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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!

Private Equity Firm Charged with Compliance Failures

Ares Management LLC, a Los Angeles-based private equity firm and registered investment adviser, has agreed to pay one million dollars to settle charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

The SEC’s order finds that, in 2016, Ares invested several hundred million dollars in a public company through a loan and equity investment that allowed Ares to appoint a senior employee to the company’s board.  The order finds that Ares’s compliance policies failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board while that employee continued to participate in trading decisions regarding the portfolio company.  According to the order, Ares obtained potential material nonpublic information about the company, including through Ares’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt, and interest payments.  After receiving this information, Ares purchased more than 1 million shares of the company’s common stock, which was 17% of the publicly available shares.  The order finds that Ares did not require its compliance staff, prior to approving the trades, to sufficiently inquire and document whether the board representative and members of his Ares team possessed material nonpublic information relating to the portfolio company. 

“Investment advisers and private equity firms that place employees on the boards of public companies bear heightened risks that they will obtain nonpublic material information through their representative occupying dual roles,” said Anita B. Bandy, Associate Director in the Division of Enforcement. “It is critical for firms like Ares to have proper policies and procedures in place to address these risks and prevent the misuse of information obtained under these special circumstances.”

The SEC’s order finds that Ares violated the compliance policies and procedures requirements of Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.  Without admitting or denying the findings, Ares consented to the entry of a cease-and-desist order and a censure, and to pay a civil penalty of one million dollars. [Please
login to IA Act UnwrappedTM to view Release No. IA-5510 In the Matter of Ares Management, LLC]   Top 
 

SEC Shuts Down Fraudulent Investment Adviser Targeting Senior Citizens

The SEC  has filed an emergency action and obtained a temporary restraining order and asset freeze against a California-registered investment adviser and his entities to halt an ongoing Ponzi scheme targeting senior citizens in Southern California.

According to the SEC’s complaint, from at least January 2018 through the present, Paul Horton Smith Sr. offered and sold securities in his company Northstar Communications LLC, and used his investment advisory firm eGate LLC and insurance and estate planning company Planning Services Inc. to market the securities.  Smith and Northstar through free workshops and other investor events allegedly promised investors guaranteed annual interest payments between 3 percent and 10.5 percent if they invested in so-called “private annuity contracts.”  In reality, as the complaint alleges, Smith did not invest the funds raised in any securities and instead used new investor funds to pay investor returns in a Ponzi-like fashion.  According to the complaint, Northstar raised more than $5.6 million from at least 35 investors and paid out $5.2 million to those investors as interest payments or principal returned.  Smith also allegedly used investor funds to settle investor fraud lawsuits.

The SEC’s complaint, filed on May 19 and unsealed late yesterday in U.S. District Court for the Central District of California, charges Smith, Northstar, eGate, and Planning Services with violating the antifraud provisions of the federal securities laws. The complaint seeks injunctions, the return of ill-gotten gains plus interest, and civil penalties.

On May 20, in addition to granting a temporary restraining order and an asset freeze, the court ordered an accounting and appointed a temporary receiver.  A hearing is scheduled for June 3, 2020, to consider continuing the asset freeze, issuance of a preliminary injunction, and appointment of a permanent receiver. In a parallel action, the U.S. Attorney’s Office for the Central District of California announced on May 21 that it filed a criminal complaint against Smith.

“As alleged in our complaint, Paul Horton Smith Sr. raised millions of dollars by touting his purported investment expertise and guaranteeing returns,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “Investors should be wary of investments promising no risk and high returns, which are classic warning signs of investment fraud.”

The SEC’s Office of Investor Education and Advocacy has issued investor alerts on frauds targeting seniors and Ponzi scheme red flags.  Additional information is available on Investor.gov and SEC.gov. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view LR-24822 SEC v. Paul Horton Smith, Sr.; Northstar Communications, LLC; Planning Services, Inc.; and eGate, LLC]  Top 

 

SEC Charges IA with Custody Rule and Related Violations

On May 22, 2020, the Commission announced settled charges against New Jersey-based investment advisory firm TSP Capital Management Group, LLC for violating Commission rules designed to protect advisory clients from the misuse or misappropriation of their assets.

Registered investment advisers that have custody of client assets are subject to the "custody rule," which requires the advisers to undergo an annual surprise examination to verify the existence of assets or, where permissible, to distribute to investors, within 120 days of each fiscal year's end, annual audited financial statements for the fund prepared in accordance with Generally Accepted Accounting Principles (GAAP). According to the SEC's order, from 2014 through 2018, TSP Capital failed to distribute in a timely manner the required annual audited financial statements to investors in the largest private fund that the firm advised, thereby repeatedly violating the custody rule. In addition, TSP Capital failed to adopt and implement written policies and procedures reasonably designed to prevent custody rule violations.

The SEC's order finds that TSP Capital violated Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-2 and 206(4)-7 thereunder. Without admitting or denying the order's findings, TSP Capital consented to a cease-and-desist order and a censure, and agreed to pay a civil penalty of $60,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-5508 In the Matter of TSP Capital Management Group, LLC]   Top

SEC Charges Companies and CEO for Misleading COVID-19 Claims
SEC Divisions and Offices Post COVID-19 Related Information Online

On May 14, 2020, the Commission announced charges in two cases involving companies that claimed in press releases to offer products to combat the COVID-19 virus – one against Applied BioSciences Corp. and one against Turbo Global Partners, Inc. and its CEO, Robert W. Singerman. The SEC previously suspended trading temporarily in the securities of Applied BioSciences and Turbo Global.

According to the SEC’s complaint against Applied BioSciences, filed in federal court in the Southern District of New York, the company issued a press release on March 31 stating that it had begun offering and shipping supposed finger-prick COVID-19 tests to the general public that could be used for “Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.”  The complaint alleges that contrary to these claims, the tests were not intended for home use by the general public and could be administered only in consultation with a medical professional.  The complaint further alleges that Applied BioSciences had not shipped any COVID-19 tests as of March 31, and its press release failed to disclose that the tests were not authorized by the U.S. Food and Drug Administration.

“We are actively monitoring the markets to detect potential fraudsters who seek to use the COVID-19 crisis as a basis for investment scams,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “As alleged in these complaints, Applied BioSciences and Turbo Global sought to take advantage of the COVID-19 crisis by misleading investors about their ability to provide solutions.” 

Steven Peikin, Co-Director of the SEC’s Division of Enforcement, in a Keynote Speech before the Securities Enforcement Forum West 2020 Conference, offered insight regarding the Division’s response to the COVID-19 crisis, including what the Division is doing to detect and address COVID-19-related misconduct.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert to warn investors about investment frauds involving claims that a company’s products or services will be used to help stop the coronavirus outbreak. The Risk Alert is available at Investor.gov.

The Division of Investment Management has issued Coronavirus (COVID-19) Response FAQs (updated by the SEC on April 14, 2020). The staff of the Division of Investment Management has prepared the responses to questions about funds and advisers affected by COVID-19.

For additional information concerning the SEC’s response to COVID-19, the Commission has setup a dedicated webpage at https://www.sec.gov/sec-coronavirus-covid-19-response.


Included is information related to:

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Morgan Stanley Smith Barney Charged with Providing Misleading Information to Retail Clients

On May 12, 2020, the Commission announced that Morgan Stanley Smith Barney LLC (MSSB) has agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  MSSB has agreed to pay a $5 million penalty that will be distributed to harmed investors.

Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.  According to the SEC’s order, MSSB marketed its wrap fee accounts as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure.  From at least October 2012 until June 2017, some of MSSB’s marketing and client communications gave the impression that wrap fee clients were not likely to incur additional trade execution costs.  During that period, however, the order finds that some MSSB managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in MSSB clients paying additional transaction fees that were not visible to them.  As a result of MSSB’s conduct, the order finds that certain MSSB clients were unable to assess the value of the services received in exchange for the wrap fee paid to MSSB.

“Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services,” said Melissa R. Hodgman, Associate Director in the SEC’s Division of Enforcement. “The SEC’s order finds that Morgan Stanley Smith Barney failed to provide certain clients in its retail wrap fee programs accurate information about the costs they incurred for the services they received.”

Without admitting or denying the findings, MSSB consented to the SEC’s order, which finds that MSSB violated provisions of the Investment Advisers Act of 1940, imposes a $5 million penalty, and includes a censure and a cease-and-desist order.  The order also creates a Fair Fund to distribute the penalty paid by MSSB to harmed investors. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5499 In the Matter of Morgan Stanley Smith Barney LLC] Top

Settled Charges Against Private Equity Fund Adviser with Conflicted Expense Reimbursements

Cooperation Considered in Imposing Sanctions - Monomoy voluntarily and promptly provided documents and information to the staff; met with the staff on multiple occasions and provided detailed factual summaries of relevant information; and was prompt and responsive in addressing staff inquiries.

On April 22, 2020, the Commission announced settled charges against New York-based private equity fund adviser Monomoy Capital Management, L.P., for failing to fully disclose or obtain consent to its practice of charging private fund portfolio companies for the costs of certain services.

According to the SEC's order, Monomoy provided fund portfolio companies with operationally-focused services through a group of Monomoy employees known as the Operations Group. Monomoy charged portfolio companies for the services of the Operations Group, which allowed Monomoy to recoup most of its costs of maintaining the group. The SEC's order finds that Monomoy did not, however, provide full and fair disclosure that it would charge the portfolio companies for the services, or otherwise obtain consent to the associated conflicts of interest.

Without admitting or denying the SEC's findings, Monomoy has consented to the entry of the Order finding that it violated the antifraud provision of Section 206(2) of the Investment Advisers Act of 1940. Monomoy also agreed to cease and desist from further violations and to be censured. Monomoy agreed to pay disgorgement of $1,521,972 and prejudgment interest of $204,606, and a civil penalty of $200,000. The disgorgement, prejudgment interest and penalty, totaling $1,926,579, will be contributed to a Fair Fund, and Monomoy will distribute the funds to the affected investors. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5485 In the Matter of Monomoy Capital Management, LP] Top

Private Fund Adviser to Pay $1 Million for Advertising and Compliance Failures

Old Ironsides Energy, LLC, a registered investment adviser based in Boston, Massachusetts, has agreed to pay a $1 million penalty to settle charges relating to its marketing of a private fund, Old Ironsides Energy Fund II LP (OIE Fund II), which received commitments of over $1.3 billion.

According to the SEC's order, when marketing the OIE Fund II from March 2014 to April 2015, Old Ironsides distributed misleading marketing materials relating to its historical performance for managing direct drilling investments. Specifically, the marketing materials identified a large, legacy investment with strong, positive returns as part of its historical "Track Record" for early stage direct drilling investments. The SEC found that the marketing materials represented that Old Ironsides had direct management over this investment, when it was actually an investment in a private fund advised by a third party. Further, by including the private fund's performance, Old Ironsides' misleadingly improved its "Track Record" for these types of investments.

The SEC's Order finds that Old Ironsides willfully violated Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-1 and 206(4)-7 thereunder. Without admitting or denying the findings in the SEC's Order, Old Ironsides agreed to a cease-and-desist order, a censure, and a $1 million penalty. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA IA-5478 In the Matter of Old Ironsides Energy, LLC]
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SEC Orders Three Self-Reporting Advisory Firms to Reimburse Investors
Brings Total Returned to Investors as Share Class Selection Disclosure Initiative Over $139 Million

On April 17, 2020, the Commission announced settled charges against two advisers that self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative, and a third adviser that self-reported within months of the initiative’s self-reporting deadline.  The Commission’s orders today are the final cases the Division intends to recommend under the terms of the initiative.  Including today’s actions, the Commission has ordered more than $139 million to be returned to investors as part of the initiative.

The voluntary initiative announced by the Division of Enforcement on February 12, 2018, provided advisers an opportunity to self-report that they had failed to fully and fairly disclose their conflicts of interests in selecting for their advisory clients more expensive mutual fund share classes that paid 12b-1 fees when lower-cost share classes were available for the clients and be eligible for standard settlement terms that did not include the imposition of a civil penalty.  From March 11, 2019 through September 30, 2019, the Commission issued orders against 95 advisers that chose to participate in the initiative.

“This incredibly successful initiative led to the return of almost $140 million to harmed investors, stopped wrongful conduct, and highlighted the importance of an adviser’s obligations to provide full and fair disclosures to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We continue to actively pursue disclosure failures that financially benefit the adviser to the detriment of the client.”

The SEC’s orders find that Merrill Lynch, Pierce, Fenner & Smith Incorporated and Eagle Strategies LLC violated Section 206(2) of the Investment Advisers Act of 1940, and ordered that they are censured, that they cease and desist from future violations, that they pay disgorgement and prejudgment interest totaling over $425,000 and that they comply with certain undertakings, including returning the money to investors.

The SEC also charged Cozad Asset Management Inc., which self-reported its share class selection violations to the Commission in the months following the initiative deadline.  The SEC found that Cozad failed to fully disclose the conflicts arising from its and its associated persons’ selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available.  The SEC’s order finds that Cozad violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and ordered that it is censured, that it cease-and-desist from future violations, that it pay disgorgement and prejudgment interest totaling over $400,000, as well as a $10,000 civil penalty, and that it comply with certain undertakings, including returning the money to investors.

Since September 2019, the Commission has issued orders against two firms that were eligible to self report pursuant to the initiative, but failed to do so.  See Mid Atlantic Financial Management Inc. (ordered to pay $1,027,002 in disgorgement and prejudgment interest and a $300,000 civil penalty) and BPU Investment Management Inc. (ordered to pay $692,107 in disgorgement and prejudgment interest and a $235,000 civil penalty). The Share Class Selection Disclosure Initiative was led by the Division of Enforcement’s Asset Management Unit. [Please
login to the IA Act UnwrappedTM Releases Database to view Release Nos. IA-5479 In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Incorporated; IA-5480 In the Matter of Eagle Strategies LLC; and IA-5477 In the Matter of Cozad Asset Management, Inc.]  Top  

 

Investment Management Coronavirus (COVID-19) Response FAQs

The staff of the Division of Investment Management has issued responses to questions about funds and advisers affected by Coronavirus (COVID-19). The responses include information regarding: contacting the Division; relief for registered investment advisers and exempt reporting advisers affected by COVID-19; SEC staff views on an adviser’s reliance on the temporary relief provided in response to COVID-19 as a risk factor for examining the adviser’s business continuity plan; guidance for advisers affected by COVID-19 (including Form ADV requirements and Custody Rule requirements); and information for investment companies. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2020 Information and the Regulatory Database to view the FAQs and associated links.]   Top 

OCIE Publishes Risk Alerts Providing Advance Information Regarding Inspections for Compliance with Regulation Best Interest and Form CRS

OCIE has issued two risk alerts: Examinations that Focus on Compliance with Regulation Best Interest and Examinations that Focus on Compliance with Form CRS. These risk alerts provide broker-dealers and investment advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation Best Interest and Form CRS.  Regulation Best Interest and Form CRS are key components of a broader package of rules and interpretations, adopted contemporaneously on June 5, 2019, to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers.  The compliance date for Regulation Best Interest and Form CRS is June 30, 2020.

Initial examinations of Regulation Best Interest will focus on assessing whether broker-dealers have made a good faith effort to implement policies and procedures reasonably designed to comply with Regulation Best Interest, including the operational effectiveness of broker-dealers’ policies and procedures.  Initial examinations of Form CRS will focus on assessing whether firms have made a good faith effort to implement Form CRS, including reviewing the filing and posting of a firm’s relationship summary as well as its process for delivering the relationship summary to existing and new retail investors.

“Regulation Best Interest and Form CRS are critical to the protection of Main Street investors, and we feel it is important to share our plans for initial examinations to help firms assess their preparedness as the June 30, 2020 compliance date nears,” said Pete Driscoll, Director of OCIE.  “Based on conversations we have had with the industry, we know firms have made substantial progress in implementing these new rules.  We understand that this implementation will be an iterative process, and our focus will be on firms continuing good faith and reasonable efforts, including taking into account firm-specific effects from disruptions caused by COVID-19.”

“OCIE has been working closely with both FINRA and SEC staff to ensure that we harmonize our examination efforts for Regulation Best Interest across our examination programs,” said John Polise, OCIE’s National Director for the Broker-Dealer and Exchange program.  “I encourage firms to review the Risk Alerts to understand the scope of initial exams.” [Please
login to the IA Act UnwrappedTM Examination Tools Database to view the Risk Alerts.]
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SEC Awards $450,000 to Compliance Whistleblower

On March 30, 2020, the SEC announced an award of $450,000 to a whistleblower whose significant information helped focus an ongoing investigation on the violations that were ultimately charged.

The whistleblower, who had compliance-related responsibilities, is eligible for an award because the whistleblower reported concerns about the relevant conduct internally within the company and then waited 120 days before reporting to the SEC.  This is the SEC’s third whistleblower award to an individual who had compliance or internal audit responsibilities.

“To ensure that important information about securities laws violations is reported to the SEC when appropriate corrective action is not taken by the company, the rules permit awards to compliance professionals in certain limited circumstances,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Here, the whistleblower made reasonable efforts to work within the company’s compliance structure, suffered unique hardships as a result, and reported to the Commission after the requisite time period had passed, ultimately providing meaningful assistance to the Commission’s investigation and subsequent enforcement action.”

The SEC has awarded over $396 million to 77 individuals since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity.   Top 

SEC Extends Conditional Exemptions From Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected by COVID-19

Form ADV & Form PF Filing Date Extended to June 30, 2020


On March 25, 2020, the SEC announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19. In addition, the SEC’s Division of Corporation Finance issued today its current views regarding disclosure considerations and other securities law matters related to COVID-19.

“Health and safety continue to be our first priority,” said SEC Chairman Jay Clayton. “These actions provide temporary, targeted relief to issuers, investment funds and investment advisers affected by COVID-19. At the same time, we encourage public companies to provide current and forward-looking information to their investors and, in these uncertain times, companies are reminded that they can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.”

Public Company Relief

To address potential compliance issues, the Commission issued an order that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. Today’s Order supersedes and extends the Commission’s Original Order of March 4, 2020. Among other conditions, companies must continue to convey through a current report a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed. The Commission may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

Investment Fund and Adviser Relief


The Commission also issued orders (https://www.sec.gov/rules/other/2020/ia-5469.pdf and https://www.sec.gov/rules/other/2020/ic-33824.pdf) that would provide certain investment funds and investment advisers with additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements, as applicable. Today’s Orders supersede and extend the filing periods covered by the Commission’s Original Orders of March 13, 2020. Among other conditions, entities must notify the Division staff and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur. The time periods for relief are described in the Orders. The Commission may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Firms and financial professionals are encouraged to contact SEC staff with questions or matters of particular concern.

Public Company Disclosure Guidance

The Division of Corporation Finance today issued Disclosure Guidance Topic No. 9, providing the staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The Division has been monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations and is providing the guidance as companies prepare disclosure documents during this uncertain time.

The guidance encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies.

The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and financial professionals will continue to closely track developments, and, if appropriate, consider additional relief from other regulatory requirements for those affected by the Coronavirus. Entities and financial professionals affected by the Coronavirus are encouraged to contact Commission staff with questions and concerns.

ADDITIONAL INFORMATION

Commission Relief for Public Companies


The Commission has issued this Order as necessary and appropriate in the public interest and consistent with the protection of investors. For those companies seeking to rely upon the Order, attention is directed to the various conditions, including the requirement to furnish a Form 8-K or Form 6-K by the later of March 16 or the original reporting deadline.

In connection with the Commission relief issued in the order, the Commission staff will take the following positions with respect to certain obligations under the Securities Act and the Exchange Act:

Disclosure Considerations for All Public Companies

The Commission encourages all companies and other related persons to consider their activities in light of their disclosure obligations under the federal securities laws. For example, where a company has become aware of a risk related to the Coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and discourage directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk. To the extent the registrant or insiders are engaged in transactions, or circumstances otherwise warrant it, the registrant should consider what disclosures are required in order to inform the public of its financial condition.

When companies do disclose material information related to the impacts of the Coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.

Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the Coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for this information.

Requests for Additional Assistance Relating to COVID-19

Some companies and other affected persons may continue to require additional or different assistance in their efforts to comply with the requirements of the federal securities laws and therefore are encouraged to contact Commission staff. Registrants facing administrative difficulties in the filing process (e.g., inability to obtain a required signature due to an executive officer being located in a quarantined zone) are encouraged to contact the staff who will be available to help address these issues. The Commission staff will continue to address these and any issues on a case-by-case basis in light of their fact-specific nature. If you require general assistance related to this order please call (202) 551-3500 or submit your request for assistance and contact information at https://www.sec.gov/forms/corp_fin_interpretive.

Commission Relief for Funds and Investment Advisers

The Commission has issued the Orders as necessary and appropriate in the public interest and consistent with the protection of investors. For an entity seeking to rely upon an Order, attention is directed to the various conditions, including, that entities must notify the Division staff and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the Order or estimate a date by which the required action will occur.

Subject to their conditions, the Orders provide the following temporary exemptive relief:

Relief Related to the Investment Company Act of 1940

Relief Related to the Investment Advisers Act of 1940

The Order would extend the following obligations for which the original due date is on or after the date of the original order but on or prior to June 30, 2020. The original order extended to April 30, 2020. Filing or delivery, as applicable, would still need to be made as soon as practicable but no later than 45 days after the original due date.

Commission Statement of Delivery of Fund Prospectuses

The Commission also takes the position, as described in the orders, that it would not provide a basis for a Commission enforcement action if a registered fund does not deliver to investors the current prospectus of the registered fund where the prospectus is not able to be timely delivered because of circumstances related to Coronavirus, subject to the conditions described in the orders. The Commission’s position has been extended to June 30, 2020. Delivery would still need to be made as soon as practicable but no later than 45 days after the date originally required.

Division of Investment Management contact information:

 

•    For general questions or concerns related to impacts of Coronavirus on the operations or compliance of funds and advisers, including questions about Form N-MFP and Form N-CR, please email IM-EmergencyRelief@sec.gov.
•    For questions regarding Form N-LIQUID, please email IM-N-LIQUID@sec.gov and simultaneously contact: Tim Husson, Associate Director, at (202) 551-6803 and Jon Hertzke, Assistant Director, at (202) 551-6247.
•    For questions regarding Form ADV, email IARDLive@sec.gov.
•    For questions regarding Form PF, email FormPF@sec.gov.


[Please
login to IA Act UnwrappedTM to view Release No. IA-5469.]

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OCIE Statement on Operations and Exams – Health, Safety, Investor Protection and Continued Operations are our Priorities

 

The SEC’s Office of Compliance Inspections and Examinations (OCIE) recognizes that health and other measures necessitated by COVID-19 may significantly alter the operations of registrants in the securities markets. OCIE remains fully operational nationwide and continues to execute on its investor protection mission. In light of health and safety concerns and other circumstances, OCIE has moved to conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site. OCIE recognizes that registrants have taken similar steps and are devoting substantial time and attention to maintaining operations.

 

Recognizing these conditions and priorities, OCIE is working with registrants to address the timing of its requests, availability of registrant personnel, and other matters to minimize disruption. Specifically, we will work with registrants to ensure that our work can be conducted in a manner consistent with maintaining normal operations, and importantly, necessary or appropriate health and safety measures.

 

In addition, OCIE is fully aware of the regulatory relief that was provided to registrants in response to COVID-19, see https://www.sec.gov/sec-coronavirus-covid-19-response. OCIE believes it is important to communicate to registrants that reliance on regulatory relief will not be a risk factor utilized in determining whether OCIE commences an examination. We encourage registrants to utilize available regulatory relief as needed.

 

As it has done during other times of market stress, OCIE is actively engaged in on-going outreach and other efforts with many registrants to assess the impacts of COVID-19 and to gather information, including challenges with operational resiliency. In furtherance of these efforts, OCIE may discuss with registrants the implementation and effectiveness of registrants’ business continuity plans, particularly in the interests of protecting investors and the integrity of the markets.

 

OCIE staff is available to answer questions or discuss issues during this important time. Our contact information is available at https://www.sec.gov/ocie. If you suspect or observe activity that may violate the federal securities laws or otherwise operates to harm investors, please notify SEC staff at https://www.sec.gov/tcr.  Top 

 

Order Regarding Pending Administrative Proceedings

On March 20, 2020 the SEC issued Release No. IA-5467 in which the SEC orders that parties shall to the extent possible submit all filings to the Commission by sending them electronically at apfilings@sec.gov. The SEC will also continue to accept paper filings sent to the Office of the Secretary, although processing of documents received only via mail may be delayed. [Please login to the IA Act UnwrappedTM Releases Databse to view Release No. IA-5467]  Top 

SEC Takes Targeted Action to Assist Funds and Advisers, Permits Virtual Board Meetings and Provides Conditional Relief from Certain Filing Procedures

On March 13, 2020, the SEC announced regulatory relief for funds and investment advisers whose operations may be affected by the coronavirus.  The relief provided today covers in-person board meetings and certain filing and delivery requirements for certain investment funds and investment advisers.  The impacts of the coronavirus may delay or prevent funds and advisers operating in affected areas from meeting certain regulatory obligations due to restrictions on large gatherings, travel and access to facilities, the potential limited availability of personnel and similar disruptions.  The relief is designed to enable funds and advisers to meet those obligations and to continue their operations, while recognizing that there may be temporary disruptions outside of their control.

“Investment funds and advisers are at the forefront of Main Street investor access to financial markets, and the Commission is monitoring closely the impacts of the coronavirus on investors and market participants,” said SEC Chairman Jay Clayton.  “As investors, investment funds, investment advisers and other market participants endeavor to address these challenges, the Commission stands ready to take action in the interest of our investors and our markets as appropriate.  Today’s targeted relief will provide additional time so affected funds and advisers can continue meeting the expectations of their investors and clients.”

The Commission and its staff continue to assess impacts relating to the coronavirus on investors and market participants, and will consider additional relief from other regulatory requirements.  Firms and financial professionals affected by the coronavirus are encouraged to contact the staff with questions and concerns.  The Commission may extend the time period for relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.

Division of Investment Management contact information:

ADDITIONAL INFORMATION

The Commission has issued the orders having due regard for the needs and safety of registered investment companies, other funds and investment advisers impacted by coronavirus while also considering the importance of markets and investors receiving materially accurate and timely information. For an entity seeking to rely upon an order, attention is directed to the various conditions, including, as applicable, the requirements to notify Commission staff of the intention to rely upon the order and to disclose information on its website about its reliance upon the order.

Subject to their conditions, the orders provide the following temporary exemptive relief:

Relief Related to the Investment Company Act of 1940

•    Registered management investment companies, business development companies, and any investment adviser or principal underwriter of such companies from Investment Company Act sections and rules requiring certain agreements, plans or arrangements be approved by the company’s board of directors by an in-person vote due to circumstances related to the current or potential effects of coronavirus;

•    Registered management investment companies and unit investment trusts affected by coronavirus from Form N-CEN and Form N-PORT filing deadlines;

•    Registered management investment companies and unit investment trusts affected by coronavirus from annual and semi-annual report transmittal deadlines; and

•    Registered closed-end investment companies and business development companies from the requirement to file Form N-23C-2 at least 30 days prior to calling or redeeming securities.

Relief Related to the Investment Advisers Act of 1940

•    Registered investment advisers and exempt reporting advisers affected by coronavirus to file an amendment to Form ADV or file reports on Form ADV part 1A, respectively;

•    Registered investment advisers affected by coronavirus from requirements to deliver amended brochures, brochure supplements or summary of material changes to clients where the disclosures are not able to be timely delivered because of circumstances related to coronavirus; and

•    Private fund advisers affected by coronavirus from Form PF filing requirements.

Commission Statement of Delivery of Fund Prospectuses

The Commission also takes the position, as described in the orders, that it would not provide a basis for a Commission enforcement action if a registered fund does not deliver to investors the current prospectus of the registered fund where the prospectus is not able to be timely delivered because of circumstances related to coronavirus, subject to the conditions described in the orders.  Top 

SEC Grants IAs Extension for Filing Form ADV & Form PF until April 30th

The current outbreak of coronavirus disease 2019 (COVID-19) was first reported on December 31, 2019. The disease has led to disruptions to transportation, including buses, subways, trains and airplanes, and the imposition of quarantines around the world, which may limit investment advisers’ access to facilities, personnel, and third party service providers. The SEC recognizes that, in these circumstances, investment advisers may face challenges in timely satisfying provisions of the Advisers Act and rules thereunder concerning the filing and delivery of certain reports and disclosures. In light of the current situation, we are issuing this Order providing a temporary exemption from certain requirements of the Advisers Act.  Click HERE to access Release No. 5463.
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Division of Investment Management – New Resource for Modified or Withdrawn Staff Statements

The staff of the Division of Investment Management is making available a list of no-action letters and other staff statements that have been modified or withdrawn. This list, titled “Modified or Withdrawn Staff Statements,” is now available on the Commission’s website at sec.gov/divisions/investment/im-modifiedwithdrawn-staff-statements.

The staff expects to update this web page periodically, but may not issue separate informational updates or announcements for each update. Therefore, you may wish to subscribe to the email bulletins that will notify subscribers of updates to this web page.

The list on the Modified or Withdrawn Staff Statements web page is not exhaustive. Both this list and the referenced staff documents represent the views of staff of the Division of Investment Management and are not a rule, regulation, or statement of the Securities and Exchange Commission. Furthermore, the Commission has neither approved nor disapproved the content of this list or the referenced staff documents. Like all staff guidance, neither the list nor any referenced staff document has any legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person. [Please
login to the IA Act UnwrappedTM Examination Tools Database for more information]  Top 


Division of Investment Management Operating Status


The Division of Investment Management is continuing to conduct normal business functions.  IM disclosure staff is continuing to review filings, issue comment letters and accelerate the effective date of registration statements as requested and as appropriate. IM chief counsel staff is continuing to review exemptive applications, requests for no-action relief and other guidance requests.

The Division currently anticipates being able to maintain normal time frames for reviews and other matters.  If you are engaged with the staff on a matter, please keep that staff aware of any changes in your schedule.

Follow this guidance if you are not sure who you should contact about a matter:
https://www.sec.gov/investment/Article/investment_about.html   Top 

 

SEC Operating Status - COVID-19

From the SEC website: The health and safety of the SEC’s staff are first and foremost in our minds.  To that end, over the course of this week, the SEC’s Washington, DC headquarters has moved to a mandatory telework posture.

In the past several weeks, staff have been preparing for telework readiness, including conducting network capacity tests, encouraging all employees to test their remote connectivity, and preparing for the possibility of remote open and closed Commission meetings.

A majority of SEC headquarters staff began teleworking earlier this month.  The agency has remained fully operational, and we remain intently focused on fulfilling our mission on behalf of America’s investors and our markets.  top 

 

Investment Management Statement on Fund Board Meetings and Unforeseen or Emergency Circumstances Related to Coronavirus

The Division of Investment Management is actively monitoring the current and potential effects of COVID-19 on investment advisers and funds.  As a result of its outreach, the Division understands that fund boards may have upcoming meetings that were planned anticipating in-person attendance and that boards may be concerned about potential travel restrictions or the ability of directors to travel.  Division staff issued a letter to the Independent Directors Council in February 2019 that provides that the staff would not recommend enforcement action if fund boards do not adhere to certain in-person voting requirements in the event of unforeseen or emergency circumstances affecting some or all of the directors.[1]  As a result of the current and potential effects of COVID-19, the staff is hereby extending the no-action position expressed in the Independent Directors Council letter with respect to unforeseen or emergency circumstances to cover all approvals and renewals (including material changes) of contracts, plans or arrangements under section 15(c) or rules 12b-1 or 15a-4(b)(2), as well as the selection of a fund’s independent public accountant pursuant to Section 32(a) where such accountant is not the same accountant as selected in the immediately preceding fiscal year.[2]

This position applies to board meetings held between the date of this update and June 15, 2020.  The Division staff may extend the time period for this no-action position as circumstances warrant, with any additional conditions deemed appropriate.

The Division encourages investment advisers and funds to contact the Division staff with any concerns they have related to the staff letter or to current or potential effects of COVID-19 on their operations, including any need for relief or guidance, at 202-551-6825 or email at imocc@sec.gov.  In addition, as investment advisers and funds plan and prepare for any potential impacts, the Division encourages them to evaluate their business continuity plans and valuation procedures, among other relevant policies, procedures and systems.

This IM Staff Statement represents the views of the staff of the Division of Investment Management.  It is not a rule, regulation, or statement of the Securities and Exchange Commission. The Commission has neither approved nor disapproved its content.  This Staff Statement, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

Footnotes

[1] See letter from the staff of the Division of Investment Management to Independent Directors Council (Feb. 28, 2019), available at https://www.sec.gov/divisions/investment/noaction/2019/independent-directors-council-022819.

[2] Consistent with the letter to the Independent Directors Council, this position is conditioned on  board ratification of these actions at the next in-person board meeting.  Top 

 

SEC Provides Conditional Regulatory Relief & Assistance for Companies Affected by the Coronavirus
SEC is closely monitoring the impact of the coronavirus on investors and capital markets

The Commission announced that it is providing conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws. The impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions.


To address potential compliance issues, the Commission has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances.

The Commission may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

SEC Chairman Jay Clayton noted, "The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, we recognize that this situation may prevent certain issuers from compiling these reports within required timeframes."


Chairman Clayton added, "We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.  How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements."


In addition, the Division of Investment Management has issued a staff statement regarding certain in-person board voting requirements under the Investment Company Act of 1940, available at https://www.sec.gov/investment/staff-statement-im-covid-19 . [See article above.]

The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and financial professionals will continue to closely track developments, and, if appropriate, consider additional relief from other regulatory requirements for those affected by the coronavirus. Entities and financial professionals affected by the coronavirus are encouraged to contact Commission staff with questions and concerns.  Top 

SEC Amends Exemptions from IA Registration for Advisers to Rural Business Investment Companies

On March 2, 2020, the SEC adopted amendments to two rules in order to implement congressionally mandated exemptions from registration for investment advisers who advise rural business investment companies (RBICs).  These exemptions were enacted as part of the RBIC Advisers Relief Act of 2018, which amended the Investment Advisers Act.

The Commission adopted amendments to rules 203(l)-1 and 203(m)-1.  These rules implement exemptions from SEC registration for advisers to venture capital funds and private funds. The amendments include RBICs in the definition of the term “venture capital fund” and exclude their assets from the definition of the term “assets under management” for purposes of the private fund adviser exemption.

Advisers to RBICs, which are licensed by the U.S. Department of Agriculture, use the equity raised in capitalizing their funds to make venture capital investments mostly in smaller enterprises located primarily in rural areas.

“These amendments implement congressionally-mandated exemptions to the Advisers Act that are intended to reduce regulatory burdens for advisers to RBICs,” said SEC Chairman Jay Clayton.  “It is my hope that the reduction in regulatory burdens will encourage capital formation in rural areas where capital to form and grow a business all too often is more scarce than it should be.”

The amendments will be published on the Commission’s website and in the Federal Register.  They will become effective upon publication in the Federal Register. [Please
login to IA Act UnwrappedTM to view Release No. IA-5454 and the amendments under Regulatory Database Rules 203(l)-1 and 203(m)-1.]  Top  

 

SEC Charges Additional IAs for Undisclosed Conflicts of Interest Related to Aequitas Enterprise

On February 27, 2020, the SEC charged New Jersey and California-based investment advisers with failing to adequately disclose conflicts of interest related to their clients' investments in the Oregon-based Aequitas enterprise. To settle these charges, the investment advisers have agreed to pay a total of $564,000, which will be used to fund a distribution to harmed investors.

The SEC previously charged Aequitas Management LLC and three of its top executives with fraudulently raising more than $350 million from approximately 1,500 investors. The SEC also previously charged investment advisers in Massachusetts and Washington for failing to disclose their Aequitas-related conflicts of interest to advisory clients.

In two separate orders, the SEC found that from 2013 to 2015, Jeffrey C. Sica, of Morristown, New Jersey and William M. Malloy, III, of La Jolla, California, and the investment adviser firms that they each controlled, steered advisory clients to invest in Aequitas securities at the same time that Aequitas was compensating the firms through loans or for consulting services that included introducing investors to Aequitas.

According to the order against Sica and his firm, Sica Wealth Management, LLC (SWM), Sica's firm received approximately $2 million from Aequitas pursuant to consulting and loan agreements, but Sica and SWM failed to adequately disclose the agreements and payments to their advisory clients who invested in Aequitas securities. According to the order against Malloy and his firm Fortress Investment Management, LLC, Fortress received monthly $15,000 payments from Aequitas, but Malloy failed to adequately disclose the payments to advisory clients who invested in a Fortress fund that invested heavily in Aequitas securities. Malloy also inaccurately claimed that another investment adviser he controlled had the $100 million in assets under management required for SEC registration, causing it to remain improperly registered.

Without admitting or denying the SEC's findings, Sica and SWM consented to an order finding that they failed to disclose conflicts of interest in violation of Section 206(2) of the Investment Advisers Act of 1940. Also without admitting or denying the SEC's findings, Malloy and Fortress consented to an order finding that Malloy violated Section 206(2) and aided and abetted and caused a violation of Section 203A of the Advisers Act, and that Fortress was a cause of Malloy's Section 206(2) violations. The order also suspends Malloy from the industry for twelve months. Sica, Malloy, and their related entities have agreed to pay approximately $564,000 to resolve the SEC's charges, including disgorgement of the advisory fees they charged during the time of their violations, which will be used to fund a distribution to harmed investors.  [Please
login to IA Act UnwrappedTM to view Release Nos. IA-5453 In the Matter of Sica Wealth Management, LLC and Jeffrey C. Sica and IA-5452 In the Matter of Fortress Investment Management, LLC and William M. Malloy]   Top  

 

SEC to Hold National Compliance Outreach Seminar for IAs & ICs

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

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management (IM), and the Asset Management Unit (AMU) of the Division of Enforcement jointly sponsor the compliance outreach program.  The national seminar will be held on April 21 at the SEC’s Washington, DC, headquarters from 8:30 a.m. to 5:30 p.m. ET.  In-person attendance is limited to 500; a live webcast will be available at SEC.gov. The seminar agenda can be found
HERE.

Speakers will include SEC Chairman Jay Clayton, senior leadership from OCIE, IM, and AMU, and industry representatives.  Topics will include: program priorities in 2020, investment adviser standard of conduct and related disclosures, issues regarding conflicts of interest, certain regulatory hot topics, and topics specific to investment companies and investment advisers to private funds.

“This year marks the 15th anniversary for the compliance outreach program, and this event will be the tenth national seminar for investment advisers and investment companies,” said OCIE Director Pete Driscoll. “The program has proven to be a powerful tool in providing critical information to the compliance community, particularly areas we view as higher risk and of importance to our mission of protecting investors.  The open exchange of ideas and discussion of compliance challenges between our staff and market participants during these seminars is crucial to the program’s success, and we look forward to discussing ways we can further share information to promote improved compliance in the industry.”

“This event provides us with an opportunity to engage directly with the professionals responsible for overseeing the implementation of our investor protections.   We are particularly looking forward to continuing our outreach efforts with smaller asset managers and their compliance professionals as we seek to gain a better understanding of specific issues they face in complying with our regulations,” said Division of Investment Management Director Dalia Blass.

Investment adviser and investment company senior officers may register online to attend the event in-person at https://www.sec.gov/compliance-outreach-program-national-seminar-2020. If registrations exceed capacity, investment company and investment adviser CCOs will be given priority on a first-registered basis.  Registration instructions also will be sent to SEC-registered advisers using the email account on the adviser’s most recent Form ADV filing.  The event will also be made available via live and archived audio webcast, which does not require registration.  For more information, contact: ComplianceOutreach@sec.gov.  Top 

 

Partial Summary Judgment Against IA & Principal for False and Misleading Marketing of Investment Strategies

On February 13, 2020, a federal district court in Massachusetts granted partial summary judgment in favor of the Securities and Exchange Commission in its pending action against Navellier & Associates, Inc., a Nevada-based investment advisory firm, and its founder and chief investment officer, Louis Navellier, of Florida. The SEC's complaint alleges that the defendants breached their fiduciary duties and defrauded their advisory clients and prospective clients through the use of marketing materials that included false and misleading statements regarding the performance of the firm's Vireo AlphaSector investment strategies.

The court's order holds that defendants defrauded their clients, and that the SEC is entitled to summary judgment on its claims that defendants violated the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The court's order further finds that the defendants knew there were misleading statements in their marketing materials and that there had been inadequate due diligence, yet they failed to inform their clients. Instead, as the court found, the defendants continued to sell the Vireo AlphaSector investment strategies despite their knowledge that representations about the strategies were false and misleading. The court also rejected the defendants' affirmative defense of selective enforcement and denied defendants' motion for summary judgment on all counts. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view Release No. LR-24744 SEC v. Navellier & Associates, Inc., and Louis Navellier]  Top 

IA Charged with Inadequate Controls to Prevent Insider Trading

On February 4, 2020, the Commission announced settled charges against registered investment adviser Cannell Capital, LLC (CCL) of Alta, Wyoming for not having policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

According to the SEC's order, CCL specializes in investing in the securities of thinly-traded companies with little or no analyst coverage. To understand these securities, it frequently communicated with issuer insiders and others who had access to material nonpublic information. The order finds that from 2014 through October 2019, CCL failed to follow its written policies and procedures by not maintaining a reasonably designed list of securities that members, officers, and employees and their family household members were prohibited from trading after the firm came into possession of potential material nonpublic information.

The order also finds that CCL's written policies and procedures were not reasonably designed to prevent misuse of material nonpublic information because they did not address any business-specific risks and lacked any guidance regarding when trading in securities should be restricted.

The order finds that CCL violated Section 204A of the Investment Advisers Act of 1940 by failing to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. Without admitting or denying the findings in the SEC's order, CCL consented, to the entry of a cease-and-desist order, a censure, and a $150,000 civil penalty. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5441 In the Matter of Cannell Capital, LLC.]   Top 

Agencies Propose Changes to Modify “Covered Funds” Restrictions of Volcker Rule

Five federal financial regulatory agencies have invited public comment on a proposal to modify regulations implementing the Volcker rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds – known as “covered funds.”

Since the regulations implementing the Volcker rule were finalized in 2013, the rule has created compliance uncertainty and imposed limits on certain banking services and activities that the Volcker rule was not intended to restrict.  To address these concerns, the agencies simplified requirements for the proprietary trading restrictions in November 2019.  Today’s proposal would modify the restrictions for banking entities investing in, sponsoring, or having certain relationships with covered funds.

In particular, the joint agency proposal would improve and streamline the covered funds portion of the rule, address the treatment of certain foreign funds, and permit banking entities to offer financial services and engage in other permissible activities that do not raise concerns that the Volcker rule was intended to address.

The proposed changes were jointly developed by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

Comments will be accepted until April 1, 2020.   Click HERE to access the proposing release.

Media Contacts:

Federal Reserve - Eric Kollig     202-452-2955
CFTC - Office of Public Affairs 202-418-5080
FDIC - Julianne Fisher Breitbeil 202-898-6895
OCC - Bryan Hubbard             202-649-6870
SEC - Office of Public Affairs  202-551-4120
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SEC Charges Portfolio Manager and Advisory Firm with Misrepresenting Risk in Mutual Fund

The SEC announced charges against a New York-based investment adviser for misleading investors about the management of risk in a mutual fund. Catalyst Capital Advisors LLC (CCA) and its President and Chief Executive Officer, Jerry Szilagyi, agreed to pay a combined $10.5 million to settle the charges.  The SEC also filed a complaint in federal district court in Madison, Wisconsin, against Senior Portfolio Manager, Edward Walczak, for fraudulently misrepresenting how he would manage risk for the fund.

The SEC's settled order against CCA and Szilagyi finds that, although CCA told investors that it abided by a strict set of risk parameters for the Catalyst Hedged Futures Strategy Fund, it breached those parameters and failed to take the required corrective action during a majority of the trading days between December 2016 and February 2017. As alleged, the fund lost hundreds of millions of dollars – approximately 20% of its value – from December 2016 through February 2017 as markets moved against it.  The SEC's complaint against Walczak alleges that he told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more than 8%, when in fact no such safeguards limited losses and Walczak did not otherwise consistently manage the fund to an 8% loss threshold.

"Fund managers must be truthful and transparent when describing their risk management procedures," said C. Dabney O'Riordan, Co-Chief of the SEC Enforcement Division's Asset Management Unit.

Daniel Michael, Chief of the Division's Complex Financial Instruments Unit, added, "Here, CCA's misrepresentations, and Walczak's alleged departure from his stated approach to managing risk, deprived investors of accurate information about an important aspect of the fund's management."

The SEC's order finds that CCA violated the antifraud provisions of the federal securities laws, and that Szilagyi was a cause of CCA's violations and failed reasonably to supervise Walczak. Without admitting or denying the findings, CCA and Szilagyi agreed to be censured, to cease and desist from future violations, and to certain undertakings as described in the order. CCA agreed to pay disgorgement of $8,176,722 plus prejudgment interest of $731,759, and a civil penalty of $1,300,000. Szilagyi agreed to pay a civil penalty of $300,000. The payments will be placed in a fair fund for distribution to affected investors. The SEC's complaint against Walczak alleges that he violated the antifraud provisions of the federal securities laws and seeks a permanent injunction, disgorgement of ill-gotten gains, and a civil penalty. In parallel action, the Commodity Futures Trading Commission (CFTC) today announced settled charges against CCA and Szilagyi, and a district court action against Walczak. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5436 In the Matter of Catalyst Capital Advisors, LLC and Jerry Szilagyi.]  Top 

OCIE Publishes Observations on Cybersecurity and Resiliency Practices

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued examination observations related to cybersecurity and operational resiliency practices taken by market participants.

The observations highlight certain approaches taken by market participants in the areas of governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness. The observations highlight specific examples of cybersecurity and operational resiliency practices and controls that organizations have taken to potentially safeguard against threats and respond in the event of an incident.

“Data systems are critical to the functioning of our markets and cybersecurity and resiliency are at the core of OCIE’s inspection efforts,” said SEC Chairman Jay Clayton.  “I commend OCIE for compiling and sharing these observations with the industry and the public and encourage market participants to incorporate this information into their cybersecurity assessments.”

“Through risk-targeted examinations in all five examination program areas, OCIE has observed a number of practices used to manage and combat cyber risk and to build operational resiliency,’ said Peter Driscoll, Director of OCIE.  “We felt it was critical to share these observations in order to allow organizations the opportunity to reflect on their own cybersecurity practices.” 

 

OCIE conducts examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, transfer agents, and others. It uses a risk-based approach to examinations to fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.  [Please login to the IA Act UnwrappedTM Examination Tools Database/2020 Information to view OCIE's Cybersecurity and Resiliency Observations.]  Top 

 

OCIE Announces 2020 Examination Priorities

On January 7, 2020, OCIE announced its 2020 examination priorities. OCIE publishes its examination priorities annually to enhance the transparency of its examination program and to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.

“OCIE’s 2020 examination priorities identify key areas of risk, both existing and emerging, that we expect self-regulatory organizations (SROs), clearing firms, investment advisers and other market participants to identify and mitigate. I applaud OCIE’s thoughtful, strategic and efficient focus, which is critical to the fulfillment of the SEC’s mission and our service to Main Street investors,” said SEC Chairman Jay Clayton.

“As markets evolve, so do risks and potential harm to investors. OCIE continually works to adjust its examination focus areas to target these risks and publishes its annual priorities to communicate where we see the potential for increased risk and related harm. We hope that this transparency helps firms evaluate and improve their compliance programs, which ultimately helps protect investors,” said OCIE Director Pete Driscoll.

OCIE’s 2020 examination priorities are:

Retail Investors, Including Seniors and Those Saving for Retirement – OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.

Market Infrastructure – OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.

Information Security – OCIE will continue to prioritize cyber and other information security risks across the entire examination program.

Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors
– OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers (RIAs) will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds.  Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.

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

Financial Technology (Fintech) and Innovation, Including Digital Assets and Electronic Investment Advice – OCIE recognizes that advancements in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of new sources of data (often referred to as “alternative data”), warrant ongoing attention and review. OCIE also will continue to identify and examine SEC-registered firms engaged in the digital asset space, as well as RIAs that provide services to clients through automated investment tools and platforms, often referred to as “robo-advisers.”

FINRA and MSRB – OCIE will continue its oversight of the Financial Industry Regulatory Authority (FINRA) by focusing examinations on FINRA’s operations, regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also continue to examine the Municipal Securities Rulemaking Board (MSRB) to evaluate the effectiveness of its operations and internal policies, procedures, and controls.

The published priorities for FY 2020 are not exhaustive and will not be the only areas OCIE focuses on 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 a given entity’s history, operations, services, products offered, and other risk 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, services and other factors that may pose risk to investors or the financial markets. OCIE staff also takes into account input and advice from the Chairman and other Commissioners, staff from other SEC divisions and offices, and other federal financial regulators. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2020 Information to view the full text of OCIE's 2020 Examination Priorities publication.] Top 

 

Headline News

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Updates

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

IA-5512 In the Matter of Oxbow Advisors, LLC

IA-5511 In the Matter of Syed Arham Arbab

IA-5510 In the Matter of Ares Management, LLC

IA-5503 In the Matter of Wallace Byers

IA-5509 In the Matter of William Andrew Hightower

LR-24822 SEC v. Paul Horton Smith, Sr.; Northstar Communications, LLC; Planning Services, Inc.; and eGate, LLC

IA-5508 In the Matter of TSP Capital Management Group, LLC
Added to the IA Act UnwrappedTM Releases Database and Regulatory Database Rule 206(4)-2 Risks/Significant Cases Tab

IA-5507 In the Matter of Barton W. Stuck

IA-5506 Notice of Intention to Cancel Registration of McDaniel Investments, LLC

IA-5505 In the Matter of Edmunds Private Capital, LLC

IA-5504 Notice of Intention to Cancel Registration of Strategic Options, LLC

Keynote Address: Securities Enforcement Forum West 2020
Steven Peikin - Co-Director, Division of Enforcement (May 12, 2020)
Including: COVID-19 Enforcement Matters & Ongoing Non-COVID-19 Work
Added to the IA Act UnwrappedTM Examination Tools Database/2020 Information

LR-24817 SEC v. Ambassador Advisors, LLC, et al

IA-5500 In the Matter of Justin N. Deckert
IA-5502 In the Matter of Travis Laska
IA-5501 In the Matter of Stacy L. Beane

LR-24815 SEC v. TCA Fund Management Group Corp. and TCA Global Credit Fund GP, Ltd.

IA-5499 In the Matter of Morgan Stanley Smith Barney LLC
Added to the IA Act UnwrappedTM Releases Database and linked to the term "wrap fee program" in the Glossary & Definitions Database

IA-5498 In the Matter of Lawrence E. Hagedorn

IA-5497 In the Matter of Barry R. Bekkedam

IA-5496 In the Matter of D.B. Fitzpatrick & Co., Inc.
Added to the IA Act UnwrappedTM Releases Database and to the No-Action/Exemptive Release Tab under Regulatory Database Rule 206(4)-5, Pay to Play