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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!

2020 Renewal Program
 

The 2020 Renewal Program Calendar is now available. Preliminary Statements will be available November 11 in E-Bill. Renewal reports will continue to be available through IARD/CRD for reconciliation purposes. See the IARD Reports Quick Reference Guide for additional information.

Note: Effective with the 2020 Renewal program, the Annual IA Representative System Processing Fee will increase from $10 to $15. The Initial IA Representative System Processing Fee will also increase to $15 dollars on January 2, 2020. [Please
login to the IA Act UnwrappedTM Regulatory Database - Rule 204-1 Form ADV Amendments for more information regarding renewals.]  Top

 

Enforcement Publishes Annual Report for FY2019

The SEC's Division of Enforcement has issued its annual report for fiscal year 2019. The report details the division’s efforts and initiatives on behalf of investors, highlights several significant actions, and presents the activities of the division from both a qualitative and quantitative perspective.

“The results depicted in this report reflect the division’s focus on rooting out misconduct that can do significant harm to investors and our markets, and the focus the division places on identifying wrongdoing and taking prompt action to effectively help harmed investors,” said SEC Chairman Jay Clayton. “Across a broad array of cases, the Enforcement staff has continued to show determination, sophistication, and thoughtfulness in detecting and deterring bad conduct and crafting meaningful remedies. I thank the dedicated women and men of the division, in our home office and in our 11 regional offices, for their efforts in support of our mission and investors.”

As in prior years, the report describes the division’s efforts guided by five core principles: (1) focus on the Main Street investor, (2) focus on individual accountability, (3) keep pace with technological change, (4) impose remedies that most effectively further enforcement goals, and (5) constantly assess the allocation of resources.

“The report shows how the principles we have articulated inform our work to protect investors and ensure that the U.S. securities markets remain the safest and strongest in the world,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.

In fiscal year 2019, the SEC brought a diverse mix of 862 enforcement actions, including 526 standalone actions. These actions addressed a broad range of significant issues, including issuer disclosure/accounting violations; auditor misconduct; investment advisory issues; securities offerings; market manipulation; insider trading; and broker-dealer misconduct. Through these actions, the SEC obtained judgments and orders totaling more than $4.3 billion in disgorgement and penalties. Importantly, the SEC also returned roughly $1.2 billion to harmed investors as a result of enforcement actions.

“The actions and initiatives described in the report reflect our deliberate, principled approaches to investigations, litigation, and case resolutions,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “We are proud of the work Enforcement staff did in enabling the SEC to punish misconduct, deter future wrongdoing, and obtain relief for harmed investors.” [Please
login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to access the full report.]  Top 

 

SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers

The SEC has voted to propose amendments to modernize the rules under the Investment Advisers Act addressing investment adviser advertisements and payments to solicitors. The proposed amendments are intended to update these rules to reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.

“The advertising and solicitation rules provide important protections when advisers seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago,” said SEC Chairman Jay Clayton. “The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices.”

The proposed amendments to the advertising rule would replace the current rule’s broadly drawn limitations with principles-based provisions. The proposed approach would also permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.

The proposed amendments to the solicitation rule would expand the current rule to cover solicitation arrangements involving all forms of compensation, rather than only cash, subject to a new de minimis threshold. They also would update other aspects of the rule, such as who is disqualified from acting as a solicitor under the rule.

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

FACT SHEET
Investment Adviser Advertisements; Compensation for Solicitations
Nov. 4, 2019

Highlights


The Commission today voted to propose amendments to the rules that prohibit certain investment adviser advertisements and payments to solicitors, respectively, under the Investment Advisers Act of 1940 (the “Act”). Neither rule has been amended significantly since its adoption in 1961 and 1979, respectively. Since that time, the Commission and our staff have continued to learn about adviser marketing and solicitation practices, as those practices have evolved significantly with advancements in technology and the changes within the asset management industry and its investor base. The proposed amendments to Rule 206(4)-1 and Rule 206(4)-3 are designed to respond to these changes.

The Commission has also voted to propose amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule, which would reflect the changes proposed to the advertising and solicitation rules.

Proposed Amendments to Advertising Rule

The proposed amendments to Rule 206(4)-1 would replace the current rule’s broadly drawn limitations with more principles-based provisions, as described below.

Definition of Advertisement.  The proposal would update the definition of “advertisement” so that it is flexible enough to remain relevant and effective in the face of advances in technology and evolving industry practices.  

The definition would include any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser.

The Commission proposed exclusions from this definition for:  (1) live oral communications that are not broadcast, (2) responses to certain unsolicited requests for specified information, (3) advertisements, other sales material, or sales literature that is about a registered investment company or a business development company and is within the scope of other Commission rules; and (4) information required to be contained in a statutory or regulatory notice, filing, or other communication.

General Prohibitions.  The proposed rule would prohibit the following advertising practices:  

Testimonials and Endorsements.  The proposal would permit testimonials and endorsements, subject to specified disclosures, including whether the person giving the testimonial or endorsement is a client and whether compensation has been provided by or on behalf of the adviser.

Third-Party Ratings.  The proposed rule would permit third-party ratings, subject to specified disclosures and certain criteria pertaining to the preparation of the rating.

Performance Information Generally.  The proposal would prohibit including in any advertisement: 

Performance Information in a Retail Advertisement. The proposed rule would provide additional protections for an advertisement targeted to a retail audience:  (1)requiring the presentation of net performance alongside any presentation of gross performance, and (2)requiring generally the presentation of the performance results of any portfolio or certain composite aggregations across 1-, 5-, and 10-year periods.

Internal Pre-Use Review and Approval.  In addition, the proposed amendments would require advertisements to be reviewed and approved in writing by a designated employee before dissemination, except for advertisements that are:  (1) communications disseminated only to a single person or household or to a single investor in a pooled investment vehicle; or (2) live oral communications broadcast on radio, television, the internet, or any other similar medium. 

Proposed Amendments to Solicitation Rule

The proposed amendments to Rule 206(4)-3 would largely make refinements in scope, written agreement content, and disclosure requirements, as described below.

Scope.

All Forms of Compensation.  The proposed rule would apply regardless of whether an adviser pays cash or non-cash compensation to a solicitor.  Non-cash compensation would include directed brokerage, awards or other prizes, and free or discounted services.

Private Fund Solicitors.  The proposed rule would apply to the solicitation of current and prospective investors in private funds, rather than only to the solicitation of current and prospective clients of the adviser.

Exempt Arrangements.  The proposed rule would substantially retain the current rule’s partial exemptions for (1) solicitors that refer investors for impersonal investment advice, and (2) solicitors that are employees or otherwise affiliated with the adviser.  However, these arrangements would no longer be subject to the current rule’s written agreement requirement.  The proposal would also add two new full exemptions for: (1) de minimis compensation to solicitors, and (2) advisers that participate in certain nonprofit programs.

Disqualified Solicitors
.  The proposed rule contains an expanded list of disciplinary events for which persons would be disqualified from acting as a solicitor, with a limited exception.

Written Agreement.  Under the proposed rule, an adviser that compensates a solicitor for solicitation activities would be required to enter into written agreement with the solicitor, unless an exemption applies.  The proposed rule would require that the written agreement include: (1) a description of the solicitation activities and compensation, (2) a requirement that the solicitor perform its solicitation activities in accordance with certain provisions of the Advisers Act, and (3) a requirement that solicitor disclosure be delivered to investors.  The proposed rule would eliminate the current rule’s requirements that the solicitor agree to deliver the adviser’s Form ADV brochure and perform its solicitation activities consistent with the instructions of the adviser. 

Disclosure Requirements. The solicitor disclosure required under the proposed rule would continue to highlight for investors the solicitor’s financial interest in the client’s choice of an investment adviser.  Our proposal would modify the current solicitor disclosure to include additional information about a solicitor’s conflict of interest. Our proposal would eliminate the current rule’s requirement that the adviser obtain from each investor acknowledgments of receipt of the disclosures.

Oversight of Solicitors. The proposed rule would require that the adviser have a reasonable basis for believing that the solicitor has complied with the rule’s written agreement, including complying with the solicitor disclosure requirement. This requirement would be largely the same as the current rule.

Proposed Amendments to the Books and Records Rule and to Form ADV

The proposed amendments to Rule 204-2 relate to the proposed amendments to the advertising and solicitation rules.

Finally, today’s proposal would amend Form ADV to provide additional information regarding advisers’ advertising practices to help facilitate the Commission’s inspection and enforcement capabilities.

Review of Relevant Staff Guidance

Staff in the Division of Investment Management have issued a number of no-action letters and other guidance addressing the application of the current advertising and solicitation rules.  The Commission’s release accompanying the proposed amendments includes a list of the relevant letters and guidance.  The staff is reviewing these letters to determine whether any should be withdrawn in connection with any adoption of the proposed amendments.

What’s Next? - The proposed amendments will be published on the Commission’s website and in the Federal Register.  The public comment period will remain open for 60 days after publication in the Federal Register.

The Commission also approved for use two short-form tear sheets (“feedback flyers”) to gather information. Investors are encouraged to submit additional feedback about their experiences with adviser marketing on the investor feedback flyer. Smaller advisers are encouraged to submit additional feedback about how the proposed rules would affect them on the adviser feedback flyer The feedback flyers are available on the Commission’s website. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5407 Investment Adviser Advertisements; Compensation for Solicitations]  Top

Regulatory Agencies Join the Global Financial Innovation Network

The Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) have announced joining the Global Financial Innovation Network (GFIN).

U.S. financial regulators have taken proactive steps in recent years to enhance regulatory clarity and understanding for all stakeholders and promote early identification of emerging regulatory opportunities, challenges, and risks. Participation in the GFIN furthers these objectives and enhances the agencies’ abilities to encourage responsible innovation in the financial services industry in the United States and abroad. By promoting knowledge-sharing on innovation in financial services, U.S. members of GFIN will seek to advance financial and market integrity, consumer and investor protection, financial inclusion, competition, and financial stability. Participation in international organizations such as this helps U.S. financial regulators represent the interests and needs of the nation and its financial services stakeholders.

The agencies join 46 other financial authorities, central banks, and international organizations from around the globe that are members of the GFIN to foster greater cooperation among financial authorities on a variety of innovation topics, regulatory approaches, and lessons learned. Top 

FAQs Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation

The Division of Investment Management has published Frequently Asked Questions discussing certain compensation arrangements and related disclosure obligations arising from both the investment adviser’s fiduciary duty and Form ADV.

Compensation that an investment adviser, its affiliates or its associated persons receives in connection with the investments it recommends and related services it provides can result in the investment adviser having interests that conflict with those of its clients.

The Division notes that many investment advisers appear to have recognized these conflicts and have responded through practices designed to address them, including through elimination, disclosure or a combination of disclosure and mitigation. However, SEC examinations staff have observed and enforcement cases have illustrated that, in some instances, investment advisers have not appropriately addressed these conflicts of interest. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to view the full text of the Division’s publication and FAQs.]   Top 

 

SEC Announces the Formation of Asset Management Advisory Committee

The SEC has announced the formation of an Asset Management Advisory Committee formed to provide the Commission with diverse perspectives on asset management and related advice and recommendations. Topics the committee may address include trends and developments affecting investors and market participants, the effects of globalization, and changes in the role of technology and service providers. The committee is comprised of a group of outside experts, including individuals representing the views of retail and institutional investors, small and large funds, intermediaries, and other market participants.

“Asset management is a critical component of our markets and is especially important to Main Street investors,” said SEC Chairman Jay Clayton. “This committee will help the Commission ensure that our regulatory approach to asset management meets the needs of retail investors and market participants at a time when the industry is evolving rapidly. I would like to thank each of the committee members for agreeing to participate on this important committee.”

Chairman Clayton has appointed Edward Bernard, Senior Advisor to T. Rowe Price, as the initial committee Chairman. Other committee members include:


John Bajkowski, President and Chief Executive Officer, American Association of Individual Investors
Michelle McCarthy Beck, Chief Risk Officer, TIAA Financial Solutions
Jane Carten, Director, President, Director, and Portfolio Manager, Saturna Capital
Scot Draeger, President-Elect, General Counsel, and Director of Wealth Management, R.M. Davis Inc.
Mike Durbin, President, Fidelity Institutional
Gilbert Garcia, Managing Partner, Garcia Hamilton & Associates
Paul Greff, Chief Investment Officer, Ohio Public Employees Retirement System
Rich Hall, Deputy Chief Investment Officer, The University of Texas/Texas A&M Investment Management Co.
Neesha Hathi, Executive Vice President and Chief Digital Officer, Charles Schwab Corp.
Adeel Jivraj, Partner, Ernst & Young LLP
Ryan Ludt, Principal and Global Head of ETF Capital Markets and Broker/Index Relations, Vanguard
Susan McGee, Board Member, Goldman Sachs BDC Inc.
Jeffrey Ptak, Head of Global Manager Research, Morningstar Research Services
Erik Sirri, Professor of Finance, Babson College, and Independent Trustee, Natixis Funds, Loomis Sayles Funds, and Natixis ETFs
Aye Soe, Managing Director and Global Head of Product Management, S&P Dow Jones Indices
Ross Stevens, Founder and Chief Executive Officer, Stone Ridge Asset Management
Rama Subramaniam, Head of Systematic Asset Management, GTS
John Suydam, Chief Legal Officer, Apollo Global Management
Mark Tibergien, Managing Director and Chief Executive Officer of Advisor Solutions, BNY Mellon | Pershing
Russ Wermers, Dean’s Chair in Finance and Chairman of the Finance Department, University of Maryland’s Smith School of Business, and Managing Member, Wermers Consulting LLC 
Alex Glass, Indiana Securities Commissioner (non-voting)
Tom Selman, Executive Vice President, Regulatory Policy, and Legal Compliance Officer, FINRA (non-voting)


The committee will be formally established on Nov. 1, 2019 for an initial two-year term, which can be renewed by the Commission. The Commission will announce further details about the committee in the near future. Top 

SEC Charges IAs with Unlawful Proxy Voting of Client Securities

The SEC announced settled charges against two registered investment advisers, New York-based Amadeus Wealth Advisors LLC and California-based Three Bridge Wealth Advisors LLC, for the unlawful proxy voting of client securities.

The SEC's orders find that on two separate occasions in 2015, Amadeus and Three Bridge both voted client proxies notwithstanding representations in their client advisory agreements and regulatory filings with the SEC that they would not accept or exercise proxy voting authority over client securities. Both firms managed mainly retail accounts during that period. According to the SEC's orders, at the request of representatives of the same registered broker-dealer, Amadeus and Three Bridge each executed and returned to the broker-dealer letters voting proxies for numerous clients in securities of issuers affiliated with that broker-dealer. In each instance, the advisory firms cast their clients' votes in favor of the proposition at issue for the proxy being solicited on behalf of the issuer. Neither advisory firm made any disclosure to any of the clients or sought authority to vote those clients' proxies prior to executing and returning the letters to the broker-dealer. Amadeus voted client proxies without authority for a total of 20 client accounts, while Three Bridge did so for over 65 client accounts.

The SEC's orders find that Amadeus and Three Bridge violated Section 206(2) of the Investment Advisers Act of 1940 by engaging in this conduct. Without admitting or denying the SEC's findings, Amadeus and Three Bridge each consented to a cease-and-desist order and agreed to pay civil monetary penalties of $40,000 and $60,000, respectively. [Please
login to IA Act UnwrappedTM to view Release Nos. IA-5375 In the Matter of Three Bridge Wealth Advisors, LLC & IA-5374 In the Matter of Amadeus Wealth Advisors, LLC under Regulatory Database Rule 206(4)-6 Risks/Significant Cases Tab]  Top 


Cash Solicitation Rule Violations

On September 26, 2019, the SEC issued Release No. IA-5371 In the Matter of Cetera Investment Advisers LLC.  These proceedings arise out of Cetera’s violation of Section 206(4) of the Advisers Act and Rule 206(4)-3 thereunder (the “Solicitor Rule”), which prohibit a registered investment adviser from paying a solicitor a cash fee for solicitation activities unless, among other things, the solicitor furnishes the client with a separate written disclosure document identifying the solicitor and the investment adviser, describing the nature of the relationship between the solicitor and the investment adviser, and specifying the terms of the compensation arrangement.

Since at least January 2007, Cetera has paid cash fees to approximately 350 banks to, among other things, solicit investment advisory clients on behalf of Cetera. As part of this process, Cetera did not require the banks to give clients a separate written disclosure document or otherwise provide the information required under the Solicitor Rule.

As a result, Cetera’s clients were not informed of the extent of the banks’ financial interest in the clients’ choice of Cetera as an investment adviser and did not have all of the information that would enable them to evaluate the solicitor’s recommendation. By paying cash fees for solicitation activities and not ensuring that advisory clients received the required disclosures, Cetera violated the Solicitor Rule.
[Please login to IA Act UnwrappedTM to view Release No. IA-5371 In the Matter of Cetera Investment Advisers LLC under Regulatory Database Rule 206(4)-2 Risks/Significant Cases.]  Top   
 

SEC Orders IA to Return Nearly $1.5 Million to Clients Harmed by Share Class Selection Disclosure Violations

On September 30, 2019, the Commission announced that dually-registered investment adviser and broker-dealer Founders Financial Securities, LLC has agreed to settle charges that it invested clients in more expensive mutual fund share classes, which provided the firm with financial benefits, without disclosing this conflict to clients. The settlement includes a distribution to harmed investors.

The SEC's order finds that Maryland-based Founders purchased, recommended or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of available lower-cost share classes of the same funds for which the clients were eligible. Those 12b-1 fees were then passed on to Founders, or used to offset amounts due from Founders for the cost of client custody services. This practice created a conflict of interest that the firm did not adequately disclose to clients.

In addition, the order finds that Founders breached its duty to seek best execution for its clients by investing them in mutual fund share classes with 12b-1 fees rather than available lower-cost share classes of the same funds. According to the SEC's order, Founders also failed to adopt and implement written policies and procedures designed to prevent these violations.

The SEC's order finds that Founders violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC's findings, Founders will pay disgorgement of $1,246,133, prejudgment interest of $229,332, and a civil penalty of $140,000. Founders has agreed to distribute $1,475,465 to harmed investors. Founders also consented to a censure and the entry of a cease-and-desist order from committing or causing further violations of these provisions of the federal securities laws.  [Please
login to IA Act UnwrappedTM to view Release No. IA-5397 In the Matter of Founders Financial Securities, LLC]  Top 

SEC Charges Hedge Fund Adviser and Top Executives With Fraud

 

The SEC has charged SBB Research Group, LLC, a Chicago-area hedge fund adviser and its two top executives with a multi-year fraud that inflated fund values.  According to the SEC's complaint, SBB Chief Executive Officer Samuel Barnett founded the firm in 2010 while still in college, raised millions from friends and family members, and invested almost exclusively in structured notes. The complaint alleges that as SBB sought outside investors, Barnett and Chief Operating Officer and Chief Compliance Officer Matthew Aven promised prospective investors that they would use "fair value" when recording investments. Instead, they used their own valuation model to artificially inflate the value of the structured notes.

 

As a result, SBB misstated the funds' historical performance and overcharged investors approximately $1.4 million in fees. According to the complaint, once the valuation issues were uncovered by SEC exam staff, the defendants took steps to conceal their fraud from investors and SBB's auditor. The complaint alleges that when SBB hired an outside valuation firm in 2016, performance for its flagship fund was slashed, and SBB surreptitiously credited investors for the overcharged fees but did not disclose the underlying problem.

 

"Investors rely on investment advisers to accurately value assets and disclose fund performance," said Daniel Michael, Chief of the SEC Division of Enforcement’s Complex Financial Instruments Unit. "As alleged in the SEC's complaint, SBB, Barnett, and Aven intentionally manipulated valuation models to deceive current and prospective investors."

 

The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, charges the defendants with violations of the antifraud provisions of the federal securities laws and seeks permanent injunctions and civil penalties.  Top 

 

SEC Orders an Additional 16 Self-Reporting Advisory Firms to Pay Nearly $10 Million to Investors
Orders Firm That Did Not Self-Report to Pay $300,000 Penalty for Disclosure Failures

The SEC announced settled charges against 17 investment advisers for disclosure failures regarding their mutual fund share class selection practices. The firms include 16 advisers that self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative and one adviser that did not self-report and was ordered to pay a $300,000 civil penalty.

As part of the initiative announced on Feb. 12, 2018, the Division of Enforcement agreed that for eligible firms that self-reported by the deadline, the Division would recommend standardized settlement terms to the Commission, including that the Commission not impose a civil penalty. On March 11, 2019, the Commission instituted actions against 79 advisers that participated in the initiative, ordering the payment of over $125 million in disgorgement and prejudgment interest to investors. Today, the Commission issued orders against 16 additional advisers that self-reported as part of the initiative, bringing the total amount ordered to be returned to investors to over $135 million. The Commission did not order a civil penalty as to any of those self-reporting firms.

The Commission today also charged Mid Atlantic Financial Management Inc., which was eligible to self-report as part of the initiative but did not. The Commission found that Mid Atlantic, whose affiliate received 12b-1 fees, failed to fully disclose the conflicts arising from its selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available. Among other things, the SEC ordered Mid Atlantic to pay over $1 million in disgorgement and prejudgment interest. Unlike the firms that self-reported as part of the initiative, however, the Commission also ordered Mid Atlantic to pay a $300,000 civil monetary penalty.

“Today’s actions reaffirm the benefits to advisers and their clients for self-reporting as part of the Initiative,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit. “They also demonstrate the Commission’s commitment to holding advisers accountable for selecting more expensive investments that eat away at their clients’ investment returns without proper disclosure.”

The SEC’s orders find that the 16 self-reporting firms 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 nearly $10 million and that they comply with certain undertakings, including returning the money to investors. As to Mid Atlantic, the SEC’s order finds that it violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 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 $1 million and a $300,000 civil penalty, and that it comply with certain undertakings, including returning the money to investors.  Top 

Two BMO Advisory Firms Pay Over $37 Million to Harmed Clients for Failing to Disclose Conflicts of Interest

Two BMO advisers have agreed to pay over $37 million to settle charges regarding their failure to tell clients about certain aspects of how the advisers selected investments in their retail investment advisory program, known as the Managed Asset Allocation Program (MAAP), which included the selection of more expensive investments from which BMO advisers profited.

According to the SEC’s order, when selecting investments for clients, BMO Harris Financial Advisors Inc. (BMO Harris) and BMO Asset Management Corp. (BMO Asset Mgmt) preferred mutual funds managed by BMO Asset Mgmt (proprietary funds) and invested approximately 50% of MAAP client assets in proprietary funds. This practice resulted in payment of additional management fees to BMO Asset Mgmt, however, the SEC’s order found that neither BMO adviser disclosed this practice or the associated conflict of interest to clients. Moreover, the SEC’s order found that, when considering mutual funds for MAAP, BMO Asset Mgmt evaluated the lower-cost institutional share class for both proprietary and non-proprietary funds, but the higher-cost, non-institutional share class for proprietary mutual funds always was selected for MAAP.

In addition, the SEC found that BMO Harris failed to disclose its conflicts of interest arising from investing MAAP client assets in higher-cost share classes of certain mutual funds, including funds managed by BMO Asset Mgmt, when lower-cost share classes were available. By selecting the higher-cost share classes, BMO Harris received revenue sharing payments and avoided paying certain transaction costs, while clients received lower returns on these investments.

“These BMO advisers repeatedly put their own financial interests ahead of clients by giving preference to their own mutual funds or selecting higher-cost share classes,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “This is important information for an adviser to tell clients as it goes to the heart of the adviser-client relationship and will impact the clients’ returns.”

The SEC’s order finds that BMO Harris and BMO Asset Mgmt willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, BMO Harris and BMO Asset Mgmt agreed to cease and desist from committing or causing any future violations of these provisions, to pay disgorgement and prejudgment interest of $29.73 million, and to pay a civil penalty of $8.25 million, amounts which will be distributed to harmed investors, and to be censured. [Release No. IA-5377 In the Matter of BMO Harris Financial Advisors, Inc. and BMO Asset Management Corp.]  Top 

IA Ordered to Pay $2.5 Million to Clients Related to Mutual Fund Share Class Selection Violations

Registered investment adviser Sigma Planning Corp. has agreed to settle charges that it selected mutual fund investments for clients that provided the firm with financial benefits without disclosing its conflicts to clients. The settlement includes a distribution to harmed investors.

The SEC's order finds that Sigma had two undisclosed financial conflicts with respect to the selection of 12b-1 fee-paying mutual fund share classes. First, Sigma failed to fully disclose its conflicts relating to select mutual fund share classes for which Sigma was paid a portion of the 12b-1 fees when lower cost share classes for the same mutual fund were available to Sigma's clients. Second, Sigma failed to disclose to clients that by selecting these 12b-1 fee share classes, the firm also avoided paying its clearing broker an asset-based fee that it would have otherwise had to pay. In addition, Sigma failed to disclose the conflicts associated with its broker-dealer affiliates receiving revenue-sharing payments in connection with certain alternative investment products that Sigma purchased for its advisory clients. The order also finds that Sigma itself acted as an unregistered broker-dealer.

The SEC's order finds that Sigma violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, as well as the broker registration provisions of Section 15(a) of the Securities Exchange Act of 1934.

Without admitting or denying the SEC's findings, Sigma will pay disgorgement of $1,920,809, prejudgment interest of $225,909, and a civil penalty of $400,000. Sigma has agreed to distribute these funds to harmed investors. Sigma also consented to a censure and the entry of a cease-and-desist order from committing or causing further violations of these provisions of the federal securities laws.
[Please login to IA Act UnwrappedTM to view Release No. IA-5356 In the Matter of Sigma Planning Corp.] Top

SEC Charges Morgan Stanley for Recommending Unsuitable Municipal Bond Transactions

On September 17, 2019, the SEC announced administrative and cease-and-desist proceedings against Morgan Stanley Smith Barney LLC (Morgan Stanley), a registered broker dealer and investment adviser that is also registered with the Municipal Securities Rulemaking Board (MSRB), for allegedly recommending unsuitable municipal bond transactions to its customers.

According to the SEC's order, from June 2013 through December 2017, Morgan Stanley recommended 135 "swap" transactions to its retail customers in which the customers sold one municipal bond while purchasing another municipal bond that was nearly identical to the bond sold or that otherwise provided no apparent economic benefit to the customer. Further, the order finds Morgan Stanley did not document information about the customers that indicated that any of the swaps were suitable for the customers. Morgan Stanley received over $340,000 in commissions and fees upon execution of these swap transactions, which Morgan Stanley returned, with interest, to affected customers during the course of the SEC's investigation.

The order instituting the proceeding found that Morgan Stanley willfully violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits broker dealers from effecting transactions in municipal securities in contravention of MSRB Rules, and also found that Morgan Stanley violated MSRB Rules G-8, G-17, G-19, and G-27. Morgan Stanley consented, without admitting or denying the findings in the SEC's order, to the entry of a cease-and-desist order, to be censured, and to pay a $225,000 civil penalty. [Please
login to IA Act UnwrappedTM to view Release No. IA-5354 In the Matter of Morgan Stanley Smith Barney, LLC]  Top

Investment Adviser Principal and Agency Cross Trading Compliance Issues

On September 4, 2019 OCIE issued a Risk Alert to provide an overview of the most compliance issues identified by OCIE related to principal trading and agency cross transactions under Section 206(3) of the Advisers Act, which were identified in examinations of investment advisers. Examples of the four most common compliance issues are:

1. Section 206(3) requirements not followed.  OCIE staff observed advisers that did not appear to follow the specific requirements of Section 206(3).  For example, OCIE staff observed: 

• Advisers that, acting as principal for their own accounts, had purchased securities from, and sold securities to, individual clients without recognizing that such principal trades were subject to Section 206(3).  Thus, these advisers did not make the required written disclosures to the clients or obtain the required client consents. 
 
• Advisers that had recognized that they engaged in principal trades with a client, but did not meet all of the requirements of Section 206(3), such as:

 o Failing to obtain appropriate prior client consent for each principal trade.

 o Failing to provide sufficient disclosure regarding the potential conflicts of interest and terms of the transaction.

• Advisers that had obtained client consent to a principal trade after the completion of the transaction.

2. Principal trade issues related to pooled investment vehicles.  OCIE staff observed advisers that engaged in certain transactions involving pooled investment vehicle clients where such advisers did not appear to follow the requirements of Section 206(3).  For example, OCIE staff observed:


• Advisers that effected trades between advisory clients and an affiliated pooled investment vehicle, but failed to recognize that the advisers’ significant ownership interests in the pooled investment vehicle would cause the transaction to be subject to Section 206(3).
 
• Advisers that effected principal trades between themselves and pooled investment vehicle clients, but did not obtain effective consent from the pooled investment vehicle prior to completing the transactions.

3. Agency cross transactions.  OCIE staff observed advisers’ practices that gave rise to compliance issues in connection with agency cross transactions.  For example, OCIE staff observed:

• Advisers that disclosed to clients that they would not engage in agency cross transactions, but in fact engaged in numerous agency cross transactions in reliance on Rule 206(3)-2.  
 
• Advisers that effected numerous agency cross transactions and purported to rely on Rule 206(3)-2, but could not produce any documentation that they had complied with the written consent, confirmation, or disclosure requirements of the rule. 

4. Policies and procedures related to Section 206(3).  OCIE staff observed advisers that did not have policies and procedures relating to Section 206(3) even though the advisers engaged in principal trades and agency cross transactions.  OCIE staff also observed advisers that established—but failed to follow—policies and procedures regarding principal trades and agency cross transactions.

OCIE encourages advisers to review their written policies and procedures and the implementation of those policies and procedures to ensure that they are compliant with principal trading and agency cross transaction provisions of the Advisers Act and the rules therender. [Please
login to IA Act UnwrappedTM to view the full text of the Investment Adviser Principal and Agency Cross Trading Compliance Issues Risk Alert in the Examination Tools Database, or under Regulatory Database Rule 206(3)-2 Risks Tab.]  Top 


SEC Monitoring Impact of Hurricane Dorian on Capital Markets


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

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

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

RSM US LLP Charged With Violating Auditor Independence Rules

On August 27, 2019, the SEC charged public accounting firm RSM US LLP with violations of the agency’s auditor independence rules in connection with more than 100 audit reports involving at least 15 audit clients.

According to the SEC’s order, RSM US repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements, which were included or incorporated by reference in public filings with the Commission or provided to investors.  Instead, the SEC found that RSM US or its associated entities, including other member firms of the RSM International network, provided non-audit services to, and had an employment relationship with, affiliates of RSM US audit clients, which violated the SEC’s auditor independence rules.  The prohibited non-audit services included corporate secretarial services, payment facilitation, payroll outsourcing, loaned staff, financial information system design or implementation, bookkeeping, internal audit outsourcing, and investment adviser services.  The prohibited employment relationship concerned a partner at an RSMI member firm in Australia serving on a voluntary basis as a non-discretionary member of the board of an affiliate of a RSM US issuer audit client.  As detailed in the SEC’s order, certain of RSM US’s independence controls were also inadequate, resulting in the firm’s failure to identify and avoid these prohibited non-audit services and the prohibited employment relationship.  These violations occurred between 2014 and 2015, with certain violations remaining undetected until at least 2016.

“The SEC’s auditor independence rules specifically prohibit audit firms from providing certain non-audit services,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement.  “Audit firms must put in place procedures, training, and systems that provide a reasonable assurance of independence, and they must monitor for independence on an ongoing basis.”

The SEC’s order finds that RSM US violated the auditor independence provisions of the federal securities laws and caused the audit clients to violate their obligations to have their financial statements audited by independent public accountants.  The order also finds that RSM US engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice by virtue of its violations of the auditor independence requirements.

RSM US consented to the SEC’s order without admitting or denying the findings and was ordered to cease and desist from future violations.  RSM US agreed to pay a $950,000 penalty and be censured.  RSM US additionally agreed to engage an independent consultant to evaluate its current quality controls for complying with auditor independence requirements for non-audit services.  In determining to accept RSM US’s offer of settlement, the SEC considered remedial acts undertaken by RSM US. [Please
login to IA Act UnwrappedTM to view Release No. IA-5331 In the Matter of RSM US LLP (f/k/a McGladrey LLP)]  Top 

SEC Brings Settled Actions Charging Cherry Picking and Compliance Failures

Laurel Wealth Advisors, Inc., a registered investment adviser based in La Jolla, California, and its former investment adviser representative, Joseph C. Buchanan, agreed to settle charges relating to Buchanan's multi-year cherry-picking scheme. Cherry-picking is the fraudulent practice of preferentially allocating profitable trades or failing to allocate unprofitable trades to an adviser's personal accounts at the expense of the adviser's client accounts.

The SEC's orders found that from at least March 2013 to June 2015, Buchanan disproportionately allocated profitable trades to his personal accounts, and disproportionately allocated unprofitable trades to his clients' accounts. The orders found that Buchanan's allocation scheme resulted in $56,075 in net same-day profits to Buchanan and $60,821 in net same-day losses to his clients. According to the SEC's order against Buchanan, the likelihood of these profitable trades being randomly allocated to his personal accounts are less than one in one billion.

According to a separate order against Laurel Wealth, Laurel Wealth failed reasonably to supervise Buchanan, despite receiving written and telephonic warnings from its brokerage provider regarding Buchanan's late allocations, and despite the brokerage provider imposing a one-month suspension on Buchanan's omnibus account. The order also found that during the relevant period, Laurel Wealth failed to implement its own internal procedures that required Buchanan and others to pre-clear and obtain written pre-approval before transacting securities for their personal accounts. The order found that Laurel Wealth's Form ADV contained misleading statements that it employed a pre-clearance procedure to prevent conflicts of interest and to ensure that its employees' personal transactions were carried out in a way that did not endanger client interests.

The SEC's order against Buchanan found that Buchanan violated the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and 10b-5(c) thereunder. Without admitting or denying these findings, Buchanan consented to the entry of a cease-and-desist order, and an order to pay disgorgement of $56,227 and prejudgment interest of $15,284. Payment of the disgorgement and interest amounts, except for $40,000, was waived and no penalty was imposed based on Buchanan's financial condition. Buchanan also consented to a permanent associational bar and investment company bar.

The SEC's order against Laurel Wealth found that Laurel Wealth made misleading statements in violation of Section 206(2) of the Investment Advisers Act of 1940, failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act in violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and failed reasonably to supervise Buchanan within the meaning of Section 203(e)(6) of the Advisers Act. Without admitting or denying these findings, Laurel Wealth consented to the entry of a cease-and-desist order, which includes a censure, payment of a $100,000 penalty, and a voluntary undertaking to provide a copy of the order to each of Buchanan's former Laurel Wealth clients. [Please
login to IA Act UnwrappedTM to view Release No. IA-5330 In the Matter of Laurel Wealth Advisors, Inc.]  Top 


SEC Clarifies Investment Advisers' Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice


On August 21, 2019, the SEC issued guidance to assist investment advisers in fulfilling their proxy voting responsibilities. The guidance discusses, among other matters, the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they use the services of a proxy advisory firm.  In addition, the Commission issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules and provided related guidance about the application of the proxy antifraud rule to proxy voting advice.  Both of these actions explain the Commission’s view of various non-exclusive methods entities can use to comply with existing laws or regulations or how such laws and regulations apply.

“Voting is a key component of shareholder engagement and investing more generally,” said SEC Chairman Jay Clayton.  “I’d like to thank Commissioner Elad Roisman for his leadership on our efforts to consider improvements to the proxy process, and for helping to develop this important guidance that, among other things, will provide clarity to investment advisers regarding proxy voting responsibilities, and ultimately benefit their clients.”      

“Today’s releases have benefited from the substantial engagement from the public over the past decade, including last November’s Staff Roundtable on the Proxy Process and the extensive public comments the Commission has received,” said Commissioner Roisman.  “The releases reiterate the Commission’s views on the importance of investment advisers’ voting responsibly on behalf of their clients and the applicability of our proxy rules to proxy voting advice.  Advisers who vote proxies must do so in a manner consistent with their fiduciary obligations and, to the extent they rely on voting advice from proxy advisory firms they must take reasonable steps to ensure the use of that advice is consistent with their fiduciary duties. In addition, proxy advisory firms, to the extent they engage in solicitations, must comply with applicable law.”

FACT SHEET
SEC Open Meeting
August 21, 2019


The Commission has issued guidance to assist investment advisers in fulfilling their proxy voting responsibilities, particularly where they use the services of a proxy advisory firm, and provides guidance on proxy voting disclosures under Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940.  The Commission has also issued an interpretation of Exchange Act Rule 14a-1(l) that proxy voting advice generally constitutes a solicitation under the federal proxy rules and related guidance regarding the application of the antifraud provisions in Exchange Act Rule 14a-9 to proxy voting advice.

Proxy Voting Responsibilities of Investment Advisers


Investment advisers owe each of their clients a duty of care and loyalty with respect to services undertaken on the clients’ behalf, including proxy voting.  Rule 206(4)-6 under the Advisers Act requires an investment adviser who exercises voting authority with respect to client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that the investment adviser votes proxies in the best interest of its clients.

The guidance clarifies how an investment adviser’s fiduciary duty and Rule 206(4)-6 under the Advisers Act relate to an adviser’s proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm.  The guidance follows a question and answer format and provides examples to help facilitate compliance.

In particular, the guidance discusses, among other things:

Applicability of the Federal Proxy Rules to Proxy Voting Advice

The federal proxy rules apply to any solicitation for a proxy with respect to any security registered under Exchange Act Section 12.  Under Exchange Act Rule 14a-1(l), a solicitation includes, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,” and includes communications by a person seeking to influence the voting of proxies by shareholders, regardless of whether the person itself is seeking authorization to act as a proxy.

Under the Commission interpretation, proxy voting advice provided by proxy advisory firms generally constitutes a solicitation subject to the federal proxy rules.  The Commission’s interpretation does not affect the ability of proxy advisory firms to continue to rely on the exemptions from the federal proxy rules’ filing requirements.  These exemptions, found in Rule 14a-2(b), among other things, provide relief from the obligation to file a proxy statement, as long as the advisory firm complies with the exemption’s conditions.

Solicitations that are exempt from the federal proxy rules’ filing requirements remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.  The Commission guidance explains what a person providing proxy voting advice should consider when considering the information it may need to disclose in order to avoid a potential violation of Rule 14a-9 where the failure to disclose such information would render the advice materially false or misleading.

What’s Next?


The guidance and interpretation will be effective upon publication in the Federal Register.

We encourage investment advisers to review their policies and procedures in light of the guidance in advance of next year’s proxy season.  To the extent that firms identify operational or other questions in the course of that review, we encourage them to contact the staff of the Division of Investment Management. 
[Please login to IA Act UnwrappedTM to view Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325, “Fiduciary Release”; also see Release No. 34-86721 Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice ]. Top

SEC Releases Videos on Choosing and Working with a Financial Professional

On August 15, 2019, the SEC released a series of short educational videos designed to provide ordinary investors with basic information about choosing and working with a financial professional. The videos are now available at SEC.gov and Investor.gov/CRS.

“Through my discussions with Main Street investors across the country, it became apparent to me that there are several key concepts involving working with a financial professional that have not been well explained,” said Chairman Jay Clayton. “These videos are designed to describe, generally and in plain language, the differences between brokers-dealers and investment advisers, arming investors with the information they need to ask better questions and help them make sound decisions for themselves and their families with their hard-earned money. We encourage investors to ask direct questions of their financial professional, so that they can better understand the services they will receive and what they are paying.  I encourage investors to ask my favorite question:  If I work with you, how much of my money is going to fees and costs, and how much is going to work for me?”

The videos released are a part of the Commission’s larger Main Street investor engagement and education campaign, following recently adopted rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers and bring the legal requirements and mandated disclosure in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940.

Chairman Clayton previously announced that these videos, along with investor events, would be part of a new campaign designed to help retail investors understand key differences between broker-dealers and investment advisers, and to help them decide whether working with one of those types of financial professionals is right for them. [Please
login to IA Act UnwrappedTM Regulatory Database Rule 204-5 for more information under the Description Tab.]   Top 

SEC Charges IA with Failing to Disclose Financial Conflict of Interest

The Commission announced settled charges against MVP Manager LLC ("MVP"), a New York-based investment adviser to private funds, for failing to adequately disclose conflicts of interest.

According to the SEC's order, MVP advised and managed private fund clients that invested in the securities of venture-backed companies that had not conducted initial public offerings. The order finds that on three occasions between December 2014 and December 2015, MVP personnel arranged to receive a brokerage commission from the counterparty that was selling such securities to MVP's client funds. Each of these arrangements created a potential or actual conflict of interest because MVP and its personnel had an economic incentive to cause the private funds to purchase the securities at the prices MVP negotiated with the counterparties, which would trigger the payment of the commissions. None of the disclosure documents that MVP provided to fund investors, however, revealed the existence of the arrangements or MVP's attendant conflicts of interest.

The SEC order finds that MVP willfully violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the SEC's findings, MVP agreed to settle by consenting to a cease-and-desist order and censure, disgorgement and prejudgment interest of approximately $170,000, and a civil monetary penalty of $80,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-5319 In the Matter of MVP Manager LLC.]  Top 

SEC to Consider Proxy Voting Guidance
Open Meeting Agenda for Wednesday, August 21, 2019


Item 1: Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers

Office: Division of Investment Management

Staff: Dalia Blass, Paul Cellupica, Holly Hunter-Ceci, David Bartels, and Thankam Varghese

The Commission will consider whether to publish guidance regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940.

For further information, please contact Thankam Varghese or Holly Hunter-Ceci in the Division of Investment Management at (202) 551-6825.

Item 2: Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice

Office: Division of Corporation Finance

Staff: William Hinman, Michele Anderson, Ted Yu, Tamara Brightwell, and Adam Turk

The Commission will consider whether to publish an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934, to proxy voting advice.

For further information, please contact Adam Turk in the Division of Corporation Finance at (202) 551-3500. Top

SEC Charges Recidivist IA for Failing to Disclose Conflicts of Interest

On July 24, 2019, the Commission announced that recidivist N. Gary Price, a principal of formerly registered investment adviser Genesis Capital LLC, agreed to settle charges that he failed to disclose to clients significant conflicts of interest relating to recommendations to invest in securities issued by Aequitas Commercial Finance, LLC. The SEC previously charged Aequitas Management LLC and four of its affiliates, including ACF, with fraudulently raising more than $350 million from investors.

According to the SEC's order, from 2013 through 2015, Genesis made several investments for its mutual fund clients in promissory notes issued by ACF. Price, of Gig Harbor, Washington, approved these investments through Genesis's investment committee. At the time Genesis made these investments, Price benefited from significant financial ties to Aequitas entities. In particular, the SEC's order found that Price held ownership stakes in two Aequitas-affiliated businesses that together received $3.6 million in loans from ACF as well as a $10 million line of credit. At the same time, a broker-dealer part-owned by Price allegedly received fees from another Aequitas affiliated-business for referring other investors to ACF.   Despite several opportunities to disclose his ties to Aequitas, the SEC's order found that Price repeatedly failed to do so.

The SEC's order found that Price violated Section 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the SEC's findings, Price consented to a cease-and-desist order, and agreed to pay disgorgement and prejudgment interest of $67,033 and a civil penalty of $75,000. The order also bars Price from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to apply for reentry after one year. 
[Please login to IA Act UnwrappedTM to view Release No. IA-5307]   Top 

Adviser & Principals Charged with Failing to Disclose Conflicts of Interest

On July 24, 2019, the Commission announced that Foundations Asset Management, LLC (“FAM”), an Anchorage, Alaska-based investment adviser, along with its principals Michael Shamburger and Rob Wedel, agreed to settle charges that they failed to disclose conflicts of interest related to compensation FAM received.

The SEC’s order finds that from May 2013 to June 2016, FAM breached its fiduciary duty to its retail clients by failing to disclose conflicts of interest FAM had in recommending investments in the private real estate fund Alaska Financial Company III LLC (“AFC III”).

As detailed in the order, during this period, AFC III and its manager paid FAM approximately $254,000, in both up-front payments and annual trailing fees, in exchange for FAM recommending investments in the fund. FAM ultimately recommended its clients put approximately $12 million in AFC III. The order finds that FAM, Shamburger, and Wedel failed on multiple occasions to adequately disclose to clients the conflicts of interest presented by FAM’s AFC III compensation, including that FAM earned significantly more money by recommending AFC III investments as compared to other investments. The SEC’s order further finds that FAM failed to register as a broker and made materially false statements regarding its compensation in SEC filings.

The SEC’s order finds that FAM willfully violated the broker-dealer registration provision of Section 15(a) of the Securities Exchange Act of 1934 and the antifraud provisions of Sections 206(2) and 207 of the Investment Advisers Act of 1940, that Shamburger caused FAM’s violations of Section 15(a) of the Exchange Act and Sections 206(2) and 207 of the Advisers Act, and that Wedel caused FAM’s violations of Section 15(a) of the Exchange Act and Section 206(2) of the Advisers Act.

Without admitting or denying the findings, FAM agreed to pay disgorgement and prejudgment interest of $278,947 and an $85,000 penalty, while Shamburger and Wedel agreed to pay $50,000 and $25,000 penalties, respectively. The SEC’s order also includes cease-and-desist orders against FAM, Shamburger, and Wedel; a censure against FAM; and a voluntary undertaking by FAM to relinquish its right to receive further trailing fees related to AFC III investments. AFC III and its manager were the subject of a 2018 SEC enforcement action alleging fraud. [Please
login to IA Act UnwrappedTM to view Release No. IA-5306 In the Matter of Foundations Asset Management, LLC, Michael W. Shamburger, and Rob E. Wedel] Top

OCIE Publishes Observations from Supervision Initiative

As part of OCIE’s Supervision Initiative and focus on protecting retail investors, OCIE staff conducted a series of examinations to assess the oversight practices of SEC-registered investment advisers that previously employed, or currently employ, any individual with a history of disciplinary events.

On July 23, 2019, OCIE issued a Risk Alert to raise awareness of certain compliance issues that OCIE observed by sharing the staff’s observations from these examinations.

The staff conducted over 50 exams of advisers in 2017 as part of the Supervision Initiative.  The advisers examined collectively managed approximately $50 billion in assets for nearly 220,000 clients, the vast majority of whom were retail investors.  Advisers were identified for examination through a review of information about disciplinary events and other legal actions involving supervised persons of the adviser, including legal actions that are not required to be reported on Form ADV (e.g., private civil actions).  

The Supervision Initiative focused on advisers’ practices in certain areas, including: compliance programs and supervisory oversight practices, disclosures, and conflicts of interest.

The Initiative identified a variety of observed deficiencies across a range of topics.  Nearly all of the examined advisers received deficiency letters.  The vast majority of these deficiencies relate to compliance issues, but many relate to disclosure issues, including undisclosed conflicts of interest. The OCIE Risk Alert also discusses staff observations on ways to improve compliance and considerations for advisers that hire or employ supervised persons with disciplinary histories.

OCIE encourages advisers, when designing and implementing their compliance and supervision frameworks, to consider the risks presented by hiring and employing supervised persons with disciplinary histories and adopt policies and procedures to address those risks. [Please
login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to access the Risk Alert.]  Top

Portfolio Manager Charged with Mispricing Fund Investments

On July 18, 2019, the Commission announced settled administrative proceedings against Swapnil Rege, a North Brunswick, New Jersey portfolio manager and trader, for mispricing private fund investments, resulting in a large personal bonus.

According to the SEC's order, from June 2016 to April 2017, while employed by the fund's adviser, Rege manipulated the inputs he used to value interest rate swaps and swap options to create the false impression that his investments for the fund were profitable. Rege's conduct, the SEC's order finds, artificially inflated the fund's reported returns and caused the fund to pay too much in fees. Rege took steps to conceal his mispricing from the fund's adviser. Because of Rege's inflated valuations, he received a $600,000 bonus. The order states that the adviser ultimately fired Rege, closed the fund, and returned the excessive management fees to the fund.

"Rege overvalued fund assets to benefit only himself and then tried to cover it up," said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division's Asset Management Unit. "Today the SEC, along with our colleagues at the Commodity Futures Trading Commission, are holding him accountable for his misconduct, which harmed both the fund and its investors."

The SEC's order finds that, based on the above conduct, Rege aided and abetted and caused the adviser's violations of the antifraud provisions of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the findings in the SEC's order, Rege agreed to a cease-and-desist order, an associational bar and investment company prohibition with a right to apply for reentry after three years, disgorgement of ill-gotten gains of $600,000 plus prejudgment interest, and a civil penalty of $100,000.

The Commodity Futures Trading Commission (CFTC) also entered a consent order against Rege, involving substantially the same conduct as described in the SEC’s order. The CFTC's order finds that Rege violated the Commodity Exchange Act and imposes a trading ban for a period of at least three years, disgorgement that will be deemed satisfied by the payment of disgorgement under the SEC's order, and an additional penalty of $100,000. [Please
login to IA Act UnwrappedTM to view Release No. IA-5303 In the Matter of Swapnil Rege]   Top 

SEC Charges Fund Adviser and Principal for Fraudulently Overvaluing Assets

The Commission has charged Paul Alar of Atlanta, Georgia, and his investment adviser firm, West Mountain, LLC, for fraudulently over valuing assets in two funds they managed, allowing them to collect significantly inflated fees.

The SEC's complaint alleges that, beginning in late 2016, West Mountain and Alar directed two funds that they managed to invest in subsidiaries of two privately held companies. According to the complaint, at the time of the investments, both companies had minimal revenues, very limited operations, and minimal numbers of employees. Nevertheless, Alar and West Mountain recorded in the financial records for their two funds a collective unrealized gain of $18.6 million based on those investments, thereby allowing them to collect approximately $900,000 of additional fees.

The complaint further alleges that, in valuing the unrealized gains, West Mountain and Alar falsely represented to investors that independent valuations by a third party supported their valuations, even though they knew that the third-party expressly stated it "should not be regarded as an independent valuation." In addition, West Mountain's auditors had advised that the valuation methodology used to calculate the unrealized gains was unreasonable and inappropriate. The SEC also alleges that, in 2017, West Mountain and Alar misrepresented that one of the companies was actively negotiating an anticipated agreement that would result in massive gains for investors. According to the complaint, however, these "active negotiations" never existed.

The SEC's complaint, filed in federal district court in Atlanta, Georgia, charges defendants with violating the antifraud provisions of Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC seeks permanent injunctions and monetary relief. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view Litigation Release No. LR-24939 SEC v. Paul Alar and West Mountain, LLC] Top 

SEC and NASAA Explain Application of Securities Laws to Opportunity Zone Investments

The Securities and Exchange Commission and the North American Securities Administrators Association (NASAA) have issued a summary that explains the application of the federal and state securities laws to opportunity zone investments. The "opportunity zone" program was established by the Tax Cuts and Jobs Act in December 2017 to provide tax incentives for long-term investing in designated economically distressed communities.

The summary is intended to help participants in the opportunity zone program understand the compliance implications for qualified opportunity funds under federal and state securities laws.

"The opportunity zone program has the potential to encourage investment and economic development in many areas across the country that are in need of capital. The staff statement released today will help market participants understand securities laws implications when seeking to raise capital for opportunity zones," said SEC Chairman Jay Clayton. "In addition, today the SEC is issuing staff guidance regarding the ability of Main Street investors to participate in these offerings."

"This new program provides an opportunity to strengthen investments in low-income communities and rural areas that traditionally struggled to attract the capital necessary to spur economic growth and job creation," said Michael Pieciak, NASAA President and Vermont's Commissioner of Financial Regulation. "This joint summary is a good example of state and federal regulators working collaboratively to address new compliance issues raised by an innovative program and thereby promoting our dual mission of protecting investors and helping facilitate capital formation."

Specifically, this summary discusses:

  1. What are qualified opportunity zones (QOZs);
  2. When interests in qualified opportunity funds (QOFs) would be “securities” under federal and state securities laws;
  3. Registration of securities offerings with the SEC and/or state securities regulators and potential exemptions from securities registration for investments in a QOF (particularly through Rule 506 of federal Regulation D);
  4. Broker-dealer registration requirements for persons selling interests in QOFs; and
  5. Registration and exemptions from registration for QOFs that are “investment companies” and considerations for advisers to a QOF.

Please login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to view the Opportunity Zones summary, “Staff Statement on Opportunity Zones: Federal and State Securities Laws Considerations.”  Top 

Agencies Adopt Final Rule to Exclude Community Banks from the Volcker Rule

Five federal financial regulatory agencies announced on July 9th that they adopted a final rule to exclude community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds. Under the final rule, which is unchanged from the proposal, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets are excluded from the Volcker Rule.

The final rule also permits a hedge fund or private equity fund, under certain circumstances, to share the same name or a variation of the same name with an investment adviser as long as the adviser is not an insured depository institution, a company that controls an insured depository institution, or a bank holding company.

The final rule is being issued 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.  Top 

Lee Sworn in as SEC Commissioner

Allison Herren Lee was sworn into office on July 8 as an SEC Commissioner.  Ms. Lee was nominated to the SEC by President Donald J. Trump and unanimously confirmed by the U.S. Senate and fills a term that expires on June 5, 2022.

Commissioner Lee has over two decades of experience as a securities law practitioner. Most recently, she has written, lectured, and taught courses internationally on financial regulation and corporate law. She served for over a decade in various roles at the SEC, including as counsel to Commissioner Kara Stein, and as Senior Counsel in the Division of Enforcement’s Complex Financial Instruments Unit. In addition, Commissioner Lee has served as a Special Assistant U.S. Attorney, was a member of the American Bar Association’s former Committee on Public Company Disclosure, and participated on a USAID project in Armenia, assisting in the drafting of periodic reporting and disclosure provisions for a comprehensive law of the Republic of Armenia on Securities Market Regulation.

Prior to government service, Commissioner Lee was a partner at Sherman & Howard LLC, focusing on securities, antitrust, and commercial litigation. A member of the Colorado bar, she holds a bachelor’s degree in Business from the University of Colorado and a J.D. from the University of Denver College of Law, where she was salutatorian, a Chancellor’s Scholar, and served on the Law Review.  Top  

SEC Charges Investment Adviser with Fraud

On July 1, 2019, the Commission charged Fieldstone Financial Management Group LLC and its principal Kristofor R. Behn, both of Foxboro, Mass., with defrauding retail investment advisory clients by failing to disclose conflicts of interest related to their recommendations to invest in securities issued by affiliates of Oregon-based Aequitas Management LLC.  Behn also fraudulently misused approximately $500,000 of one investor’s funds to pay personal expenses.

According to the SEC’s order, from 2014 to early 2016, approximately 40 retail clients of Behn and Fieldstone invested more than $7 million in Aequitas securities, which were the subject of a previous Commission enforcement action.  The order finds that Behn and Fieldstone failed to disclose to their clients that Aequitas had provided Fieldstone with a $1.5 million loan and access to a $2 million line of credit, both of which had terms that created a significant financial incentive for Behn and Fieldstone to recommend Aequitas securities to their clients.  The order further finds that Behn and Fieldstone made material misstatements and omissions in reports filed with the Commission, including false representations that the repayment terms of the loan from Aequitas were not contingent on Fieldstone clients investing in Aequitas.

In addition, the order finds that Behn and Fieldstone fraudulently induced a client to invest $1 million in Fieldstone.  Within days of Fieldstone receiving the $1 million, Behn used approximately $500,000 to pay his personal taxes and make other payments to himself or for his personal benefit.

“Behn flagrantly disregarded his most basic duties as an investment adviser by concealing the significant financial incentives he and his firm would receive by recommending investments in Aequitas,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office.  “The Commission is committed to rooting out breaches of fiduciary duty to retail investors.”

Without admitting or denying the Commission’s findings, Fieldstone and Behn consented to the issuance of the order, which finds that they violated the antifraud provisions of the federal securities laws, censures Fieldstone, orders them to cease and desist from future violations, and orders them to pay, on a joint-and-several basis, disgorgement and prejudgment interest of $1,047,971 and a penalty of $275,000, all of which will be distributed to harmed investors.  Behn will also be permanently barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.

The SEC’s investigation was conducted by Tracy S. Combs and Thomas J. Eme of the San Francisco office and supervised by Steven D. Buchholz.  An examination of Fieldstone contributed to the investigation and was conducted by Mark S. Audet, Michael Garrity, Michael McGrath, and Mayeti Gametchu of the SEC’s Boston Regional Office.  [Please
login to IA Act UnwrappedTM to view Release No. IA-5263 In the Matter of Fieldstone Financial Management Group, LLC and Kristofor R. Behn]   Top 

2019 Compliance Outreach Program for IAs & ICs
 
The Chicago Regional Seminar is being streamed live on the SEC's website:
https://www.sec.gov/news/upcoming-events/cco-ia-ic-regional-seminar-chicago

June 25, 2019 | 9:30 AM - 4:30 PM ET

Perspectives from the Directors of OCIE and the Divisions of Enforcement and Investment Management; initiatives and registrant selection; initiatives; common deficiencies; protecting retail investors; afternoon breakout panels on RICs, private funds, recent decisions, and preparing for SEC examinations.

Agenda
 Registration (8:00 am – 8:30 am) 
 
Welcome and Opening Remarks (8:30 am – 8:35 am)  Joel R. Levin, Regional Director, Chicago Regional Office (CHRO)
 
Panel 1:  Director’s Perspectives (8:35 am – 9:35 am) Dalia Blass, Director, Division of Investment Management  Steven Peikin, Co-Director, Division of Enforcement Kristin Snyder, Deputy Director, Office of Compliance, Inspections and Examinations (OCIE) Joel R. Levin, Regional Director, CHRO (Moderator)
 
Panel 2:  IA/IC 2019 Program Overview, Priorities, Initiatives, Common Deficiencies, and Interactions with Enforcement (9:35 am – 10:30 am)   Steven J. Levine, Associate Regional Director, CHRO IA/IC Examination Program Paul Montoya, Assistant Director, Asset Management Unit (AMU), Enforcement, CHRO Alicia Tate, Risk Management Specialist, CHRO IA/IC Examination Program Tanya Solov, Director, Illinois Securities Department (Moderator)
 
Refreshment Break (10:30 am – 10:45 am) 
 
Panel 3: Protecting Retail Investors (10:45 am – 11:45 am)  Charu Chandrasekhar, Assistant Regional Director, Retail Strategy Task Force, Enforcement Louis A. Gracia, Deputy Associate Regional Director, CHRO IA/IC Examination Program Jennifer Porter, Branch Chief, Investment Adviser Regulation Office, Division of Investment Management Tina Diamantopoulos, Counsel to the Regional Director, CHRO (Moderator) 
 
A Conversation with Commissioner Elad L. Roisman (11:45 am – 12:30 pm) Hon. Elad L. Roisman, Commissioner, SEC   Joel R. Levin, Regional Director, CHRO
 
Lunch (12:30 pm – 1:30 pm)
 
Breakout Session 1 (1:30 pm – 2:30 pm) (1a) RIC Initiatives, Priorities, and Hot Topics (live and webcast) Stacey Gohl, Exam Manager, CHRO IA/IC Examination Program Daryl Hartman, Exam Manager, CHRO IA/IC Examination Program José L. Santillan, Senior Specialized Examiner, CHRO IA/IC Examination Program Susan Weis, Senior Regulatory Counsel, CHRO IA/IC Examination Program
 
(1b) Private Funds – Current Topics in Compliance (live only) Michael Collins, Staff Accountant, Private Fund Unit, OCIE  Jennifer Duggins, Co-Head, Private Fund Unit, OCIE Matthew Harris, Exam Manager, Private Fund Unit, OCIE
 
(1c) Recent Decisions (live only) Anne Graber Blazek, Senior Attorney, AMU, Enforcement, CHRO Kent McAllister, Senior Regulatory Counsel, CHRO IA/IC Examination Program Paul M.G. Helms, Partner, McDermott Will & Emery 
 
Break (2:30 pm – 2:40 pm) 
 
Breakout Session 2 (2:40 pm – 3:30 pm)
 
(2a) Newer Registrants – Preparing for a SEC Examination (live only)  Maureen Dempsey, Assistant Regional Director, CHRO IA/IC Examination Program Anne Salvador, Exam Manager, CHRO IA/IC Examination Program Brent VanHootegem, Examiner, CHRO IA/IC Examination Program
 
(2b) Q&A Session (mix of pre-submitted and live questions) (live and webcast)  SEC Staff (various)  Top     

Senate Confirms New SEC Commissioner

On Thursday, June 20th, the Senate confirmed by voice vote Allison Herren Lee, of Colorado, to be a Member of the Securities and Exchange Commission for a term expiring June 5, 2022.

Lee, a Democrat, will replace Commissioner Kara Marlene Stein, whose term expired in January. The SEC currently has a full slate of commissioners, however Commissioner Robert Jackson (also a Democrat) has noted his intent to return to New York University's Law School in the fall.   Top

Two SEC Events in Boston Scheduled for July 8th

SEC Chairman Jay Clayton announced two events for Main Street investors to be held in Boston on Monday, July 8. 

First, Chairman Clayton will host a roundtable with Main Street investors as part of the SEC’s ongoing investor education efforts. The roundtable will focus on issues relevant to Main Street investors, such as understanding key differences between broker-dealers and investment advisers, and choosing whether to work with one of these types of financial professionals. Senior SEC staff are expected to join the Chairman at this event.

Later that evening, Chairman Clayton will discuss the package of rules and interpretations adopted by the Commission on June 5, which were designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.

“The Commission has an important role to play when it comes to investor education, particularly when it comes to the critical decision of whom investors trust to assist them in securing their financial future,” said Chairman Clayton. “These events are intended to help Main Street investors better understand the key choices they have to make when deciding whether to work with a financial professional. I look forward to continuing the conversation I began with many Main Street investors at our roundtables last year.”

Details about the upcoming events can be found below. The events are free and open to the public and the media. Participants in the investor roundtable should be retail investors who work with, or are considering working with, a financial professional and have no affiliation with the financial services industry. Please note that the number of participants for both events may be limited. Please note which event(s) you are registering for in your RSVP.

Main Street Investor Roundtable
   Location: U.S. Securities and Exchange Commission, Boston Regional Office – 33 Arch Street, 24th Floor, Boston, MA 02110
   Date: July 8, 2019
   Time: 2 p.m.-3 p.m., Doors open at 1:30 p.m.
   RSVP: boston@sec.gov

Chairman Clayton’s Discussion of the Standards of Conduct for Financial Professionals
   Location: Babson College’s Boston Campus – 100 High Street, 9th Floor, Boston, MA 02210
   Date: July 8, 2019
   Time: 5 p.m.-6 p.m., Doors open at 4:30 p.m. Guests must check-in at the registration table in the lobby before proceeding to the 9th floor.
   RSVP: boston@sec.gov

Background: On June 5, 2019, the Securities and Exchange Commission adopted a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940. Chairman Clayton previously announced that events such as these would be part of a new campaign designed to help retail investors understand key differences between broker-dealers and investment advisers, and to help them decide whether working with one of those types of financial professionals is right for them. This campaign will also feature a series of short educational videos and updates to the SEC’s investor education website, Investor.gov. Top

SEC Adopts Amendments to Improve the Application of the Auditor Independence Rules to Loan Provision

The Commission has adopted amendments to the auditor independence rules relating to the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client.

The Commission has become aware of circumstances where the existing rules capture relationships that otherwise do not bear on the impartiality or objectivity of the auditor.  The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of the Loan Provision for the benefit of investors while reducing compliance burdens.

“This rulemaking reflects the staff’s extensive experience and judgment, and I thank them for their continued commitment to retrospective review,” said SEC Chairman Jay Clayton.  “The amendments we are adopting today will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats.”

These amendments will become effective 90 days after they are published in the Federal Register.

FACT SHEET

Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships
SEC Seriatim Approval

The Commission adopted amendments to the auditor independence rules relating to the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client.  The amendments are intended to more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats.

Highlights -
Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Provision”) generally provides that an auditor is not independent if that auditor is in a lending relationship with its audit client.  In recent years, the Commission has become aware that, in certain circumstances, the existing Loan Provision may not have been functioning as it was intended.

The amendments will focus the analysis on beneficial ownership rather than on both record and beneficial ownership; replace the existing ten percent bright-line shareholder ownership test with a significant influence test; add a known through reasonable inquiry standard with respect to identifying beneficial owners of the audit client’s equity securities; and exclude from the definition of audit client, for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

These amendments will become effective 90 days after they are published in the Federal Register. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5255 Auditor Independence with Respect to Certain Loans or Debtor-Creditor Relationships]  Top 

Glazer Named Senior Advisor to the Director of Investment Management

 

Adam B. Glazer has been named Senior Advisor to the Director of the Division of Investment Management. Mr. Glazer started his new position on June 12. He will advise the Director of Investment Management on issues related to mutual funds and investment advisers.

 

Mr. Glazer has been counsel to SEC Commissioner Hester M. Peirce since 2018. Prior to that, he served as counsel to SEC Commissioner Michael S. Piwowar from September 2013 until January 2018. He is a 19-year SEC veteran who joined the agency in 2000 as an attorney in the Division of Investment Management, where he focused on mutual fund rulemaking. Top  

 

KPMG Paying $50 Million Penalty for Illicit Use of PCAOB Data and Cheating on Training Exams

The SEC has charged KPMG LLP with altering past audit work after receiving stolen information about inspections of the firm that would be conducted by the Public Company Accounting Oversight Board (PCAOB).  The SEC’s order also finds that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

KPMG agreed to settle the charges by paying a $50 million penalty and complying with a detailed set of undertakings, including retaining an independent consultant to review and assess the firm’s ethics and integrity controls and its compliance with various undertakings.

“High-quality financial statements prepared and reviewed in accordance with applicable accounting principles and professional standards are the bedrock of our capital markets.  KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton.  “The resolution the Enforcement Division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.”
“The breadth and seriousness of the misconduct at issue here is, frankly, astonishing,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

“This settlement reflects the need to severely punish this sort of wrongdoing while putting in place measures designed to prevent its recurrence.”
“This conduct was particularly troubling because of the unique position of trust that audit professionals hold,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Investors and other market professionals rely on these gatekeepers to fulfill a critical role in our capital markets.”

Five former KPMG officials were charged last year in a case alleging they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG.  According to the SEC’s order issued today against KPMG, these senior personnel sought and obtained confidential PCAOB lists of inspection targets because the firm had experienced a high rate of audit deficiency findings in prior inspections and improvement had become a priority. Armed with the PCAOB data, the now-former KPMG personnel oversaw a program to review and revise certain audit work papers after the audit reports had been issued to reduce the likelihood of deficiencies being found during inspections.

The SEC’s order also finds that KPMG audit professionals who had passed training exams sent their answers to colleagues to help them also attain passing scores.  The exams related to mandatory continuing professional education, ethics and integrity, and training mandated by a prior SEC order finding audit failures.  They sent images of their answers by email or printed answers and gave them to colleagues.  This included lead audit engagement partners who not only sent exam answers to other partners, but also solicited answers from and sent answers to their subordinates.

Furthermore, the SEC’s order finds that certain KPMG audit professionals manipulated an internal server hosting training exams to lower the score required for passing.  By changing a number embedded in a hyperlink, they manually selected the minimum passing scores required for exams.  At times, audit professionals achieved passing scores while answering less than 25 percent of the questions correctly.

“The sanctions will protect our markets by promoting an ethical culture at KPMG,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division.  “To that end, KPMG will take additional remedial steps to address the misconduct and further strengthen its quality controls, all of which will be reviewed and assessed by an independent consultant.”

In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order.  The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation.

KPMG has admitted the facts in the SEC’s order. It has also acknowledged that its conduct violated a PCAOB rule requiring the firm to maintain integrity in the performance of a professional service and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.

The SEC’s investigation, which is continuing, has been conducted by Ian Rupell and Paul Gunson and supervised by Rami Sibay. [In the Matter of KPMG, LLC
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SEC Updates List of Firms Using Inaccurate Information to Solicit Investors

The SEC has updated its list of unregistered entities that use misleading information to solicit primarily non-U.S. investors, adding 11 soliciting entities, four impersonators of genuine firms, and nine bogus regulators.

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

“By making this information readily available through the PAUSE list, investors are better able to evaluate solicitations to buy and sell securities and avoid being a victim of fraud,” said Jennifer Diamantis, Chief of the SEC’s Office of Market Intelligence.

In addition to alerting investors to firms falsely claiming to be registered, the PAUSE list flags those impersonating registered securities firms and bogus “regulators” who falsely claim to be government agencies or affiliates.  Inclusion on the PAUSE list does not mean the SEC has found violations of U.S. federal securities laws or made a judgment about the merits of any securities being offered.

The PAUSE list is periodically updated by the SEC’s Office of Market Intelligence in coordination with the Office of Investor Education and Advocacy and the Office of International Affairs. Top 

SEC Adopts Standards of Conduct Rules & Interpretations for BDs & IAs

On June 5, 2019, the Commission voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940.

Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.

“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” said SEC Chairman Jay Clayton. “Our staff, working collaboratively across all of our Divisions and many of our Offices, has leveraged its decades of experience and expertise in considering these issues. I believe that the exceptional work of the SEC staff, including their careful evaluation of the feedback we received, will benefit retail investors and our markets for years to come. This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

Under Regulation Best Interest, broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.

The Form CRS Relationship Summary will require registered investment advisers and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional. While facilitating layered disclosure, the format of the relationship summary allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. Form CRS will also include a link to a dedicated page on the Commission’s investor education website, Investor.gov, which offers educational information about broker-dealers and investment advisers, and other materials.

The Commission also issued an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients under the Advisers Act. The interpretation reflects how the Commission and its staff have applied and enforced the law in this area, and inspected for compliance, for decades. By highlighting principles relevant to the fiduciary duty, investment advisers and their clients will have greater clarity about advisers’ legal obligations.

Finally, the Commission issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act. This interpretation confirms and clarifies the Commission’s position, and illustrates the application in practice in connection with exercising investment discretion over customer accounts and account monitoring.

Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance. Our interpretations under the Advisers Act will become effective upon publication in the Federal Register.

The Commission recognizes that these new rules will require various market participants to make changes to their operations, including to mandatory disclosures, marketing materials and compliance systems. In order to assist firms with planning for compliance with these new rules, the Commission is establishing an inter-Divisional Standards of Conduct Implementation Committee. We encourage firms to actively engage with this committee as questions arise in planning for implementation. You may send your questions by email to: IABDQuestions@sec.gov.
 
FACT SHEET

SEC Open Meeting
June 5, 2019


The Commission adopted a package of new rules and amendments and interpretations to enhance the quality of retail investors’ relationships with broker-dealers and investment advisers. The rulemaking package is designed to enhance investor protections while preserving retail investor access and choice in: (1) the type of professional with whom they work, (2) the services they receive, and (3) how they pay for these services.

The new rules will enhance the standard of conduct that broker-dealers owe to their customers and align the standard of conduct with retail customers’ reasonable expectations. The rules will also provide additional transparency and clarity for retail investors through enhanced disclosures designed to help them understand who they are dealing with, and why that matters. The interpretations reaffirm, and in some cases clarify, the standard of conduct that investment advisers owe to their clients and clarify the scope of the services a broker-dealer can provide consistent with the statutory definition of investment adviser.

With the adoption of this package, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.

HIGHLIGHTS


Regulation Best Interest

Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers that substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. It provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation.

When making a recommendation of a securities transaction or an investment strategy involving securities, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests. Regulation Best Interest, in an enhancement from the proposal, applies to account recommendations, including recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution. It also applies to implicit “recommendations to hold” that result from agreed-upon account monitoring.

Regulation Best Interest includes the following components:

• Disclosure Obligation: Broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.

• Care Obligation: A broker-dealer must exercise reasonable diligence, care and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation. The broker-dealer must then consider these factors in light of the retail customer’s investment profile and make a recommendation is in the retail customer’s best interest. The final regulation, which is an enhancement from the proposal, explicitly requires the broker-dealer to consider the  costs of the recommendation.

• Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. This obligation, which is an enhancement from the proposal, specifically requires policies and procedures to:

? Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest or the interests of the firm ahead of the retail customer’s interest;
? Prevent material limitations on offerings, such as a limited product menu or offering only proprietary products, from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer’s interest; and
? Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.

• Compliance Obligation: In an enhancement from the proposal, broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

Form CRS Relationship Summary

Investment advisers and broker-dealers will be required to deliver a relationship summary to retail investors at the beginning of their relationship. Firms will summarize information about services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history. The relationship summary will have a standardized question-and-answer format to promote comparison by retail investors in a way that is distinct from existing disclosures. The relationship summary will permit the use of layered disclosure so that investors can more easily access additional information from the firm about these topics. It also will highlight the Commission’s investor education website, Investor.gov, which offers the investing public educational information, including a series of educational videos designed to provide ordinary investors with some basic information about broker-dealers and investment advisers.

Investment Adviser Interpretation

An investment adviser owes a fiduciary duty to its clients under the Advisers Act—a duty that is established by and enforceable through the Advisers Act. This duty is principles-based and applies to the entire relationship between an investment adviser and its client. The final interpretation reaffirms, and in some cases clarifies, certain aspects of the federal fiduciary duty that an investment adviser owes to its clients.

Solely Incidental Interpretation


The broker-dealer exclusion under the Advisers Act excludes from the definition of investment adviser—and thus from the application of the Advisers Act—a broker or dealer whose performance of advisory services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for those services. The interpretation confirms and clarifies the Commission’s interpretation of the “solely incidental” prong of the broker-dealer exclusion of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within the “solely incidental” prong of this exclusion if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.

What’s Next?

The rules, forms, and interpretations will be published on the Commission’s website and in the Federal Register. The rules and forms will be effective 60 days from publication in the Federal Register and the interpretations will be effective upon publication in the Federal Register.

By June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.

In order to assist firms with planning for compliance with these new rules, the Commission is establishing an inter-Divisional Standards of Conduct Implementation Committee, comprised of representatives from our Division of Investment Management, Division of Trading and Markets, Division of Economic and Risk Analysis, Office of Compliance Inspections and Examinations, and Office of the General Counsel. We encourage firms to actively engage with this committee as questions arise in planning for implementation. You may send your questions by email to IABDQuestions@sec.gov.  Top

Hedge Fund Adviser to Pay $5 Million for Compliance Failures Related to Valuation of Fund Assets

On June 4, 2019, the Commission announced that a private fund manager in the mortgage-backed securities space has agreed to pay a $5 million penalty to settle charges stemming from compliance deficiencies that contributed to the firm’s failure to ensure that certain securities in its flagship fund were valued properly. The fund manager’s chief investment officer (CIO) agreed to pay a $250,000 penalty.

Item #1 in the SEC's Order states:

"Valuation of client assets is a critically important area for investment advisers. Failure to properly value assets can impact key areas of fund operations and also potentially lead to over or under payment of withdrawal proceeds, incorrect calculation of fees and inaccurate performance reporting, among other things. Under the Compliance Programs Rule 206(4)-7, registered investment advisers are required to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the federal securities laws stemming from inaccurate valuations."

An SEC investigation found that Colorado-based investment adviser Deer Park Road Management Company LP, in connection with its flagship STS Partners’ fund which has been ranked as one of the most consistent performing hedge funds in the country, failed to have policies and procedures to address the risk that its traders were undervaluing securities and selling for a profit when needed.  The firm also failed to guard against its traders’ providing inaccurate information to a pricing vendor and then using the prices it got back to value bonds.  CIO Scott Burg oversaw the valuation of certain assets in the flagship fund and approved valuations that the traders flagged as “undervalued” with notations to “mark up gradually.”  Also overseeing valuation was a committee comprised of the principal’s relatives and others without relevant expertise.

“Valuation of client assets is a critically important area for investment advisers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Deer Park’s pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow.”

Without admitting or denying the findings in the SEC’s order, Deer Park consented to a censure and Deer Park and Burg agreed to cease and desist from committing or causing any violations and future violations of a provision of the Investment Advisers Act requiring reasonably designed policies and procedures. [Please
login to the IA Act UnwrappedTM Releases Database to view Release No. IA-5245 In the Matter of Deer Park Road Management Company, LP and Scott E. Burg]   Top 

Marshall Gandy Named Co-Head of SEC’s IA/IC Exam Program

Marshall Gandy has been named Co-National Associate Director of the Investment Adviser/Investment Company examination program in the Office of Compliance Inspections and Examinations (OCIE).

He joins Co-National Associate Director Kristin Snyder, who has led the program since Aug. 10, 2016, and was named OCIE’s Deputy Director on July 25, 2018.  Together, Ms. Snyder and Mr. Gandy will oversee more than 630 lawyers, accountants, and examiners responsible for inspections of SEC-registered investment advisers and investment companies. 

Mr. Gandy has been the Associate Regional Director for Examinations in the SEC’s Fort Worth office since March 2012 and will continue in that role while also assuming this shared leadership position in the national investment adviser/investment company program.  He joined the SEC in 1999 and spent eight years as a trial counsel and enforcement attorney in the Fort Worth office’s enforcement program before taking the role of Senior Regional Counsel at FINRA’s Dallas District Office. Mr. Gandy also held the roles of Presiding Judge and Assistant District Attorney in Dallas County before joining the SEC.

“Marshall is an exceptional and collaborative leader of our Fort Worth exam team and will bring additional strong leadership to the national IA/IC program,” said OCIE Director Peter B. Driscoll.  “His efforts to improve our exam process, increase investor outreach and pursue emerging risk areas have strengthened the entire exam program.”

Mr. Gandy said, “I am extraordinarily honored for the opportunity to serve in this new role in OCIE.  For seven years, I have been extremely privileged to work with Fort Worth’s fantastic exam team, and now that privilege will extend to working with the equally talented and dedicated IA/IC teams across the entire exam program.”

Mr. Gandy received his law degree from Southern Methodist University and his bachelor’s degree from Sam Houston State University.

OCIE conducts the SEC’s National Examination Program through examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies and transfer agents.  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. Top 

SEC to Vote on Regulation Best Interest on June 5th

Open Meeting Agenda
Wednesday, June 5, 2019


Item 1: Regulation Best Interest — Standard of Conduct for Broker-Dealers

Office: Division of Trading and Markets
The Commission will consider whether to adopt a new rule to establish a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.

Item 2: Form CRS Relationship Summary
Office: Division of Investment Management, Division of Trading and Markets
The Commission will consider whether to adopt new and amended rules and forms to require registered investment advisers and registered broker-dealers to provide a brief relationship summary to retail investors.

Item 3: Standard of Conduct for Investment Advisers

Office: Division of Investment Management
The Commission will consider whether to publish a Commission interpretation of the standard of conduct for investment advisers.

Item 4: Interpretation of "Solely Incidental"
Office: Division of Investment Management
The Commission will consider whether to publish a Commission interpretation of the solely incidental prong of section 202(a)(11)(C) of the Investment Advisers Act of 1940.
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IA Defrauded Clients by Overcharging Advisory Fees


On May 28, 2019, the Commission charged investment adviser Stephen Brandon Anderson with defrauding clients by overcharging advisory fees of at least $367,000.

According to the SEC’s order, Anderson owned and operated River Source Wealth Management, LLC, a now-defunct registered investment adviser in North Carolina.  River Source’s primary revenue stream was customer advisory fees.  Customer agreements provided that those fees would be based on each customer’s assets under management.  The SEC’s order finds, however, that in 2015 and 2016, Anderson overcharged a majority of his clients.  The amount and percentages of the overcharges varied but, in the aggregate, amounted to approximately 40% more than the agreed-upon maximum customer advisory fees. 

As described in the order, Anderson also misled his clients about the reason he transferred their assets from River Source’s long-time asset custodian, falsely stating that it was his decision and that the separation was “amicable.”  In fact, as the order finds, the asset custodian ended the relationship with River Source after it noticed irregular billing practices and failed to receive sufficient supporting documentation from Anderson.  Furthermore, the order finds that Anderson made material misstatements in reports filed with the Commission, including overstating River Source’s assets under management by at least $34 million (18%) in 2015 and $61 million (35%) in 2016, and failed to implement required compliance policies and procedures.  The order prohibits Anderson from acting in a supervisory or compliance capacity or from charging advisory fees without supervision for at least three years, and requires Anderson to provide notice of the SEC order to clients and prospective clients.

“When advisors breach their duty to clients by misleading and overcharging them, they can expect the SEC will craft a package of remedies that will compensate harmed investors, provide additional safeguards for prospective investors, and deter similar conduct,” said Carolyn M. Welshhans, Associate Director in SEC’s Enforcement Division.

The SEC’s order finds that Anderson violated Sections 206(2) and 207 of the Investment Advisers Act, and aided and abetted and caused River Source’s violations of the books and records and compliance provisions of the Advisers Act.  In addition to the limitations and undertakings discussed above, Anderson agreed to a cease-and-desist order and a censure, and agreed to pay disgorgement and prejudgment interest of $405,381 and a $100,000 penalty.  Payments made by Anderson pursuant to the order will be distributed to harmed investors through a Fair Fund.  Anderson consented to the order without admitting or denying the findings. [Please
login to IA Act UnwrappedTM to view Release No. IA-5242 In the Matter of Stephen Brandon Anderson] Top 


OCIE Issues Risk Alert Regarding Safeguarding Customer Records and Information in Network Storage and the Use of Third-Party Security Features


OCIE has issued a new Risk Alert highlighting the risks associated with the storage of electronic customer records and information by broker-dealers and investment advisers in the cloud and on other types of network storage solutions. 

During recent examinations, OCIE identified security risks associated with the storage of electronic customer records and information by broker-dealers and investment advisers in various network storage solutions, including those leveraging cloud-based storage. Although the majority of these network storage solutions offered encryption, password protection, and other security features designed to prevent unauthorized access, examiners observed that firms did not always use the available security features.  Weak or misconfigured security settings on a network storage device could result in unauthorized access to information stored on the device.

OCIE staff observed firms storing electronic customer records and information using various types of storage solutions, including cloud-based storage.  During examinations, OCIE staff identified the concerns that may raise compliance issues under Regulations S-P and S-ID, including: misconfigured network storage solutions; inadequate oversight of vendor-provided network storage solutions; and insufficient data classification policies and procedures. 

The implementation of a configuration management program that includes policies and procedures governing data classification, vendor oversight, and security features would help to mitigate the risks incurred when implementing on-premise or cloud-based network storage solutions.  During examinations, OCIE staff observed several features of effective configuration management programs, data classification procedures, and vendor management programs, including:

Please login to the IA Act UnwrappedTM Examination Tools Database/2019 Information to view the full text of the Risk Alert. Top 

Cherry-Picking and Soft Dollar Violations


On May 16, 2019, the SEC issued Release No. IA-5236 In the Matter of J.S. Oliver Capital Mangement, L.P., and Ian O. Mausner. This proceeding involves misconduct by JS Oliver, a registered investment adviser, and its founder, president, head portfolio manager, and control person, Mausner, for engaging in two distinct schemes: fraudulent trade allocation by “cherry-picking” favorable trades for JS Oliver’s affiliated hedge fund clients to the detriment of other, unfavored client accounts, and misusing client commission credits called “soft dollars.”

JS Oliver and Mausner disproportionately allocated favorable trades to six client accounts, including four affiliated hedge funds, ultimately harming three unfavored clients by approximately $10.7 million. Mausner financially benefitted from the cherry-picking scheme because he and his family were personally invested in the hedge funds, and he earned additional fees from one of the hedge funds based on the boost in its performance as a result of the cherry-picking.

JS Oliver and Mausner used over $1.1 million in soft dollar credits in a manner not disclosed to clients. Soft dollar credits arise from the client commission arrangement between an investment adviser and the broker-dealer that handles the trades for the adviser. Generally, a client’s investment assets are used to pay additional commissions – called “soft dollar credits” –that the broker-dealer sets aside as payment for legitimate research and brokerage expenses of the adviser. The Respondents’ misuse of these soft dollar credits included: (1) $329,265 paid to Mausner’s ex-wife for amounts due pursuant to a divorce agreement; (2) $300,000 in grossly inflated “rent” paid to a company Mausner owned, the majority of which was funneled directly to Mausner’s personal bank account; (3) approximately $480,000 paid to a company owned by a JS Oliver employee for purported outside research and analysis; and (4) nearly $40,000 in payments for fees on Mausner’s personal timeshare in New York, New York. [Please
login to IA Act UnwrappedTM to view Release No. IA-5236 In the Matter of J.S. Oliver Capital Mangement, L.P., and Ian O. Mausner]   Top

Aderton Named Co-Chief of the Asset Management Unit
Specialized Unit Focuses on Misconduct by IAs, ICs and Private Funds

Adam S. Aderton has been named Co-Chief of the Division of Enforcement's Asset Management Unit, a national specialized unit that focuses on misconduct by investment advisers, investment companies, and private funds.  He succeeds Anthony Kelly, who left the agency in November 2018. Mr. Aderton has brought or supervised enforcement actions that addressed a wide range of misconduct and investor harm across the asset management industry, including the SEC’s actions against:

•    Two J.P. Morgan wealth management subsidiaries for failing to disclose conflicts of interest to retail clients
•    Two UBS advisory firms for failing to disclose a change in investment strategy by a closed-end fund they advised
•    Gustavo A. Altuzarra, Christopher R. Chase, and three entities they controlled for using client funds to make unauthorized loans and concealing those loans through fraudulent straw purchaser transactions
•    Crypto Asset Management LP and its principal, Timothy Enneking, for making misrepresentations to investors and causing its advised fund’s violations

"Adam is a highly respected leader and his broad experience and strong judgment are a tremendous asset. We look forward to working closely with him as co-chief of the Asset Management Unit," said Stephanie Avakian, Co-Director of the SEC's Division of Enforcement.

"I am confident that Adam and his Co-Chief, Dabney O'Riordan, will together provide strong leadership of the Asset Management Unit and continue to deliver results for investors harmed by asset manager misconduct," said Steven Peikin, Co-Director of the SEC's Division of Enforcement.

"I am honored to lead the Asset Management Unit with Dabney," said Mr. Aderton. "I have been with the Unit since its inception, and I have tremendous pride in its people, its work, and all it has accomplished so far. I look forward to working with our talented and dedicated colleagues across the country as we continue our work protecting investors in this critical industry."

Mr. Aderton joined the SEC in 2008 as a staff attorney in the Division of Enforcement. He joined the Asset Management Unit in 2010, and was promoted to Assistant Director in 2013. Mr. Aderton received the Ellen B. Ross Award in 2013, which recognizes exemplary commitment, enthusiasm, and performance in the fair and effective enforcement of the federal securities laws. Before joining the SEC, Mr. Aderton served as a law clerk to the Honorable J. Frederick Motz on the U.S. District Court in Maryland and then was a securities associate at Wilmer Cutler Pickering Hale and Dorr LLP in Washington, D.C. He received his law degree from the University of Virginia School of Law where he was Order of the Coif and his undergraduate degree with highest honors from Truman State University. Top 

SEC Staff Announces Agenda for May 31 FinTech Forum

The Commission has announced the agenda for the forum that its staff is hosting on May 31 to discuss distributed ledger technology and digital assets. The 2019 FinTech Forum, which will be hosted by the SEC's Strategic Hub for Innovation and Financial Technology (FinHub), will begin at 9:30 a.m. ET, and will feature four panels. The agenda and speaker list for the forum is provided below.

The FinTech Forum will be held at the SEC's headquarters in Washington, D.C., and is open to the public on a first-come, first-serve basis. While the forum will begin at 9:30 a.m. ET, doors will open at 8 a.m. ET. Guests attending should bring photo identification and are encouraged to time their arrival with the understanding that they will be screened by security before entering the FinTech Forum. No registration is required to attend the event.

A live webcast will be available on the SEC's main website and will be archived on the FinHub page on the SEC website for later viewing. The public is encouraged to follow the SEC on Twitter at @SEC_News for live updates throughout the forum. The FinTech Forum hashtag is #SECfintech.

Agenda and Panelists
(All times Eastern, Panelists listed are scheduled to appear)

8 a.m.        Doors open

Morning Session

9:30 a.m.   Opening Remarks by Valerie Szczepanik, Head, FinHub

Remarks by William Hinman, Director, Division of Corporation Finance

Panel 1: Capital Formation Considerations
Moderator: Jonathan Ingram, Chief Legal Advisor, FinHub, Division of Corporation Finance
Panelists:
•Paul Brody – Ernst & Young
•Joshua Ashley Klayman – Klayman LLC
•Aaron Wright – Cardozo Law School

Remarks by Brett Redfearn, Director, Division of Trading and Markets

Panel 2: Trading and Markets Considerations
Moderator:  Elizabeth Baird, Deputy Director, Division of Trading and Markets
Panelists:
•David Forman – Fidelity Brokerage Services
•Mark Wetjen – DTCC
•Neha Narula – MIT Media Lab

Lunch Break – 75 minutes

Afternoon Session

Remarks by Dalia Blass, Director, Division of Investment Management

Panel 3: Investment Management Considerations
Moderator: Jennifer McHugh, Senior Special Counsel, Division of Investment Management
Panelists:
•Jay Baris – Shearman & Sterling LLP
•John D’Agostino – DMS
•Amy Steele - Deloitte

Remarks by Peter Driscoll, Director, Office of Compliance Inspections and Examinations

Panel 4: Distributed Ledger Technology Innovations: Industry Trends and Specific Use Cases for Financial Markets
Moderator: Scott Walker, Special Counsel, FinHub
Panelists:
•Christopher Ferris – IBM
•Todd McDonald – R3
•Kevin Werbach – Wharton School, University of Pennsylvania

5:30 p.m.        FinTech Forum concludes
  Top


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 

 

Headline News

2020 Renewal Program
Calendar now available - note fee increases
Read more...

 

Enforcement Publishes Annual Report for FY2019

Read more...

SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers

Read more...

 

Regulatory Agencies Join the Global Financial Innovation Network

Read more...

 

FAQs Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation

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.

IA-5410 In the Matter of William Harper Minor, Jr.

LR-24664 SEC v. Gregory M. Bercowy

IA-5409 In the Matter of Daniel Sholom Frishberg

IA-5408 In the Matter of Morgan Stanley Smith Barney LLC

IA-5406 In the Matter of James T. Booth

IA-5405 In the Matter of Cameron G. High

IA-5404 In the Matter of Thomas D. Conrad, Jr.

Enforcement Division Annual Report - FY19
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

LR-24660 SEC v. Bolton Securities Corporation d/b/a Bolton Global Asset Management

IA-5407 Investment Adviser Advertisements; Compensation for Solicitations
Proposing Release

Securities Industry and Financial Markets Association
Extention of Temporary No-Action Letter - Advisers Act Sec. 202(a)(11)

FAQs Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation
Division of Investment Management

Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

Joint Statement on Activities Involving Digital Assets
Statement issued by the Leaders of CFTC, FinCEN, and SEC
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information

LR-24643 SEC v. Cetera Advisors, LLC and Cetera Advisor Networks LLC

IA-5403 In the Matter of Albert K. Hu

IA-5402 In the Matter of Saving2Retire, LLC, and Marian P. Young

LR-24640 SEC v. Thomas Conrad, Jr. et al.

IA-5401 In the Matter of Michael Siva
LR-24638 SEC v. Daniel Rivas, et al.

IA-5400 In the Matter of Mark Megalli

IA-5399 In the Matter of Daniel Sholom Frishberg

LR-24633 SEC v. Westport Capital Markets, LLC and Christopher E. McClure

LR-24632 SEC v. Bluepoint Investment Counsel, et al

LR-24829 SEC v. James T. Booth

LR-24828 SEC v. Marcus Beam

LR-24617 SEC v. William M. Apostelos, et al.

LR-24626 SEC  v. Yellowstone Partners, LLC, David H. Hansen, and Cameron G. High

IA-5369 In the Matter of Hefren-Tillotson, Inc.

IA-5368 In the Matter of Joseph B. Bronson

IA-5367 In the Matter of Nicholas Lattanzio

IA-5366 In the Matter of Leonardo Cornide and Jorge Falcon

Unlawful Proxy Voting of Client Securities:
IA-5375 In the Matter of Three Bridge Wealth Advisors, LLC
IA-5374 In the Matter of Amadeus Wealth Advisors, LLC
Added to the IA Act UnwrappedTM Releases Database and to the Risks/Significant Cases Tab under Regulatory Database Rule 206(4)-6

IA-5371 In the Matter of Cetera Investment Advisers LLC
Added to the IA Act UnwrappedTM Releases Database and to Risks/Significant Cases under Regulatory Database Rule 206(4)-2 Cash Payments for Client Solicitations

Oversight of the SEC: Wall Street’s Cop on the Beat
Testimony Before the U.S. House of Representatives Committee on Financial Services
Added to the IA Act UnwrappedTM Examination Tools Database/2019 Information