actions In Advance of a Potential SEC Shutdown

We understand that the uncertainty regarding the SEC's operating status in the event of a federal government shutdown raises concerns for registrants that plan to request acceleration of their registration statements or qualification of their offering statements in the near future. Given this uncertainty, you may consider submitting your request while the SEC is open and operating.

We will be closed December 24th and 25th in observance of the holiday. However, the SEC will remain fully operational for a limited number of days beyond the start of a government shutdown. During the time we remain open, we will conduct ordinary business. If a change in our operating status looks imminent, we will provide as much advance notice as possible. Regardless of our operating status, EDGAR will accept registration statements, offering statements and other filings; however, as discussed below, during a shutdown we will not be able to declare registration statements effective nor qualify Form 1-A offering statements. 
Top


OCIE Announces 2019 Examination Priorities


The Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE) has announced its 2019 examination priorities. OCIE publishes its exam priorities annually to promote transparency of its examination program and provide insights into the areas it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets. This year, particular emphasis will be on digital assets, cybersecurity, and matters of importance to retail investors, including fees, expenses, and conflicts of interest.  

"OCIE continues to thoughtfully approach its examination program, leveraging technology and the SEC staff's industry expertise,” said SEC Chairman Jay Clayton.  “As these examination priorities show, OCIE will maintain its focus on critical market infrastructure and Main Street investors in 2019.”

“OCIE is steadfast in its commitment to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that improve compliance, prevent fraud, monitor risk, and inform policy. We believe our ongoing efforts to improve risk assessment and maintain an open dialogue with market participants advance these goals to the benefit of investors and the U.S. capital markets,” said OCIE Director Pete Driscoll.

This year, OCIE's examination priorities are broken down into six categories: (1) compliance and risk at registrants responsible for critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) digital assets; (5) cybersecurity; and (6) 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 2019. 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, broker-dealers entrusted with customer assets, and portfolio management and trading.

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, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. 

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 2019 are not exhaustive and will not be the only issues OCIE addresses in its examinations, Risk Alerts, and investor and industry outreach. While the priorities drive OCIE’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of the registrant’s operations, products offered, and other factors. 

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, and the SEC's fellow regulators.

OCIE is responsible for conducting examinations of entities registered with the SEC, including more than 13,200 investment advisers, approximately 10,000 mutual funds and exchange traded funds, roughly 3,800 broker-dealers, about 330 transfer agents, seven active clearing agencies, 21 national securities exchanges, nearly 600 municipal advisors, FINRA, the MSRB, the Securities Investor Protection Corporation, and the Public Company Accounting Oversight Board, among others. The results of OCIE’s examinations are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices, and pursue misconduct.  [Please
login to the IA Act UnwrappedTM Examination Tools Database/2018 information to view the full text of OCIE's 2019 Examination Priorities.] Top 


IA Charged with Pay-to-Play Rule Violations


On December 18, 2018 the Commission issued Order No. IA-5077 In the Matter of Ancora Advisors, LLC. These proceedings involve violations of the Commission’s “pay-to-play” rule for investment advisers by Respondent Ancora Advisors, an investment adviser. Rule 206(4)-5, promulgated under Section 206(4) of the Advisers Act, is a prophylactic rule designed to address pay-to-play abuses involving campaign contributions made by certain investment advisers or their covered associates to government officials who are in a position to influence the selection of investment advisers to manage government client assets, including the assets of public pension funds and other public entities. Among other things, Rule 206(4)-5 prohibits certain investment advisers from providing investment advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees (known as covered associates) makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers.
[Please login to IA Act UnwrappedTM to view Release No. IA-5077 In the Matter of Ancora Advisors, LLC.] Top


OCIE Releases Observations from IA Exams Relating to Electronic Messaging


OCIE conducted a limited-scope examination initiative of registered investment advisers designed to obtain an understanding of the various forms of electronic messaging used by advisers and their personnel, the risks of such use, and the challenges in complying with certain provisions of the Advisers Act.

OCIE conducted the initiative because it noticed an increasing use of various types of electronic messaging by adviser personnel for business-related communications. As a result of the initiative, OCIE has issued a Risk Alert to remind advisers of their obligations when their personnel use electronic messaging and to help advisers improve their systems, policies, and procedures by sharing the staff’s observations from these examinations.

The Risk Alert focuses primarily on obligations under Rule 204-2 and Rule 206(4)-7. OCIE’s examination initiative focused on whether and to what extent advisers complied with the Books and Records Rule and adopted and implemented policies and procedures as required by the Compliance Rule. During the course of the initiative, the staff observed a range of practices with respect to electronic communications, including advisers that did not conduct any testing or monitoring to ensure compliance with firm policies and procedures.

The staff also observed and identified certain examples of practices that the staff believes may assist advisers in meeting their record retention obligations under the Books and Records Rule and their implementation and design of policies and procedures under the Compliance Rule. These practices include employee training and attestations, supervisory reviews, and control over devices. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2018 Information to access the full text of the Risk Alert.]  Top 

Remarks on the SEC’s Year in Review and Outlook for 2019

On December 6, 2018 at 4:15 pm EST, Chairman Jay Clayton will speak on the SEC’s regulatory accomplishments from the past year and goals for 2019. For more information, contact Natalie Strom, stromn@sec.gov  (for members of the media only).  The event will be held in New York, NY - the venue information is only available upon RSVP. Top


Risk-Based Examination Initiatives Focused on Registered Investment Companies

OCIE is conducting a series of examination initiatives focused on matters relevant to certain registered investment companies.

Examiners intend to focus on certain mutual funds and exchange-traded funds, the activities of their advisers, and boards of directors’ oversight. Examinations will target circumstances in which retail investors could be disadvantaged and review whether registrants have met their regulatory and other legal obligations.

Specifically, examinations will focus on Funds and/or advisers that fall into one or more of the following categories:

• Index funds that track custom-built indexes;
• Smaller ETFs and/or ETFs with little secondary market trading volume;
• Mutual funds with higher allocations to certain securitized assets;
• Funds with aberrational underperformance relative to their peer groups;
• Advisers relatively new to managing mutual funds; and
• Advisers who provide advice to both mutual funds and private funds that have similar strategies and/or are managed by the same portfolio managers.

The staff will generally assess:

• Policies and procedures of the Funds and/or their advisers, to validate that they are designed to address risks and conflicts, including Funds’ boards oversight of the compliance program;
Disclosures by Funds to investors in their prospectuses and other filings and shareholder communications, and by advisers to the Funds’ boards, regarding risks and conflicts; and
• Deliberative processes utilized by Funds, their advisers, and their boards exercising oversight, particularly when assessing practices and controls related to risks and conflicts, including disclosures, portfolio management compliance, and fund governance.

[Please login to IA Act UnwrappedTM to read more about the Examination Initiative in the National Exam Program "Risk-Based Examination Initiatives Focused on Registered Investment Companies" Risk Alert, available in the Examination Tools Database/2018 Information.]  Top


Investor Testing of the Proposed Relationship Summary for IAs & BDs


The SEC issued the following press release:

Nov. 7, 2018 - In connection with our ongoing efforts to help address investor confusion about the nature of their relationships with investment advisers and broker-dealers, the SEC’s Office of the Investor Advocate today made available a report on investor testing conducted by the RAND Corporation.  The investor testing gathered feedback on a sample Relationship Summary issued in April 2018 as part of a package of proposed rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers. The report is available for review and comment on the SEC’s website.

“Based on my discussions with many retail investors over the last several months, it is clear to me that too many retail investors are not aware of the material aspects of their relationships with their investment professionals,” said SEC Chairman Jay Clayton.  “The results of RAND Corporation’s investor testing support our efforts to provide retail investors with a clear and concise Relationship Summary to help them make important decisions about choosing to work with an investment professional.  The SEC staff is carefully reviewing RAND Corporation’s investor testing report as well as other information related to the proposed Relationship Summary that is available in the comment file.”

RAND Corporation’s investor testing of the Relationship Summary consisted of:

This report may be informative to those evaluating the proposed Relationship Summary.  This report may supplement other information considered in connection with the final rule, and the Office of Investor Advocate is making this report available to allow the public to consider and comment on this supplemental information.  Comments on this supplemental information may be submitted to comment File Nos. S7-08-18, S7-09-18, and S7-07-18 and are encouraged by Dec. 7, 2018. [Please login to the IA Act UnwrappdTM Examination Tools Database/2018 Information to access the full text of the Report.]  Top 


Denial of Resources Undermined Effectiveness of IA’s Compliance Program Resulting in Compliance Failures

CCO's warnings
were ignored
On November 6, 2018, the SEC announced that Pennant Management, Inc., formerly a registered investment adviser based in Milwaukee, has agreed to settle charges that it negligently failed to perform adequate due diligence and monitoring of certain investments contrary to Pennant’s representations to clients, which ultimately contributed to substantial client losses.  Separately, Pennant’s former CEO, Mark A. Elste, also agreed to settle charges that he contributed to Pennant’s compliance failures.

An SEC order found that, from May 2013 to September 2014, Pennant advised clients to purchase interests in facilities and other investments containing repurchase, or “repo,” agreements for portions of loans guaranteed by various government entities.  First Farmers Financial sought to use Pennant to finance what it claimed would be loans guaranteed by the U.S. Department of Agriculture.  Pennant’s initial due diligence of First Farmers identified concerning information about First Farmers’ CEO, which was never escalated. The order found that Pennant continued to offer the First Farmers repos to clients despite growing concerns about the legitimacy of the investments, including questions about whether First Farmers lied about the existence of its auditor.  By the end of September 2014, Pennant determined that First Farmers had forged paperwork and that all of the First Farmers repo agreements were fraudulent.  According to the SEC’s order, Pennant’s compliance program also lacked sufficient resources, and Pennant failed to reasonably design and implement certain compliance policies and procedures, including policies and procedures regarding initial and ongoing due diligence and monitoring of repurchase agreement counterparties.

A separate SEC order found that Elste was aware of but failed to address resource deficiencies in Pennant’s compliance program, which contributed substantially to Pennant’s compliance violations.

In January 2012, Pennant’s CEO asked one of Pennant’s portfolio managers to assume the role of interim CCO for Pennant. The CCO had no compliance experience, but accepted the position contingent upon having access to outside counsel and compliance consultants as needed. At that time, the CCO was already working extended hours to keep up with his portfolio manager duties, which he retained.

After educating himself about the compliance requirements of a registered investment adviser, and reviewing Pennant’s compliance policies and procedures, the CCO concluded that Pennant’s compliance program was deficient and advised Pennant’s CEO of his concerns. For example, in a March 2012 e-mail to Pennant’s CEO and others, the CCO raised questions about Pennant’s policies and procedures manual and advised: “In my opinion, we need the experience of an outside resource right now to help us evaluate the status of our compliance program, including our investment adviser policies and procedures manual.” Pennant, however, did not retain additional outside resources at that time.

In May 2012, after attending a compliance conference, the CCO notified Pennant’s CEO that Pennant had never completed a formal risk assessment, which he believed was necessary for an effective compliance program. The CCO also noted his understanding was that the Commission was looking closely at compliance policies and procedures and warned that, “inadequate policies could lead to enforcement action.” Consequently, the CCO indicated his “primary objective” would be to review the policies and procedures and complete a risk assessment. The CCO completed his review of the policies and procedures during 2012, and he completed a risk assessment for Pennant by September 2012.

In August 2012, Pennant’s CEO offered to make the CCO’s interim position permanent. The CCO accepted on the condition that he would have access to outside counsel, Pennant would engage compliance consultants as needed to improve the compliance program, and he would relinquish his portfolio management duties to eliminate inherent conflicts. Pennant’s CEO agreed to these conditions, but soon afterwards gave the CCO additional compliance duties. Pennant did not add compliance resources at that time.

In another email the CCO warned “in my professional opinion, there is a risk that a compliance issue may go unnoticed due to limited resources available for testing and auditing of the numerous areas of the firm’s compliance program. In 2012, I urged the firm’s executive management to add a position for a compliance officer to the staff of Pennant to focus on compliance program testing, training and other issues. I will continue to suggest this in 2013.” Despite these warnings, Pennant did not hire additional compliance resources in 2013.

As in the 2012 report, the CCO’s 2013 report reiterated his concerns about the risk resulting from insufficient resources:  “As stated in the Annual Review for 2012, there is a risk that a compliance issue may go unnoticed due to limited resources available for testing and auditing of the numerous areas of the firm’s compliance program. The CCO further explained that while 2013 was a year of transition for Pennant, his understanding was that there were plans in place to strengthen Pennant’s compliance functions. The CCO also detailed the compliance actions that Pennant planned to take in 2014, including hiring another business person to allow a current staff member to focus on compliance related projects; and the engagement of an outside compliance consultant. At this time, however, no money was budgeted for additional compliance resources.”

In February 2014, the CCO raised the need for additional compliance resources with the trustees. The independent trustees raised the issue with Pennant’s CEO. In June 2014, Pennant hired a compliance analyst, and in July 2014, Pennant engaged an outside compliance consultant to evaluate its compliance program.

The SEC’s order as to Pennant found that the adviser willfully violated antifraud, compliance, and books-and-records provisions of the Investment Advisers Act of 1940, Sections 204(a), 206(2), 206(4), and 207 of the Advisers Act and Rules 204-2(a)(3) and 206(4)-7 thereunder.  Without admitting or denying the findings, Pennant agreed to a cease-and-desist order, censure, and to pay a $400,000 civil penalty.

The SEC’s order as to Elste found that he willfully aided and abetted and caused Pennant’s compliance violations under Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the findings, Elste agreed to a cease-and-desist order, censure, and to pay a $45,000 civil penalty. [Please
login to IA Act UnwrappedTM to view Release No. IA-5062 In the Matter of Mark A. Elste, and Release No. IA-5061 In the Matter of Pennant Management, Inc.]   Top


SEC Enforcement Division Issues Report on FY 2018 Results


On November 2, 2018, the SEC’s Enforcement Division issued the annual report of its ongoing efforts to protect investors and market integrity.  The report also highlights several significant actions and initiatives that took place in FY 2018.  The report presents the activities of the Division from both a qualitative and quantitative perspective.

“As this report demonstrates, the Division’s approach to enforcement is multifaceted and outcomes-oriented with the interests of our Main Street investors front of mind,” said SEC Chairman Jay Clayton.  “The Enforcement Division has been and continues to be extremely successful in its efforts to deter bad conduct and effectively remedy harms to investors.  I thank the women and men of the Division, in our home office and in our 11 regional offices, for their continued dedication to our mission.”

In accordance with Chairman Clayton’s charge to focus on Main Street investors, Division of Enforcement Co-Directors Stephanie Avakian and Steven Peikin previously outlined five core principles that serve to guide the work of the division.

The core principles – focus on the Main Street investor, focus on individual accountability, keep pace with technological change, impose remedies that most effectively further enforcement goals, and constantly assess the allocation of resources – were first described in the Division’s FY 2017 annual report.  The Division’s adherence to these principles resulted in meaningful results, including the return of almost $800 million to harmed investors, holding individuals – including many at the highest level – accountable, barring bad actors from the securities markets, and sending strong messages of deterrence.  The impact of these actions has unquestionably protected investors of all types, particularly retail investors.

The Division’s focus on obtaining relief for harmed investors is underscored by various retail investor-specific initiatives.  One example is the Division’s Share Class Selection Disclosure Initiative, a self-reporting initiative designed to quickly return money to investors who may have been harmed by failures to disclose conflicts of interests related to the selection of mutual fund share classes.

Also illustrative of the Division’s impact in protecting investors and market integrity is the groundbreaking approach to addressing misconduct involving initial coin offerings and digital assets, which reflects a focus on cases that deliver strong and clear messages and have broad market impact.

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

“This year’s report again shows a broad range of significant enforcement actions, a thoughtful approach to remedies and relief, and the return of substantial sums to investors,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Quantitatively, the SEC brought a diverse mix of 821 enforcement actions, including 490 standalone actions, and returned $794 million to harmed investors.  A significant number of the SEC’s standalone cases concerned investment advisory issues, securities offerings, and issuer reporting/accounting and auditing, collectively comprising approximately 63 percent of the overall number of standalone actions.  The SEC also continued to bring actions relating to market manipulation, insider trading, and broker-dealer misconduct, with each comprising approximately 10 percent of the overall number of standalone actions, as well as other areas.  And it obtained judgments and orders totaling more than $3.945 billion in disgorgement and penalties. 
[Please login to the IA Act UnwrappedTM Examination Tools Database/2018 Information to access the Report.] Top 


Investment Adviser Compliance Issues Related to the Cash Solicitation Rule


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 the most common deficiencies the staff has cited relating to the Cash Solicitation Rule 206(4)-3.

The Risk Alert includes observations by OCIE staff and is intended to assist investment advisers in identifying potential issues and adopting and implementing effective compliance programs.

Some of the most frequent compliance issues that OCIE staff identified pertaining to the Cash Solicitation Rule include:

OCIE’s examinations within the scope of this review resulted in a range of actions. In response, some advisers elected to amend their disclosure documents and solicitation agreements, revise their compliance policies and procedures, or otherwise change their practices regarding the Cash Solicitation Rule. [Please login to IA Act UnwrappedTM to view the full content on the Risk Alert in the Examination Tools Database/2018 Information, or under the Regulatory Database Rule 206(4)-3 Risks Tab.]   Top  


SEC’s New Strategic Plan Puts Investors, Innovation, and Performance at Top


The Securities and Exchange Commission announced a new strategic plan to guide the agency’s work over the next four years with a primary focus on investors, innovation, and performance. The plan’s goals reflect the agency’s commitment to its longstanding mission while leveraging the opportunities and addressing the challenges that come from fast-evolving markets, products and services.

“ Our new strategic plan is a concise, straight-forward explanation of the goals that will guide us as our markets evolve. It is based on the core values that have motivated the women and men of the SEC for over 80 years, including, most importantly, serving the interests of our long term Main Street investors.”  –SEC Chairman Jay Clayton

The SEC’s new strategic plan was published in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four-year period.

Strategic Plan Summary

GOAL 1. Focus on the long-term interests of our Main Street investors.

The SEC will strive to better understand how a wider range of investors participate in the capital markets and how to reach them while tailoring policy initiatives with retail investors in mind. Initiatives under this goal will include modernizing disclosure and expanding investor choice.

GOAL 2. Recognize significant developments and trends in our evolving capital markets and adjust our efforts to ensure we are effectively allocating our resources.

Under this goal, the SEC will embrace innovation by analyzing market developments, evaluating existing rules and procedures, understanding the continually changing cyber-landscape and ensuring the appropriate resources are dedicated to each area.

GOAL 3. Elevate the SEC’s performance by enhancing our analytical capabilities and human capital development.

The SEC will invest in data and technology to leverage “the experience, knowledge, creativity, leadership and teamwork of the SEC’s staff and its leaders.” The agency is also committed to recruiting and retaining a diverse workforce with a wide range of skills and expertise. 

[Please
login to IA Act UnwrappedTM to access the Stratigic Plan in PDF version in the Examination Tools Database/2018 Information.]  Top


LendingClub Asset Management & Former Executives Charged with Misleading Investors & Breaching Fiduciary Dut
y
No charges against parent company which had promptly self-reported

The SEC has charged San Francisco-based LendingClub Asset Management LLC (formerly known as LendingClub Advisors LLC) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation, LCA’s parent company that Laplanche founded and for which he served as CEO.  LCA and Laplanche along with Carrie Dolan, LCA’s former CFO, also were charged with improperly adjusting fund returns. All three have agreed to settle the agency’s charges against them and will pay more than $4.2 million in combined penalties.  The SEC also barred Laplanche from the securities industry.

According to the SEC’s order, LCA provides investment advisory services to several private funds that purchase loan interests offered by LendingClub Corporation, a publicly-traded online marketplace lending company.  LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded, to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty.  The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.

“Investment advisers have an obligation to put their clients’ interests ahead of their own,” said Daniel Michael, Chief of the SEC’s Complex Financial Instruments Unit.  “By using funds managed by LCA to benefit its parent company, LCA and Laplanche failed to do so.”

“Investors depend on fund advisers to give them the straight scoop on performance so they can make informed investment decisions,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.  “Advisers who adjust their valuation processes to boost results are in breach of their duties to investors.”

The SEC’s order finds that LCA, Laplanche, and Dolan each violated the antifraud provisions of the Investment Advisers Act of 1940.  To settle the SEC’s charges, LCA, Laplanche and Dolan agreed to pay penalties of $4 million, $200,000, and $65,000, respectively.  Laplanche also agreed to a securities industry bar and investment company prohibition.  The SEC’s order permits Laplanche to apply for re-entry after three years.  LCA, Laplanche, and Dolan agreed to the entry of the SEC’s order without admitting or denying the findings.

The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.  LCA also reimbursed approximately $1 million to investors who were adversely impacted by the improperly adjusted monthly returns. [Please
login to IA Act UnwrappedTM to view Release No. IA-5054 In the Matter of LendingClub Asset Management, LLC, Renaud Laplanche, and Carrie Dolan]   Top   


Elon Musk Charged with Securities Fraud for Misleading Tweets


The Commission has charged Elon Musk, CEO and Chairman of Silicon Valley-based Tesla Inc., with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private.  

On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.  The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly.”  

“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations,” added Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “That standard applies with equal force when the communications are made via social media or another non-traditional form.”

The SEC’s complaint, filed in federal district court in the Southern District of New York, alleges that Musk violated antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.  Top 


SEC Charges Firm with Deficient Cybersecurity Procedures


On September 26, 2018, the Commission announced that a Des Moines-based broker-dealer and investment adviser has agreed to pay $1 million to settle charges related to its failures in cybersecurity policies and procedures surrounding a cyber intrusion that compromised personal information of thousands of customers.

The SEC charged Voya Financial Advisors Inc. (VFA) with violating the Safeguards Rule and the Identity Theft Red Flags Rule, which are designed to protect confidential customer information and protect customers from the risk of identity theft.  This is the first SEC enforcement action charging violations of the Identity Theft Red Flags Rule.

According to the SEC’s order, cyber intruders impersonated VFA contractors over a six-day period in 2016 by calling VFA’s support line and requesting that the contractors’ passwords be reset. The intruders used the new passwords to gain access to the personal information of 5,600 VFA customers.  The SEC’s order finds that the intruders then used the customer information to create new online customer profiles and obtain unauthorized access to account documents for three customers.  The order also finds that VFA’s failure to terminate the intruders’ access stemmed from weaknesses in its cybersecurity procedures, some of which had been exposed during prior similar fraudulent activity.  According to the order, VFA also failed to apply its procedures to the systems used by its independent contractors, who make up the largest part of VFA’s workforce.

“Customers entrust both their money and their personal information to their brokers and investment advisers,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division.  “VFA failed in its obligations when its deficiencies made it vulnerable to cyber intruders accessing the confidential information of thousands of its customers.”

“This case is a reminder to brokers and investment advisers that cybersecurity procedures must be reasonably designed to fit their specific business models,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.  “They also must review and update the procedures regularly to respond to changes in the risks they face.”

Without admitting or denying the SEC’s findings, VFA agreed to be censured and pay a $1 million penalty, and will retain an independent consultant to evaluate its policies and procedures for compliance with the Safeguards Rule and Identity Theft Red Flags Rule and related regulations. [Please
login to IA Act UnwrappedTM to view Release No. IA-5048 In the Matter of Voya Financial Advisors, Inc.]  Top 

 

 

Headline News

OCIE Issues Risk Alert Highlighting Compliance Issues Related to Reg S-P
Read more...

SEC Names Deputy Chief Counsels of the Division of Investment Management
Read more...

New SEC Campaign Educates Investors on Where and How to Get Answers
Read more...

COO Fraudulently Caused Advisory Firm to Overbill Clients
Inflated salary by hundreds of thousands of dollars per year
Read more...

IA Charged with Stealing Millions from Private Fund
Read more...

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.

LR-24455 SEC v. Motty Mizrahi et al.

IA-5224 In the Matter of Matthew R. Rossi and SJL Capital, LLC

IA & BD Compliance Issues Related to Regulation S-P - Privacy Notices and Safeguard Policies 
OCIE Risk Alert (April 16, 2019) 
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

IA-5223 In the Matter of Stanley S. Bae

SECret Garden 
Commissioner Hester M. Peirce at SEC Speaks 2019
Important Issues for Investors in 2019 
Rick Fleming, Investor Advocate at SEC Speaks 2019
Remarks have been added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

IA-5222 In the Matter of Karen Bruton and Hope Advisors, LLC

LR-24449 SEC v. Arif M. Naqvi and Abraaj Investment Management Limited

IA-5221 In the Matter of Martin R. Stancik

LR-24447 SEC v. Gonzalo Ortiz

IA-5220 In the Matter of Ascension Asset Management, LLC and Grenville M. Gooder, Jr.
Protective Order for personally identifiable information

Encouraging Smaller Entrants to Our Capital Markets
Remarks by Commissioner Elad L. Roisman at the 2019 SEC Speaks Conference
Added to the IA Act UnwrappedTM Examination Tools Database - 2019 Information

Management’s Discussion and Analysis of the SEC
SEC Chairman Jay Clayton's Remarks at the 2019 SEC Speaks Conference 
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

IA-5219 Notice of Intention to Cancel IA Registration of NeoCap, LLC

LR-24444 SEC v. Scott Newsholme

IA-5218 In the Matter of Alonzo R. Cahoon

IA-5217 In the Matter of Omar Zaki

LR-24435 SEC v. Motty Mizrahi and MBIG Company

LR-24434 SEC v. Richard T. Diver

IA-5216 In the Matter of Gregory M. Bercowy

IA-5215 In the Matter of Dennis Gibb and Sweetwater Investments, Inc.

IA-5214 In the Matter of Ascension Asset Management LLC and Grenville E. Gooder, Jr.

IA-5213 Generation Investment Management US LLP and Generation Investment Management LLP
Added to the IA Act UnwrappedTM Releases Database and to the No-Action/Exemptive Order Tab under Regulatory Database Rule 206(4)-5, Pay to Play

IA-5212 In the Matter of Oscar Francis

LR-24432 SEC v. Direct Lending Investments, LLC

IA-5211 In the Matter of Neil Maxwell

IA-5210 In the Matter of Charles G. Stivers

IA-5209 In the Matter of Karl R. Dierman

IA-5208 In the Matter of Kevin D. Wanner

IA-5207 Regulatory Flexibility Agenda

Wells Fargo Securities LLC
No-Action Letter
Added to the IA Act UnwrappedTM No-Action Letter Database and to the No-Action Tab under Regulatory Database Rule 206(4)-3

PLI Investment Management Institute 2019
Remarks by Paul Cellupica, Deputy Director & Chief Counsel, Division of Investment Management
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

IA-5206 FAST Act Modernization and Simplification of Regulation S-K
Final Rule Release

IA-5205 In the Matter of Roy Dekel

IA-5204 In the Matter of Harding Advisory LLC and Wing F. Chau - OPINION

LR-24430 SEC v. Carol Ann Pedersen

IA-5203 In the Matter of Richard G. Cody

ICI Mutual Funds and Investment Management Conference
Keynote Address by Dalia Blass, Director, Division of Investment Management
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

ICI Mutual Funds and Investment Management Conference
Keynote Remarks by SEC Commissioner Elad L. Roisman
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

IA-5202 In the Matter of Grant Gardner Rogers

IA-5201 In the Matter of Talimco, LLC

IA-5200 In the Matter of Craig Arsenault

LR-24424 SEC v. Dale M. Walker

Edmunds Private Capital, LLC
Amended Application for Exemptive Order under Advisers Act Section 202(a)(11) (definition of "investment adviser") (March 12, 2019)
Added to IA Act UnwrappedTM Regulatory Database Family Office Rule 202(a)(11)(G)-1 No-Action/Exemptive Order Request Tab

Engaging on Non-DVP Custodial Practices and Digital Assets 
Division of Investment Management Letter to K. Barr/Investment Adviser Association (Mar. 12, 2019)
To inform future steps and in light of growth in the variety and complexity of the types of securities and other assets commonly utilized by registered investment advisers that settle on a Non-DVP (delivery-versus-payment) basis, the staff, through the Division’s Analytics Office, has launched an initiative to gather information on Non-DVP practices. The Division also requests comment to further inform consideration of how characteristics of digital assets impact the application of the Custody Rule.
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information and to the Plain English Description Tab under Regulatory Database Rule 206(4)-2

Release Nos. IA-5123 through IA-5199
SEC Share Class Initiative Returning More Than $125 Million to Investors
79 IAs Who Self-Reported Agree to Compensate Investors Promptly, Ensure Adequate Fee Disclosures