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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!

IM Posts New Q&A Regarding the Pay to Play Rule

The Division of Investment Management has updated the FAQs regarding Rule 206(4)-5, the Pay to Play Rule. In a new Q&A the Division offers no- action relief regarding the compliance date for the ban on third-party solicitation for Capital Acquisition Brokers (CABs):

“Until the effective date of any rules subjecting CABs to the FINRA pay to play rules, the Division would not recommend enforcement action to the Commission against an investment adviser or its covered associates under rule 206(4)-5(a)(2)(i) for payment to any person that is a CAB to solicit a government entity for investment advisory services on behalf of the investment adviser or its covered associates.”  [Please
login to IA Act UnwrappedTM to view the updated Q&As under Regulatory Database Rule 206(4)-5 and in the Examination Tools Database -2017 Information.] Top 


IA Settles with SEC for Improperly Allocating Expenses to its Private Equity Fund Clients


A New York-based investment advisory firm has agreed to pay a $275,000 penalty to settle charges that it improperly allocated legal fees and employee expenses to private equity funds it advised.

According to an SEC Order, investment adviser Capital Dynamics Inc. (CDI) improperly had private equity funds it advised pay for over $1.2 million in legal and employee expenses. The SEC’s investigation found that the private equity funds’ organizational documents did not include those legal fees or employee costs among the listed types of expenses that the fund would be responsible for paying. For example, CDI charged the private funds for $797,257 in legal fees incurred when CDI renegotiated an agreement with its own employees. CDI cooperated with the SEC’s investigation and reimbursed more than $1.4 million to the fund.

The SEC’s order further finds that CDI failed to adopt written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and related rules.

The SEC’s order finds that CDI violated Sections 206(2) and 206(4) of the Advisers Act, and Rules 206(4)-7 and 206(4)-8. Without admitting or denying the findings, CDI consented to the SEC’s order and agreed to pay the $275,000 penalty. The SEC considered CDI’s remedial acts and cooperation in reaching the settlement. [Please
login to IA Act UnwrappedTM to view Release No. IA-4746 In the Matter of Capital Dynamics, Inc.]  Top 

Outsourced CCO Sanctioned, Suspended and Fined for False Form ADV Filings
Relied on Estimates from CIO Not Verified for Accuracy

On August 15, 2017, the Commission issued Release IA-4734 In the Matter of David I. Osunkwo, In the Order, the Commission states that in 2010 and 2011, Aegis Capital, LLC and Circle One Wealth Management, LLC, registered investment advisers affiliated because of common control, failed to file timely and accurate reports with the Commission. Aegis Capital failed to file an annual update to its Form ADV for the 2010 fiscal year. Circle One filed an annual amendment to its Form ADV with the Commission in April 2011 that was intended to reflect a merger between the two investment advisers under common ownership and control of the same corporate parent holding company, Capital L Group LLC and control persons, namely the CEO, COO and CIO. That filing materially overstated the assets under management (“AUM”) and total number of client accounts for Aegis Capital and Circle One.

During the relevant time, Aegis Capital and Circle One retained SC Consulting to assist them in performing certain compliance functions as well as to provide an outsourced Chief Compliance Officer (“CCO”) to the Registrants. SC Consulting offered compliance consulting and CCO services to investment adviser firms. Respondent Osunkwo, a principal at SC Consulting, was designated as CCO to both Aegis Capital and Circle One. In this role, Osunkwo assisted Registrants and Firm Management with preparing and filing their Forms ADV. Osunkwo’s actions and inactions with respect to the Forms ADV filings led to Circle One’s inability to file accurate reports with the Commission.

In filing the Form ADV, Osunkwo relied on estimates that the Registrants’ CIO provided him.

Specifically, the CIO sent Osunkwo an email that stated:

“David – . . . I believe AUM was as follows on 12/31 Funds: $36,800,000 Schwab/Fidelity: $96,092,701 (1,179 accounts) (not sure how many customers) Circle One: probably higher than $50m, but hopefully [another employee] told you a number today Total is in the $182.89m range . . . .”

Osunkwo and SC Consulting adopted these estimates, without taking sufficient steps to ascertain their accuracy, when they filed Circle One’s annual amendment to Form ADV. This caused the report to falsely represent that the CIO attested to the accuracy of that information. As a result, Circle One’s Form ADV contained inaccurate information.

Osunkwo is suspended from association for 12 months and ordered to pay a $30,000 civil monetary penalty.
[Please login to IA Act UnwrappedTM to view Release No. IA-4745 In the Matter of David I. Osunkwo; also see Release No. IA-4744 In the Matter of Diane W. Lamm]   Top 

False ADV Filings & Failure to Maintain Books & Records
CCO Responsibilities Outsourced, but Lamm - as COO and CCO's direct supervisor - still liable

On August 15, 2017, the Commission issued Release No. IA-4744 In the Matter of Diane W. Lamm. According to the Order, Aegis Capital, LLC and Circle One Wealth Management, LLC (collectively “Registrants”), while formerly registered with the Commission as investment advisers, failed to file timely and accurate reports with the Commission and to maintain required books and records.

In Forms ADV filed with the Commission, Registrants, affiliated because of common control, materially overstated their assets under management (AUM) and total number of client accounts. As an example, in March 2011, Registrants overstated their AUM by over $119 million and total number of client accounts by at least 1,000 accounts. In addition, Registrants’ books and records were unsegregated and mixed together with affiliated entities at the level of the parent holding company.

Registrants were unable to provide adviser-specific books and records in response to examination staff’s queries in a timely manner, if at all.

Registrants outsourced their compliance responsibilities to Respondent Strategic Consulting Advisors, LLC (“SC Advisors”), a firm that offered compliance consulting and Chief Compliance Officer services to investment management firms. Respondent David I. Osunkwo, an attorney and principal at SC Advisors, was designated as Registrants’ CCO. In this role, he was responsible for preparing, reviewing, and filing Registrants’ Forms ADV.

Osunkwo reported to Diane W. Lamm (who was the Registrants’ Chief Operating Officer/COO) as his drect supervisor and worked closely Lamm, who provided information to Osunkwo to include in Aegis Capital’s Form ADV filings, signed Aegis Capital’s Form ADV, and otherwise was responsible for Registrants’ books and records. As a direct consequence of Lamm’s failures, Registrants failed to file accurate and timely reports with the Commission and failed to make and keep required books and records.   [Please
login to IA Act UnwrappedTM to view Release No. IA-4744 In the Matter of Diane W. Lamm; also see Release No. IA-4745 In the Matter of David I Oswunkwo.]  Top 


Amended Form ADV and Other-Than-Annual Amendments Raise Questions
DIM Issues No Enforcement Action Response

In Release No. IA-4509 Form ADV and Investment Advisers Act Rules, the SEC adopted amendments to Form ADV that have a compliance date of October 1, 2017. As of that date, any adviser filing an initial Form ADV or an amendment to an existing Form ADV will be required to provide responses to the form revisions adopted in the rulemaking.

Commission staff has received inquiries about circumstances in which a filer determines that it must file an other-than-annual amendment to Form ADV on or after October 1, 2017, but before its next annual amendment to the form would be due, such as when a filer is required to obtain a new private fund identification number or update a Form ADV Part 2A brochure on the Investment Adviser Registration Depository (“IARD”) system.

The Division of Investment Management has issued an Information Update addressing the issue.

“Some Form ADV filers have raised questions about how a filer making an unanticipated other-than-annual amendment before the filer’s next annual amendment is due must respond to new or amended items in Item 5 and the related Schedule D sections that would otherwise be required to be filled out on an annual basis. Some filers have noted that, in certain cases, this information may not be available because previously it was not required to be reported on Form ADV. In particular, how should an other-than-annual filer respond if the filer’s books and records did not capture the data necessary to respond completely to new Schedule D, Section 5.K.(2), which asks for the amount of regulatory assets under management and borrowings in a filer’s separately managed accounts that correspond to ranges of gross notional exposure as of the end of the filer’s fiscal year? The IARD system will not allow the submission of filings with incomplete responses.”

“In the circumstances described above, if a filer does not have enough data to provide a complete response to a new or amended question in Item 5 or the Schedule D sections related to Item 5 during the period ranging from October 1, 2017 to the filer’s next annual amendment to the form, the staff would not recommend enforcement action to the Commission under section 207 of the Investment Advisers Act of 1940 if the filer responds “0” as a placeholder in order to submit its Form ADV, with a corresponding note in the Miscellaneous section of Schedule D to identify that a placeholder value of “0” was entered.”  [Please
login to IA Act UnwrappedTM Examination Tools Database to view Information Update IM-INFO-2017-06.] Top 

OCIE Releases Observations from Cybersecurity Examinations

SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a National Exam Program Risk Alert that provides a summary of observations from OCIE’s examinations conducted pursuant to the Cybersecurity Examination Initiative. In general, OCIE staff observed increased cybersecurity preparedness, however there are areas where staff believes compliance and oversight could be improved. 

Most firms conducted periodic risk assessments of critical systems to identify vulnerabilities. All firms utilized some form of system, utility or tool to prevent, detect and monitor data loss as it relates to personally identifiable information. Although firms had a process for ensuring regular system maintenance and software patches, a few firms had a significant number of system patches - including critical security updates - that had not yet been installed.

Information protection programs typically included relevant cyber-related topics such as business continuity planning, Regulation S-P and Regulation S-ID.

Many firms had plans for addressing access incidents, plans for denial of service incidents, and plans for unauthorized intrusions. And, although BDs maintained plans for data breach incidents and customer notification of material events, the vast majority of IAs did not appear to maintain such plans. 

Some of the problem issues that OCIE staff observed included:

•    policies and procedures that were not reasonably tailored because they provided employees with only general guidance;
•    firms that did not enforce policies and procedures, or had policies and procedures that did not reflect the firm’s actual practices;
•    problems surrounding Regulation S-P among firms that did not adequately conduct system maintenance, including stale risk assessments/outdated operating systems that were no longer supported by security patches, and lack of remediation efforts regarding high-risk findings from penetration tests or vulnerability scans.

On the positive side, OCIE staff observed several specific elements that added to robust cybersecurity controls:

•    maintenance of an inventory of date, information and vendors;
•    detailed cybersecurity–related instructions;
•    maintenance of prescriptive schedules and processes for testing data integrity and vulnerabilities;
•    established and enforced controls to access data and systems;
•    mandatory employee training; and
•    engaged senior management.

OCIE noted that cybersecurity remains one of the top compliance risks for financial firms and OCIE staff will continue to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at firms. [Please
login to IA Act UnwrappedTM Examination Tools Database to view the National Exam Program Risk Alert.]   Top 

Investment Management Director David W. Grim to Leave SEC

David W. Grim, Director of the SEC’s Division of Investment Management, will leave the agency next month after more than 20 years of public service.

Mr. Grim, who joined the Division directly from law school and rose to become its leader, has left a legacy of regulatory policy reforms and legal guidance that have shaped the Division and the industry it regulates. He has also dedicated himself to developing the culture of collaboration and professional development that contributed to the Division ranking among the top places to work in the federal government. The Division oversees the $70 trillion dollar asset management industry, which includes mutual funds; exchange-traded funds; closed-end funds; variable insurance products; business development companies and investment advisers.

As Director, Mr. Grim led the Division’s policy-development; legal-interpretation; data-analysis and disclosure-review functions. Key initiatives advanced under Mr. Grim’s leadership as Director included:

•    Commission adoption of a modernized, comprehensive data-reporting regime for investment companies to improve the access and quality of information available to the Commission and the public about fund investments;
•    Commission adoption of rules to enhance liquidity risk management by mutual funds so that funds stand ready to meet investor redemptions while also minimizing the impact of those redemptions on remaining shareholders;
•    Issuance of guidance providing important and timely transparency of staff views on issues including cybersecurity and robo-advisers;
•    Issuance of an interpretation permitting “clean shares,” to further enable the sale of mutual funds at a transparent price subject to market competition;
•    Orderly implementation of money market fund reforms to protect against risks from potential investor runs;
•    Improved integration of data-analysis to better inform policy-development, disclosure-review, and industry oversight related to funds and advisers;
•    Enhanced public disclosure of aggregated data regarding private fund advisers to improve public understanding of those advisers and the funds they manage;  
•    Commission proposal of rules regarding funds’ use of derivatives; electronic delivery of fund shareholder reports; and business continuity and transition plans for investment advisers.

Mr. Grim joined the SEC in 1995 as a Staff Attorney in the Division’s Office of Investment Company Regulation. In 1998, he moved to the Division's Office of Chief Counsel, where he served in a number of positions, including being named Assistant Chief Counsel in 2007. Mr. Grim was appointed as Deputy Director of the Division in 2013, and Director in 2015.   Top 


IA Charged with Failing to Disclose Conflicts of Interest and Custody Rule Violations


On July 28, 2017, Columbia River Advisors, LLC and two of its principals agreed to settle charges that they failed to disclose conflicts of interest to investors in an investment fund they managed. The Tacoma, Washington-based adviser also agreed to settle charges that it failed properly to comply with the SEC’s investment adviser custody rule.

According to the SEC’s order, Columbia River, Benjamin J. Addink and Donald A. Foy failed to disclose to investors in an investment fund they managed that the fund made sizeable investments in a second investment fund that loaned the money back to Columbia River. The SEC found that these investments constituted conflicts of interest, which Columbia River should have disclosed before making the investments. The SEC’s order further finds that Columbia River violated the SEC’s investment adviser custody rule because the auditor it hired to audit the funds’ financial statements was not qualified under the rule, and Columbia River did not timely distribute audited financial statements to the funds’ investors for the 2012 and 2014 fiscal years as required under the rule.

The SEC’s order instituting settled cease-and-desist and administrative proceedings finds that Columbia River, Addink and Foy willfully violated Section 206(2) of the Investment Advisers Act of 1940, that Columbia River willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, and that Foy caused Columbia River’s violations of the custody rule. Without admitting or denying the SEC’s findings, Columbia River, Addink and Foy agreed to censures and must cease and desist from committing or causing further violations of the provisions and rules with which each was charged. In addition, Columbia River agreed to pay an $80,000 penalty, Addink agreed to pay a $25,000 penalty, and Foy agreed to pay a $30,000 penalty. Under the order, Columbia River is required to retain an independent consultant to review its compliance policies and procedures and to provide notice of the SEC’s order to affected investors. [Please
login to IA Act UnwrappedTM to view Release No. IA-4734 In the Matter of Columbia River Advisors, LLC, Benjamin J. Addink and Donald A. Foy]  Top 

IA Charged with Overstating the Value of Two Private Funds

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

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

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

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


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


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

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

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

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


Wanger’s Application for Consent to Associate is Denied

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


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

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

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

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

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

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


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


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

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

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

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


IM Updates FAQs Regarding Mid-Sized Advisers


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

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


IA & CEO Charged with Multiple Violations under the Advisers Act


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

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

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

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


IA Sentenced to Prison for Cherry-Picking Scheme

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

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

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

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

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


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


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

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

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


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

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


Avakian & Peikin Named Co-Directors of Enforcement


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

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

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

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

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



Commission Issues Stay for Administrative Proceedings in Light of Bandimere Decision


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

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

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

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


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

Recent OCIE Exams Suggest Vulnerability in Some Firms

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

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

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

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

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


New Appointments at the SEC


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

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

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

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


Barclays to Pay $97 Million for Overcharging Clients

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

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

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

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


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


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

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

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

As a result of this Wyoming statute, the Commission is making technical amendments to Form ADV as well as to Form ADV-W to reflect the addition of the state of Wyoming to the group of states with investment adviser regulation. Specifically, any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after July 1, 2017 will not be able to select Item 2.A.(3) of Form ADV, which currently indicates having a principal office and place of business in Wyoming (which does not regulate advisers) as a basis for Commission registration. Further, a checkbox for "WY" will be added to Item 2.C. of Form ADV to enable state notice filings for Commission-registered advisers. Finally, a checkbox for "WY" will also be added to section (b) of Form ADV-W, concerning withdrawals from state investment adviser registration. On October 1, 2017, Item 2.A.(3) will be redesignated as "Reserved." The same change will be made to Schedule R, Section 2.A.(3) for relying advisers. 
Please login to IA Act UnwrappedTM to view Amending Release No. IA-4698.  Top 

Sanctions for Misrepresenting Degree and Certification

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

From 2012 through 2016, Source misrepresented on its Form ADV brochure supplements that Smith earned a marketing degree from Radford University. In fact, Smith attended Radford, but did not graduate. In addition, from 2012 through 2016, Source misrepresented in materials distributed to clients and prospective clients that Smith held the Certified Financial Planner (“CFP”) credential. In fact, Smith took CFP coursework but did not earn the CFP credential. Smith was aware of these misrepresentations as they were made. She and Source corrected the statements after they were contacted by Commission staff in 2016. Through these actions, Source and Smith violated Sections 206(2) and 207 of the Advisers Act. Source and Smith are censured. Smith is ordered to pay a civil monetary penalty of $35,000 and give notice of this Order to her advisory clients. Smith contacted each of Source’s clients and advised them of the misrepresentations regarding her education and CFP credentials.
[Please login to IA Act UnwrappedTM to view Release No. IA-4702 In the Matter of Source Financial Advisors, LLC and Michelle M. Smith]  Top


Jay Clayton Sworn in as Chairman of SEC

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

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

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

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

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

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

Credit Suisse & Former IA Rep Charged with Breaches of Fiduciary Duty

On April 4, 2017, the Commission announced that Credit Suisse Securities (USA) LLC and one of its former investment adviser representatives have agreed to pay almost $8 million to settle charges that they improperly invested clients in more expensive “Class A” shares of mutual funds rather than less expensive “institutional” shares for which they were eligible.

The SEC’s orders find that Credit Suisse and Sanford Michael Katz breached their fiduciary duties and failed to adequately disclose the conflict of interest created by such investments as they enriched themselves at their clients’ expense. Class A shares are generally more expensive than institutional shares of the same fund because they charge investors marketing and distribution expenses known as 12b-1 fees that are paid out of the assets of the mutual fund. In this case, the 12b-1 fees were paid by the mutual funds to Credit Suisse, which then shared a portion of those fees with Katz.

According to the SEC’s orders, Credit Suisse collected approximately $3.2 million in avoidable 12b-1 fees from 2009 to 2014, and approximately $2.5 million of that amount was generated from Katz’s advisory clients. Credit Suisse also failed to implement policies and procedures to prevent these fiduciary breaches.

The SEC’s orders find that Credit Suisse and Katz violated Section 206(2) of the Investment Advisers Act of 1940, and Credit Suisse violated Sections 206(4) and 207 of the Investment Advisers Act and Rule 206(4)-7.

Without admitting or denying the SEC’s findings, Credit Suisse and Katz will collectively pay disgorgement of $3,224,483, prejudgment interest of $577,678, and penalties totaling $4.125 million. A Fair Fund will be established to compensate affected clients with the money collected in the settlement. Credit Suisse and Katz also consented to censures and the entry of cease-and-desist orders from committing or causing further violations of these provisions.
[Please login to IA Act UnwrappedTM Releases Database to view Release Nos. IA-4678 In the Matter of Credit Suisse Securities (USA) LLC, and IA-4679 In the Matter of Sanford Michael Katz]   Top 


Registration Open for 2017 Compliance Outreach Seminars for IAs and ICs


The SEC has announced the opening of registration for its compliance outreach program seminars for investment companies and investment advisers.  The seminars will be offered in four cities and are intended to help Chief Compliance Officers (CCOs) and other senior personnel enhance compliance programs at investment companies and investment advisory firms.

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and the Asset Management Unit of the Division of Enforcement jointly sponsor the compliance outreach program.

All regional seminars will include an overview of OCIE’s 2017 priorities and individual seminars will feature the following panel discussions on current topics in investment management regulation:

You must register on the SEC's website to attend one of the compliance outreach program regional seminars.  Registration for individual events will be closed at least two weeks before the event.  Seating is limited and only the Chicago seminar will be webcast.  If registrations exceed capacity, investment company and investment adviser CCOs will be given priority on a first-come, first-registered basis.  For more information, please contact ComplianceOutreach@sec.gov.   Top 


Update for IAs Relying on Unibanco No-Action Letters


The staff of the Division of Investment Management periodically receives questions regarding how multi-national financial firms document their reliance on what are referred to as the “Unibanco letters,” including what information, if any, should be submitted to the staff or Commission to facilitate the Commission’s ability to monitor and enforce certain advisers’ performance of their obligations to their U.S. clients.

Over the years, Staff has received a wide variety of documents from advisers seeking to rely on the Unibanco letters, which are conditioned on compliance with certain representations such as appointing a U.S. agent for service of process on participating affiliates.

In certain arrangements, one or more participating affiliates seek to share personnel with, and provide certain services to U.S. clients through, the registered adviser without such participating affiliate(s) registering under the Advisers Act. Based on its review of submitted documents, Staff generally believes that documentation of certain general representations and undertakings by participating affiliate(s) addresses most clearly the concerns raised in the Unibanco letters regarding the Staff’s ability to monitor the conduct of participating affiliates.

These representations are listed in a newly released IM Information Update 2017-03. [Please
login to IA Act UnwrappedTM Examination Tools Database – 2017 Information - to view the Information Update.]  Top 


Voya Charged with Failing to Disclose Fees from Clearing Broker


On March 8, 2017, the Commission issued Release No. IA-4661 In the Matter of Voya Financial Advisors, Inc. This matter involves the registered investment adviser’s failure to disclose to its clients compensation it received through an arrangement with a third party broker-dealer and conflicts arising from that compensation.

In the arrangement, the Clearing Broker agreed to share with VFA certain revenues that the Clearing Broker received from the mutual funds in the Clearing Broker’s no-transaction-fee mutual fund program (“NTF Program”). In a separate agreement, the Clearing Broker agreed to pay VFA a certain percentage of service fees that the Clearing Broker received from the mutual funds in exchange for VFA performing certain administrative services. These payments created a conflict of interest in that they provided a financial incentive for VFA to favor the mutual funds in the NTF Program over other investments when giving investment advice to its advisory clients.

VFA did not disclose this arrangement or the resulting conflict in its disclosures to its advisory clients, violating Sections 206(2) and 207 of the Advisers Act. In addition, by not adequately implementing policies and procedures reasonably designed to ensure proper disclosure of conflicts of interest, VFA violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. In the settlement, VFA agreed to provide a copy of this Order to clients, and comply with disclosure obligations, including providing a notification of this Order in the Item 2 “Material Changes since Last Annual Update” section of any brochure required under Rule 204-3. VFA must also pay disgorgement of $2.6 million, prejudgment interest, and a civil monetary penalty of $300,000. [Please
login to IA Act UnwrappedTM Releases Database to view IA-4661 In the Matter of Voya Financial Advisors, Inc.]  Top  


SEC Staff Issues Guidance on Robo-Advisers


Automated advisers - colloquially known as “robo-advisers” – represent a fast-growing trend within the investment advisory industry. Robo-advisers which are typically registered investment advisers, use innovative techniques to provide discretionary asset management services to clients through online algorithmic-based programs. They operate under a wide variety of business models and provide a range of advisory services. 

Staff of the Division of Investment Management, in coordination with OCIE, has been monitoring and engaging with robo-advisers to evaluate how they meet their obligations under the Advisers Act, given their unique structure. The Division believes that robo-advisers should keep certain unique considerations in mind as they address compliance under the Advisers Act.  Robo-advisers, like all registered advisers, are subject to the substantive and fiduciary obligations under the Act.

To address this issue, Staff has released guidance that focuses on robo-advisers that provide services directly to clients over the internet. The guidance focuses on three areas and provides suggestions on how robo-advisers may specifically address associated risks.

  1. Substance and presentation of disclosures – including explanation of business models, scope of advisory services, and presentation of disclosures in plain English – not buried online or incomprehensible
  2. Obligation to obtain information from clients to support the robo-advisers duty to provide suitable advice – including whether a questionnaire to gather client information elicits sufficient information to support a suitability obligation, and how to handle client-directed changes in investment strategy
  3. Compliance with all obligations under Rule 206(4)-7 – including a mindful consideration that reliance on algorithms and the limited human interaction with clients may create or accentuate risk exposures that should be addressed through written policies and procedures

Staff acknowledges that robo-advisers have the potential to give retain investors more affordable access to investment advisers services, and offers the guidance to provide suggestions on how to comply with their obligations under the Advisers Act.

[Please
login to IA Act UnwrappedTM to access the Guidance Update in the Examination Tools Database, or under Regulatory Database Rule 206(4)-7.]  Top  


No-Action Relief under the Custody Rule

Standing Letter of Authorization Arrangement (SLOA)
In updating amendments after Oct. 1, 2017, Form ADV Item 9 - include client assets subject to a SLOA that result in custody 

The Investment Adviser Association (IAA) has sent a letter to the SEC’s Division of Investment Management requesting clarification that an investment adviser does not have custody as set forth in Advisers Act Rule 206(4)-2 (“Custody Rule”) if it acts pursuant to a standing letter of instruction or other similar asset transfer authorization arrangement (“SLOA”) established by a client with a qualified custodian.

Alternatively, the letter requests no-action relief under the Custody Rule for an investment adviser that acts pursuant to a SLOA, as described in the letter, without obtaining a surprise independent verification as required by the Custody Rule.

The no-action request states that “it is common for a client to grant its registered investment adviser the limited power in a SLOA to disburse funds to one or more third parties as specifically designated by the client. After granting the investment adviser this limited authorization, the client then instructs the qualified custodian for the client’s account to accept the investment adviser’s direction on the client’s behalf to move money to the third party designated by the client on the SLOA. The qualified custodian takes that instruction in writing directly from the account holder (the investment adviser’s client), and the investment adviser’s authority is limited by the terms of that instruction. The investment adviser is authorized to act merely as an agent for the client. The client retains full power to change or revoke the arrangement.”

The IAA noted that there is widespread confusion and uncertainty among investment advisers, qualified custodians, broker-dealers, compliance professionals and legal counsel as to whether a SLOA would impute an investment adviser with custody.

Division Staff acknowledged that there is no standardized format for a SLOA.  Investment advisers, qualified custodians and their clients have developed a wide variety of SLOAs for third-party transfers, each of which could implicate the Custody Rule depending on the extent of the adviser’s discretion to act.  For example, an arrangement that is structured so that the investment adviser does not have discretion as to the amount, payee, and timing of transfers under a SLOA would not implicate the Custody Rule.
In response, the Division issued IM Guidance Update 2017-01 Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority to address circumstances the staff has encontered where such inadvertent custody could arise.  The Division also updated Custody Rule FAQ II.4.

The IAA contends that an investment adviser simply following a client’s instructions to transfer assets pursuant to the limited authority granted to the investment adviser under a SLOA and the investment adviser’s corresponding direction to the qualified custodian do not result in an investment adviser “holding” client funds, give an investment adviser “authority to obtain possession” of client funds, or authorize or permit an investment adviser to “withdraw client funds” for any purpose, as contemplated by the Custody Rule.

The Division disagrees and stated that “an investment adviser with power to dispose of client funds or securities for any purpose other than authorized trading has access to the client’s assets. The Division believes that a letter of instruction or other similar asset transfer authorization arrangement established by a client with a qualified custodian would constitute an arrangement under which an investment adviser is authorized to withdraw client funds or securities maintained with a qualified custodian upon its instruction to the qualified custodian. An investment adviser that enters into such an arrangement with its client would therefore have custody of client assets and would be required to comply with the Custody Rule.

Notwithstanding this view, staff of the Division of Investment Management would not recommend enforcement action to the Commission under Advisers Act Section 206(4) and Rule 206(4)-2, against an investment adviser if that adviser does not obtain a surprise examination where it acts pursuant to such an arrangement under the specific circumstances enumerated in the Division’s response.

The Division goes on to state that it understands that investment advisers, qualified custodians and their clients will require a reasonable period of time to implement the processes and procedures necessary to comply with this relief.

In addition, beginning with the next annual updating amendment after October 1, 2017, an investment adviser should include client assets that are subject to a SLOA that result in custody in its response to Item 9 of Form ADV. 
[Please login to IA Act UnwrappedTM to view the No-Action Letter.]  Top 


Morgan Stanley Settles Charges Related to ETF Investments


On February 14, 2017, Morgan Stanley Smith Barney agreed to pay an $8 million penalty and admit wrongdoing to settle charges related to single inverse ETF investments it recommended to advisory clients.

The SEC’s order finds that Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs.  Among the order’s findings, Morgan Stanley failed to obtain from several hundred clients a signed client disclosure notice, which stated that single inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session unless used as part of a trading or hedging strategy.  Morgan Stanley solicited clients to purchase single inverse ETFs in retirement and other accounts, the securities were held long-term, and many of the clients experienced losses.

The SEC’s order further finds that Morgan Stanley failed to follow through on another key policy and procedure requiring a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client.  Among other compliance failures, Morgan Stanley did not monitor the single-inverse ETF positions on an ongoing basis and did not ensure that certain financial advisers completed single inverse ETF training.
“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” said Antonia Chion, Associate Director of the SEC Enforcement Division.
[Please login to IA Act UnwrappedTM to view Release No. IA-4649 In the Matter of Morgan Stanley Smith Barney, LLC]   Top 

IA & President Settle Charges Relating to Misleading Marketing Materials

On February 8, 2017, a Minnesota-based investment adviser, Jeffrey Slocum & Associates, Inc. (“JSA”), agreed to settle charges that it provided misleading marketing materials to current and prospective advisory clients. Additionally, the adviser’s President and majority owner, Jeffrey Slocum, agreed to settle charges that he caused certain of JSA’s violations.

The SEC’s order instituting a settled administrative proceeding found that JSA disseminated marketing materials containing misleading performance data, misstatements regarding JSA’s acceptance of items of value from investment managers, and misstatements about JSA’s enforcement of its Code of Ethics. According to the order, JSA claimed that it had “never, not once, taken even so much as a nickel from an investment manager,” even though JSA’s gift policy permitted employees to accept gifts from investment managers under certain circumstances and certain JSA employees had accepted tickets to the Masters Golf Tournament in 2012 and 2013.

Additionally, JSA distributed marketing materials containing a misleading chart that purported to show the value added by JSA’s investment manager recommendations. Instead of showing the performance of JSA’s actual historical investment manager recommendations, the chart used hypothetical and back-tested performance figures. JSA also failed to adopt and implement compliance policies and procedures and failed to make and keep required books and records supporting performance data in its marketing materials. The order found that Slocum was a cause of the compliance violations and certain misstatements. JSA and Slocum agreed to the issuance of the order without admitting or denying its findings.

The order found that JSA violated Sections 204(a), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), and 206(4)-7 thereunder and that Slocum caused JSA’s violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. JSA agreed to pay a $300,000 penalty and Slocum agreed to pay a $100,000 penalty.
[Please login to IA Act UnwrappedTM to view Release No. IA-4647 In the Matter of Jeffrey Slocum & Associates, Inc., and Jeffrey S. Slocum]  Top 


Five Most Frequent Compliance Topics Identified in OCIE Exams of IAs


The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has issued a list of the five compliance topics most frequently identified in deficiency letters that were sent to SEC-registered investment advisers.

OCIE's Risk Alert discusses each of these topics and gives a few examples of typical deficiencies and weaknesses that highlight the risks and issues that examiners commonly found.

The five compliance topics addressed in the Risk Alert are deficiencies or weaknesses involving:
     (1) Rule 206(4)-7 under the Advisers Act - the “Compliance Rule”
     (2) required regulatory filings
     (3) Rule 206(4)-2 under the Advisers Act - the “Custody Rule”
     (4) Rule 204A-1 under the Advisers Act - the “Code of Ethics Rule”, and
     (5) Rule 204-2 under the Advisers Act - the “Books and Records Rule”

This information is intended to assist advisers during their compliance reviews. Advisers should review their compliance programs and practices in light of the topics noted in the Risk Alert.

[Please
login to Brightline’s IA Act UnwrappedTM Examination Tools Database/2017 Information, or view the RISKS Tabs under Regulatory Database Rules 204-2, 204A-1, 206(4)-2 & 206(4)-7 to view the Risk Alert in its entirety.]   Top 


Private Equity Adviser Permanently Barred for Improper Withdrawal from Funds


A private equity adviser has been permanently barred from the securities industry and must pay a $1.25 million penalty to settle charges that he withdrew improper fees from two private equity funds he managed.

The SEC’s order finds that Scott M. Landress formed the funds to invest in real estate trusts with underlying investments in properties throughout the UK.  His investment advisory firm SLRA Inc. earned management fees based on the net asset value of the underlying investments.  SLRA’s fees shrank and its management costs increased as real estate property values fell during the financial crisis, and the funds’ limited partners declined several requests by Landress for additional compensation to cover the shortfalls.

According to the SEC’s order, Landress directed SLRA to withdraw 16.25 million pounds from the funds in early 2014, purportedly as payment for several years of services provided by an affiliate.  He subsequently transferred the money to his personal account.  SLRA and Landress did not disclose the related-party transaction and the resulting conflicts of interest until after the money had been withdrawn.

According to the SEC’s order, Landress and SLRA returned the withdrawn service fees to the funds after the SEC began its investigation.

“Private equity fund advisers have a duty to act in the best interest of their clients, but Landress and SLRA helped themselves to millions of dollars’ worth of fees to which they had no legitimate claim,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement.

Landress and SLRA agreed to the SEC’s cease-and-desist order without admitting or denying the findings. [Please
login to the IA Act UnwrappedTM Releases Database to view IA-4641 In the Matter of SLRA Inc., and Scott M. Landress]   Top 


OCIE Director Marc Wyatt to Leave SEC

Pete Driscoll Named Acting Director

Marc Wyatt, Director of the Office of Compliance Inspections and Examinations, will leave the agency next month to return to the private sector.  Mr. Wyatt joined the SEC in December 2012 as a senior specialized examiner and co-founded the Private Fund Unit within OCIE. He was named Deputy Director in October 2014 and served as Acting Director in April 2015 before being named Director in November 2015.

“OCIE has benefited greatly from Marc’s leadership and vision,” said SEC Acting Chairman Michael Piwowar. “His efforts on enhancing our risk based exam program and the organizational changes he has put in place will leave a lasting mark on the Commission.”

“It has been an honor to serve alongside the outstanding OCIE team who work tirelessly to improve compliance, prevent fraud, monitor risk, and inform policy,” said Mr. Wyatt.  “I am grateful to have had the opportunity to work with the Commissioners and staff across the SEC to execute on our mission.” Mr. Wyatt worked with OCIE leadership and staff on a number of initiatives and accomplishments during his tenure, including:

Before coming to the SEC, Mr. Wyatt was a principal and senior portfolio manager of a global multi-strategy hedge fund. Prior to that, he was a senior investment banker in the U.S. and U.K.  Mr. Wyatt is a Chartered Financial Analyst. He graduated from the University of Delaware with a B.S. in economics and holds an M.B.A. from Duke University’s Fuqua School of Business.

Upon Mr. Wyatt’s departure, Pete Driscoll, OCIE’s Chief Risk and Strategy Officer, will become the acting director. Mr. Driscoll was previously OCIE’s managing executive from 2013 through early 2016. He joined the Agency in 2001 as a staff attorney in the Division of Enforcement in the Chicago Regional Office and was later a Branch Chief and Assistant Regional Director in OCIE. Prior to the Agency, Mr. Driscoll began his career with Ernst & Young LLP and held several accounting positions in private industry. He received his B.S. in Accounting and law degree from St. Louis University.  He is licensed as a certified public accountant and is a member of the Missouri Bar Association.   Top 

SEC Departures Continue

Since November 14, 2016, when former SEC Chair Mary Jo White announced her plans to leave the agency, many SEC leaders have followed in stride:

Wenchi Hu, Associate Director in the Division of Trading and Markets
OCIE Director Marc Wyatt
Chief Operating Officer Jeffery Heslop
Timothy L. Warren, Associate Director of Enforcement in Chicago Office
SEC Chief of Staff Andrew J. Donohue
General Counsel Anne K. Small
SEC Deputy Chief of Staff Nathaniel Stankard
Michael J. Osnato Jr., Chief of Enforcement Division’s Complex Financial Instruments Unit
Sharon Binger, Director of Philadelphia Regional Office
Enforcement Director Andrew J. Ceresney
Division of Corporation Finance Director Keith Higgins
Chief Economist and Division of Economic and Risk Analysis Director Mark Flannery
Chief Accountant James Schnurr
Trading and Markets Director Stephen Luparello
Chief Litigation Counsel Matthew C. Solomon

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Citigroup Paying $18 Million for Overbilling Clients


Citigroup Global Markets has agreed to pay $18.3 million to settle charges that it overbilled investment advisory clients and misplaced client contracts.  The SEC’s order finds that at least 60,000 advisory clients were overcharged approximately $18 million in unauthorized fees because Citigroup failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories, and other documents.  Citigroup also improperly collected fees during time periods when clients suspended their accounts.  The billing errors occurred during a 15-year period, and the affected clients have since been reimbursed.

“Advisory clients have every expectation that the fees charged by their financial adviser reflect the negotiated rate.  Citigroup failed to take the necessary precautions to ensure clients were billed in a manner consistent with their advisory agreements,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order further finds that Citigroup cannot locate approximately 83,000 advisory contracts for accounts opened from 1990 to 2012.  Without those missing advisory contracts, Citigroup could not properly validate whether the fee rates negotiated by clients when accounts were opened were the same advisory fee rates being billed to clients over the years.  It is estimated that Citigroup received approximately $3.2 million in excess fees from advisory clients whose contracts were lost.

“It’s a fundamental responsibility of a financial adviser to preserve key account documents such as advisory contracts.  Citigroup failed to safeguard its client contracts, which seriously impeded its ability to determine the proper amount of fees the firm was authorized to charge,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office.

Citigroup consented to the SEC’s cease-and-desist order and agreed to undertakings related to its fee-billing and books-and-records practices.  The firm is censured and must pay $3.2 million in disgorgement of the excess fees collected due to the missing contracts plus $800,000 in interest and a $14.3 million penalty. [Please
login to IA Act UnwrappedTM to view Release No. IA-4626 In the Matter of Citigroup Global Markets, Inc.]  Top 


SEC Chief of Staff Donohue to Leave Agency


The Commission announced that SEC Chief of Staff Andrew J. ”Buddy” Donohue will be leaving the agency at the end of January. SEC Chair Mary Jo White named Mr. Donohue as Chief of Staff in May 2015. As Chief of Staff, Mr. Donohue was a senior adviser to the Chair on all policy, management, and regulatory issues. Mr. Donohue had previously served as the Director of the SEC’s Division of Investment Management from May 2006 to November 2010.  Top 


Division of Investment Management Updates Form PF FAQs


The Division of Investment Management staff has updated the Form PF FAQs to provide additional guidance regarding general filing requirements and specific questions of the form, some of which related to amendments to the form made pursuant to the 2014 rulemaking Money Market Reform; Amendments to Form PF (Release No. IA-3979).

The staff of the Division of Investment Management has prepared the responses to questions related to Form PF and expects to update this document from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved this information. [Please
login to IA Act UnwrappedTM Regulatory Database Rules 203(m)-1 and 204(b)-1 - Plain English Description Tabs for a full listing of the updated FAQs.]   Top 


10 Firms Charged with Violating Pay-to-Play Rule

Accepted Pension Fund Fees Following Campaign Contributions

On January 17, 2017, the Commission announced that 10 investment advisory firms have agreed to pay penalties ranging from $35,000 to $100,000 to settle charges that they violated the SEC’s investment adviser pay-to-play rule by receiving compensation from public pension funds within two years after campaign contributions made by the firms’ associates.
 
According to the SEC’s orders, investment advisers are subject to a two-year timeout from providing compensatory advisory services either directly to a government client or through a pooled investment vehicle after political contributions were made to a candidate who could influence the investment adviser selection process for a public pension fund or appoint someone with such influence.  The SEC’s orders find that these 10 firms violated the two-year timeout by accepting fees from city or state pension funds after their associates made campaign contributions to elected officials or political candidates with the potential to wield influence over those pension funds.

“The two-year timeout is intended to discourage pay-to-play practices in the investment of public money, including public pension funds,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Advisory firms must be mindful of the restrictions that can arise from campaign contributions made by their associates.”

Without admitting or denying the findings, the 10 firms consented to the SEC’s orders finding they violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-5.  The firms are censured and must pay the following monetary penalties:

Release No. IA-4617 In the Matter of Adams Capital Management – $45,000
Release No. IA-4616 In the Matter of Aisling Capital – $70,456
Release No. IA-4615 In the Matter of Commonwealth Venture Management Corporation – $75,000
Release No. IA-4614 In the Matter of Alta Communications – $35,000
Release No. IA-4613 In the Matter of Cypress Advisors – $35,000
Release No. IA-4612 In the Matter of NGN Capital – $100,000
Release No. IA-4611 In the Matter of Lime Rock Management – $75,000
Release No. IA-4610 In the Matter of FFL Partners – $75,000
Release No. IA-4609 In the Matter of The Banc Funds Company – $75,000
Release No. IA-4608 In the Matter of Pershing Square Capital Management – $75,000

[Please login to IA Act UnwrappedTM to view the Releases and associated information, including recent requests for Exemptive Relief, under Regulatory Database Rule 206(4)-5, the "Pay to Play Rule"]   Top  

Morgan Stanley Paying $13 Million Penalty for Overbilling Clients
Violated Custody, Books & Records and Compliance Programs Rules

On January 13, 2017, the Commission announced that Morgan Stanley Smith Barney has agreed to pay a $13 million penalty to settle charges that it overbilled investment advisory clients due to coding and other billing system errors. The firm also violated the custody rule pertaining to annual surprise examinations.

The SEC’s order finds that Morgan Stanley overcharged more than 149,000 advisory clients because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements. Morgan Stanley also failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories, and other documentation.

According to the SEC’s order, Morgan Stanley received more than $16 million in excess fees due to the billing errors that occurred from 2002 to 2016. Morgan Stanley has reimbursed this full amount plus interest to affected clients.

“Investors must be able to trust that their investment advisers have put appropriate safeguards in place to ensure accurate billing. The long-running deficiencies in those safeguards at Morgan Stanley resulted in 36 different types of billing errors that caused overcharges to customers,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order further finds that Morgan Stanley failed to comply with the annual surprise custody examination requirements for two consecutive years when it did not provide its independent public accountant with an accurate or complete list of client funds and securities for examination. Morgan Stanley also failed to maintain and preserve client contracts.

“The custody rule’s surprise examination requirement is designed to provide clients protection against assets being misappropriated or misused,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office. “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”

Without admitting or denying the findings that it violated various provisions of the Investment Advisers Act of 1940 and related rules, Morgan Stanley consented to the SEC’s cease-and-desist order and agreed to the $13 million penalty, a censure, and undertakings related to its fee billing and books and records practices. [Please
login to IA Act UnwrappedTM to view IA-4607 In the Matter of Morgan Stanley Smith Barney, LLC, and associated information, under Regulatory Database Rule 206(4)-2]   Top  


SEC Announces 2017 Examination Priorities

New Focus on Electronic Investment Advice, Money Market Funds, and Senior Investors

On January 12, 2017 the Commission announced its Office of Compliance Inspections and Examinations’ (OCIE) 2017 priorities.   Areas of focus include electronic investment advice, money market funds, and financial exploitation of senior investors.  The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks.
 
“These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice,” said SEC Chair Mary Jo White.  “Whether it is protecting our most vulnerable senior investors or those investing in the trillion dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation’s securities laws.”

“OCIE’s priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements,” said OCIE Director Marc Wyatt.

The 2017 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisors.  Areas of examination focus include:

Retail Investors – Protecting retail investors remains a priority in 2017.  OCIE will continue several 2016 initiatives to assess risks to retail investors seeking information, advice, products, and services. It also will undertake examinations to review firms delivering investment advice through electronic mechanisms, sometimes referred to as “robo-advising,” as well as wrap fee programs in which investors are charged a single bundled fee for advisory and brokerage services.

Senior Investors and Retirement Investments – OCIE also is continuing its focus on public pension advisers and expanding its focus on senior investors and individuals investing for retirement.  OCIE is broadening its ReTIRE initiative to include reviews of investment advisers and broker-dealers that offer variable insurance products to investors with retirement accounts as well as those advisers that offer and manage target-date funds.  OCIE also will focus more specifically on registrants’ interactions with senior investors, including with respect to identifying financial exploitation.

Market-Wide Risks – To help fulfill the SEC’s mission of maintaining fair, orderly, and efficient markets, OCIE will continue its focus on registrants’ compliance with the SEC’s Regulation SCI and anti-money laundering rules.  New initiatives for 2017 include an evaluation of money market funds’ compliance with the SEC’s amended rules, which became effective in October 2016.

FINRA – Consistent with OCIE’s goal of enhancing oversight of FINRA to protect investors and the integrity of our markets, it will continue conducting inspections of FINRA's operations and regulatory programs, and focus resources on assessing the examinations of individual broker-dealers.

Cybersecurity – OCIE will continue its ongoing initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers.

The published priorities for 2017 are not exhaustive and may be adjusted in light of market conditions, industry developments, and ongoing risk assessment activities.  OCIE selected the priorities in consultation with the Commission, the SEC’s policy divisions and regional offices, the Division of Enforcement, the SEC’s Investor Advocate, and other regulators. [Please
login to the IA Act UnwrappedTM Examination Tools Database – 2017 information - for additional information regarding the 2017 examination focus.]   Top 


Private Equity Adviser Had Personal Investments in Third-Party Service Provider

Charged with Failing to Disclose Potential Conflicts of Interest

On January 10, 2017, the Commission announced that a New York, N.Y.-based private equity fund adviser has agreed to settle charges that the adviser breached its fiduciary duty to its fund clients and made materially misleading statements to the funds’ investors by failing to disclose potential conflicts of interest.

According to the SEC’s order, Centre Partners Management, LLC (“CPM”) provides investment advisory services to four funds and their related parallel entities. Three of CPM’s principals (the “CPM Principals”) have personal investments in a third-party information technology service provider (the “Service Provider”), two of CPM’s principals occupy two of the three seats on the Service Provider’s board of directors, and the wife of one of the principals is a relative of the Service Provider’s co-founder and Chief Executive Officer. CPM engaged the Service Provider to perform due diligence services for portfolio company investments on behalf of, and paid for by, its fund clients, and several of the fund clients’ portfolio companies separately retained the Service Provider for assorted information technology services.

Also according to the SEC’s order, from 2001 to 2014 these potential conflicts were not disclosed, as required by the funds’ governing documents, to the advisory committees responsible for reviewing such conflicts. In addition, while CPM provided extensive disclosure of its use of the Service Provider in the investment due diligence process and presented its business relationship with this Service Provider as a competitive advantage to investors, absent from these disclosures was any mention of the relationships between the CPM Principals and the Service Provider until CPM disclosed some of the potential conflicts after an SEC examination. Although neither CPM nor the CPM Principals financially profited from their relationships with the Service Provider, CPM breached its fiduciary duty to its fund clients and made materially misleading statements to the funds’ investors by failing to disclose these potential conflicts of interest.

The SEC’s order finds that CPM violated Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-8 thereunder. Without admitting or denying the SEC’s findings, CPM agreed to a censure, a cease-and-desist order, and to pay a $50,000 penalty. [Please
login to IA Act UnwrappedTM to view Release No. IA-4604 In the Matter of Centre Partners Management, LLC.]   Top  


IA & Lawyer Settle Charges in Secret Referral Fee Scheme


A Connecticut-based investment adviser has agreed to admit wrongdoing and pay more than $575,000 to settle charges that he defrauded a client and then compounded his scheme by attempting to mislead SEC investigators while lying to other clients about the status of the SEC’s investigation.
 
According to the SEC’s order against John W. Rafal, he secretly paid a lawyer for referring a legal client’s large account to Essex Financial Services, an investment advisory firm Rafal founded.  Instead of disclosing the referral fee arrangement to the elderly widow who owned the account, as required by law, Rafal and the lawyer agreed to disguise the payments as legal services purportedly provided by the lawyer’s firm.  After other Essex officers discovered and stopped Rafal’s payment arrangement, Rafal continued to secretly pay the lawyer using other accounts he controlled.

The SEC’s order further finds that while the SEC’s investigation was ongoing, Rafal reacted to escalating rumors that he had committed a securities law violation by sending numerous emails to Essex clients falsely stating that the SEC had “fully investigated all matters” and “issued a ‘no action’ letter completely exonerating” him and the firm.

According to the SEC’s order, Rafal also tried in vain to throw SEC enforcement investigators off the track.  During testimony while responding to direct questions about the referral fees, Rafal concealed the additional payments he made after Essex halted the arrangement and falsely indicated that the lawyer had returned all the money he was previously paid.

Enforcement investigators referred the suspected obstruction to the SEC’s Office of Inspector General, whose agents conducted a parallel investigation along with the U.S. Attorney’s Office for the District of Massachusetts, which announced a criminal case against Rafal for obstructing the proceedings of a federal agency.

“Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC’s investigation was over, and then attempted to mislead those investigating him.  He will now be paying the price for his deceit,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “We will not tolerate attempts to mislead and we will continue to refer possible obstruction cases to the SEC’s Office of Inspector General.”

SEC Inspector General Carl Hoecker said, “The charges announced by the U.S. Attorney’s Office reflect the Office of Inspector General’s commitment to investigate individuals who obstruct SEC enforcement activities.”

The lawyer involved in the payment scheme, Peter D. Hershman, agreed to pay more than $90,000 to settle SEC charges against him for aiding and abetting Rafal’s securities law violations.  Both Rafal and Hershman also agreed to be barred from the securities industry and from serving as an officer or director of a publicly-traded company, and they agreed to be permanently suspended from appearing and practicing before the SEC as attorneys.  The SEC’s orders prohibit them from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content.

Rafal is no longer affiliated with Essex Financial Services, which agreed to pay more than $180,000 in disgorgement and interest to settle charges related to Rafal’s misconduct.  Hershman and Essex neither admitted nor denied the findings against them in the SEC’s orders. [Please
login to IA Act UnwrappedTM to view Release Nos. IA-4603 In the Matter of Essex Financial Services, Inc.; IA-4602 In the Matter of Peter Hershman, Esq.; IA-4601 In the Matter of John W. Rafal]   Top  


Jay Clayton is Top Contender to Chair SEC

Co-Authored Opinion Piece on the Need to Act Cooperatively to Address Cybersecurity Threats

Wall Street attorney Jay Clayton has emerged as the top contender to Chair the Securities and Exchange Commission. Clayton is currently a partner at Sullivan & Cromwell, LLP.

Sullivan & Cromwell LLP is an international law firm headquartered in New York City. According to Sullivan & Crowell’s website (www.sullcrom.com), “Jay Clayton’s practice involves public and private mergers and acquisitions transactions, capital markets offerings, regulatory and enforcement proceedings, and other matters where multidisciplinary advice and experience is valued. Mr. Clayton also advises several high-net-worth families regarding their public and private investments.”

To get an idea of how Mr. Clayton will lead the Commission, read an article he co-authored,We Don’t Need a Crisis to Act Unitedly against Cyber Threats (June 2015), which lays out a plan to ensure that businesses and governments work collectively and cooperatively to address looming cyber threats.

If selected, Clayton would succeed current SEC Chair Mary Jo White, who has held the post since 2013.  Chair White announced that she intends to leave the Commission at the end of the Obama Administration. With Chair White’s departure, there will be three vacancies on the Commission. Commissioner Kara Stein’s term is scheduled to expire in 2017, and Commission Michael Piwowar’s term will expire in 2018.

The SEC is made up of five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. The President also designates one of the Commissioners as Chairman. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. The Chairman and Commissioners may continue to serve approximately 18 months after terms expire if they are not replaced before then. To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party.
[Please login to IA Act UnwrappedTM to read more about Mr. Clayton in the Examination Tools Database – 2017 Information]  Top 


Enforcement Charges for Hacking into Law Firm Computer Networks

SEC's enhanced trading surveillance & analysis capabilities identified ‘hacking to trade’ scheme

The SEC has charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms, racking up almost $3 million in illegal profits.  The SEC also is seeking an asset freeze that prevents the traders from cashing in on their illicit gains.  The enforcement action marks the first time the SEC has charged hacking into a law firm’s computer network.

The SEC’s complaint alleges that Iat Hong, Bo Zheng, and Hung Chin executed a deceptive scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions.

According to the SEC’s complaint, the alleged hacking incidents involved installing malware on the law firms’ networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations.  Hong and Zheng in particular coveted the emails of attorneys involved in mergers and acquisitions as they exchanged a list of partners who performed the work at one of the law firms prior to the hack at that firm. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges.

“We used enhanced trading surveillance and analysis capabilities that we developed over the last few years to identify the broad scope of the defendants’ alleged scheme, including the use of both U.S. and offshore accounts to carry it out,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “This action demonstrates our commitment and effectiveness in rooting out cyber-driven schemes no matter how sophisticated.”

“As we allege, the defendants’ ‘hacking to trade’ scheme involved numerous levels of deception as they gained broad access to the nonpublic networks of two law firms, stole confidential information and then used it for substantial personal gain,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement.  “This action marks the end of their alleged deception and serves as a stark reminder to companies and firms that your networks can be vulnerable targets.”

According to the SEC’s complaint, Hong, Zheng, and Chin used the stolen confidential information contained in emails to purchase shares in at least three public companies ahead of public announcements about entering into merger agreements.  The SEC alleges that they spent approximately $7.5 million in a one-month period buying shares in semiconductor company Altera Inc. in advance of a 2015 report that it was in talks to be acquired by Intel Corporation.  Within 12 hours of emails being extracted from one of the firms, Hong and Chin allegedly began purchasing shares of e-commerce company Borderfree so aggressively that they accounted for at least 25 percent of the company’s trading volume on certain days in advance of the announcement of a 2015 deal.  Hong and Zheng also allegedly traded in advance of a 2014 merger announcement involving InterMune, a pharmaceutical company.

The SEC’s complaint charges Hong, Zheng, and Chin with violating the antifraud provisions of the federal securities laws and related rules.  The SEC seeks a final judgment ordering them to pay penalties and disgorge ill-gotten gains plus interest and permanently enjoining them from violating the federal securities laws.  Hong’s mother is named as a relief defendant in the SEC’s complaint for the purpose of recovering ill-gotten gains in her accounts resulting from her son’s alleged illicit trading. The SEC’s investigation is continuing. [Please
login to the IA Act UnwrappedTM Enforcement Case Database to view Litigation Release No. LR-23711 SEC v. Iat Hong, et al]  Top


Company Settles Charges in Whistleblower Retaliation Case


An oil-and-gas company has agreed to settle charges that it used illegal separation agreements and retaliated against a whistleblower who expressed concerns internally about how its reserves were being calculated.
 
The SEC’s order finds that Oklahoma City-based SandRidge Energy Inc. conducted multiple reviews of its separation agreements after a new whistleblower protection rule became effective in August 2011, yet continued to regularly use restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company.

The SEC’s order further finds that SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves.  The employee had been offered a promotion, which was turned down.  Just months later, senior management concluded the employee was disruptive and could be replaced with someone “who could do the work without creating all the internal strife.” The company had conducted no substantial investigation of the whistleblower’s concerns and only initiated an internal audit that was never completed. The employee’s separation agreement also contained the company’s prohibitive language that violated the whistleblower protection rule.

“Ignoring a rule that protects communications between outgoing employees and the SEC, SandRidge flatly prohibited such contact in their separation agreements and at the same time retaliated against an employee who raised concerns about the company to its management,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC.  This is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.”  Without admitting or denying the SEC’s findings, SandRidge agreed to pay a penalty of $1.4 million, subject to the company’s bankruptcy plan. Top


Penalties for Violating Whistleblower Protection Rule


A technology company has agreed to pay a penalty of $180,000 to settle charges involving its severance agreements that impeded at least one former employee from communicating information to the SEC.
 
The SEC’s order finds that Virginia-based NeuStar Inc. violated a Whistleblower Protection Rule (Exchange Act Section 21F) by routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company.  Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause.  These severance agreements were used with at least 246 departing employees from Aug. 12, 2011 to May 21, 2015.

NeuStar, which voluntarily revised its severance agreements promptly after the SEC began investigating, consented to the SEC’s cease-and-desist order without admitting or denying the findings.  The company agreed to make reasonable efforts to inform those who signed the severance agreements that NeuStar does not prohibit former employees from communicating any concerns about potential violations of law or regulation to the SEC.

“Public companies cannot use severance agreements to impede whistleblowers from communicating with the SEC about a possible securities law violation,” said Antonia Chion, Associate Director of the SEC’s Enforcement Division.  “NeuStar’s severance agreements broadly prohibited former employees from communicating any disparaging information about the company to the SEC, and unsurprisingly at least one former NeuStar employee was chilled by such language.”

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “This action demonstrates our continued strong enforcement of this critically important whistleblower protection rule and underscores our ongoing commitment to ensuring that potential whistleblowers can freely communicate with the SEC about possible securities law violations.”  Top 


OCIE’s New Multi-Branch Adviser Initiative


OCIE continues to work through its 2016 Exam Priorities list with the new Multi-Branch Adviser Initiative, focusing on advisers who provide advisory services from multiple locations.

OCIE staff has observed an apparent increase in the use of IAs employing business models that have numerous branch offices and operations geographically dispersed from the adviser’s principal or main office. The use of a branch office model can pose unique risks and challenges to advisers, particularly in the design, implementation and effectiveness of a compliance program as well as the supervision and oversight of people and the services provided at remote locations.

OCIE is launching the Multi-Branch Adviser Initiative to focus primarily on the advisers’ compliance programs and investment recommendations. With regard to compliance programs, the Staff will assess through interviews and the review of advisory records: the implementation of policies and procedures in the main office and branch offices; the supervision structure; the role and empowerment of compliance personnel charged with overseeing the branch offices; and the accuracy of information in the adviser’s filings regarding the branch offices.

Staff may also focus attention on particular business activities, including fees and expenses, advertising and codes of ethics – including the oversight and monitoring of personal securities transactions and whether the advisers have properly identified access persons at the branch offices.  With regard to the custody rule, Staff will assess the controls related to the identification of accounts over which the adviser maintains custody and the involvement of branch office personnel in making such determinations.

As a fiduciary, an adviser has an obligation to act in the best interests of its advisory clients and to identify and disclose any material conflict of interest. In the Multi-Branch Adviser Initiative, OCIE staff will review the process by which investment advice (including the formulation of investment recommendations and the management of client portfolios) is provided to advisory clients from supervised persons located in branch offices. The Staff will focus on the supervisory controls designed to address specific risks presented in a branch office model regarding the provision of advisory services to clients, such as the identification of potential conflicts of interest and the level of autonomy supervised persons have in providing advice.

Staff may also focus attention on assessing compliance and testing controls in certain risk areas, including oversight of investment recommendations and controls regarding investment authority, suitability of the investment advice, and any due diligence that the adviser has told clients is undertaken with respect to investments; the disclosure of conflicts of interest that arise through branch office activities and how branch offices’ trading activity is monitored.  [Please
login to the IA Act UnwrappedTM Examination Tools Database and/or Regulatory Database Rule 206(4)-7 to access additional information regarding the Multi-Branch Adviser Initiative.]  Top 


SEC Operating Status


The SEC has stated that it will remain open and operational in the event the federal government undergoes a lapse in appropriations after Dec. 9. Any changes to the SEC's operational status will be announced on the SEC's website. Click HERE to access the SEC's "Operations Plan under a Lapse in Appropriations and Government Shutdown" (dated Dec. 9, 2016).  


Enforcement Director Ceresney to Leave SEC


Enforcement Director Andrew J. Ceresney will leave the agency by the end of the year. During his nearly four years as head of the agency’s largest division, Mr. Ceresney implemented approaches that strengthened the Division’s investigative and litigation practices and enhanced its effectiveness and impact. Under his leadership, the Enforcement Division brought significant cases across the entire spectrum of the securities industry, achieving record numbers of enforcement actions and monetary remedies.   

During Mr. Ceresney’s tenure, the Commission filed more than 2,850 enforcement actions and obtained judgments and orders totaling more than $13.8 billion in monetary sanctions.  The SEC also charged over 3,300 companies and over 2,700 individuals, including many CEOs, CFOs, and other senior corporate officers.  The Division filed a record number of more than 475 investment adviser or investment company-related actions.  These actions included 11 cases involving private equity firms and a significant conflicts of interest case against two JPMorgan wealth management subsidiaries.
 
Under Mr. Ceresney, the Division made significant enhancements to its investigative processes, settlement approaches, and trial program, including:

Upon Mr. Ceresney’s departure, Stephanie Avakian, Deputy Director of the SEC’s Enforcement Division, will become the Acting Director.  Ms. Avakian joined the SEC in June 2014 from the law firm of Wilmer Cutler Pickering Hale and Dorr LLP, where she was a partner in the firm’s New York office and a vice chair of the firm’s securities practice.  She previously worked in the SEC Enforcement Division as a branch chief in the New York Regional Office, and later served as a counsel to SEC Commissioner Paul Carey.  Top 


Real Estate Fund Adviser Settles Fraud Charges


The CEO of a now-bankrupt and deregistered investment adviser, Indianapolis-based HDGM Advisory Services, LLC (HDGM), has agreed to settle charges relating to his failure to disclose $5.8 million of prepaid fees charged to two real estate investment funds in 2012.

An SEC investigation found that Harold D. Garrison, the CEO of HDGM, charged prepaid fees and then repeatedly failed to disclose those fees to the board of directors and investment committee of the two investment funds – GPIF-I Equity Co., Ltd. and GPIF-I Finance Co., Ltd. (GPIF Funds). In quarterly reports provided to the board of directors, the investment committee, and representatives of investors in the GPIF Funds, Garrison and HDGM repeatedly failed to disclose the prepaid fees in charts that purported to show all such fee activity. The prepaid fees were used to finance HDGM’s operations during 2012. Garrison and HDGM filed for bankruptcy protection in 2014.

The SEC’s order finds that Garrison violated Sections 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, Garrison agreed to a cease-and-desist order, to pay disgorgement of $1.35 million, which will be deemed satisfied by a payment of that amount from an insurance company to investors, and to pay investors any residual proceeds from the sale of his residence as well as a civil penalty of $350,000. Garrison also agreed to an industry bar with the right to reapply after one year. [Please
login to IA Act UnwrappedTM to view Release No. IA-4584 In the Matter of Harold D. Garrison.]  Top 


PIMCO Settles Charges of Misleading Investors about ETF Performance


Pacific Investment Management Company (PIMCO) has agreed to retain an independent compliance consultant and pay nearly $20 million to settle charges that it misled investors about the performance of one its first actively managed exchange-traded funds (ETFs) and failed to accurately value certain fund securities.
 
According to the SEC’s order, PIMCO’s Total Return ETF attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012.  The initial performance was attributable to buying smaller-sized bonds known as “odd lots” as part of a strategy to help bolster performance out of the gate.  But in monthly and annual reports to investors, PIMCO provided other, misleading reasons for the ETF’s early success and failed to disclose that the resulting performance from the odd lot strategy was not sustainable as the fund grew in size.

“PIMCO misled investors about the true long-term impact of its odd lot strategy and denied them the opportunity to make fully informed investment decisions about the Total Return ETF,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”

The SEC’s order further finds that PIMCO’s odd lot strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares.  PIMCO valued these bonds using prices provided by a third-party pricing vendor for round lots, which are larger-sized bonds compared to odd lots.  By blindly relying on the vendor’s price for round lots without any reasonable basis to believe it accurately reflected what the fund would receive if it sold the odd lots, PIMCO overstated the Total Return ETF’s net asset value (NAV) by as much as 31 cents.

“PIMCO overstated its NAV almost every day for four months because its policies and procedures were not reasonably designed to properly address issues concerning odd lot pricing,” Mr. Ceresney said.

PIMCO agreed to be censured and consented to the SEC’s order without admitting or denying the findings that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, Rules 206(4)-7 and 206(4)-8, and Section 34(b) of the Investment Company Act of 1940.  PIMCO agreed to pay disgorgement of fees totaling $1,331,628.74 plus interest of $198,179.04 and a penalty of $18.3 million. [Please
login to IA Act UnwrappedTM to view Release No. IA-4577 In the Matter of Pacific Investment Management Company, LLC]  Top  


IA Reliance on Predecessor Registrations

Investment Management Addresses Special Registration Provisions

The Staff of the Division of Investment Management has received numerous inquiries over the years concerning when, and under which circumstances, an entity may be able to rely on a predecessor’s registration as an investment adviser with the SEC.

In newly released guidance, the Staff addresses five specific instances in which an investment adviser may be able to rely on special registration provisions for “successors” to SEC-registered advisers, and the method by which a succession is effectuated:

In general, a successor to the business of a predecessor registered investment adviser may rely on the registration of its predecessor if the successor files an application to register as an investment adviser within thirty days after taking over the predecessor’s business.

The Commission has previously explained that the purpose behind the ability of a successor to rely on the registration of its predecessor is to facilitate the legitimate transfer of business between two or more entities and to enable the successor to operate without an interruption of business.

Investment advisers that elect to rely on a predecessor’s registration may do so under two methods, depending on the circumstances: succession by application or succession by amendment. An adviser that fails to file a substantially complete Form ADV that indicates that the adviser is submitting a filing as a succession by application or succession by amendment within the statutory time would have to file a new application to register on Form ADV. Such an investment adviser would be conducting an investment advisory business without being registered.

Read the Division’s Guidance regarding registration provisions for successors, including the answers to common questions, by logging into Brightline Solutions’ IA Act UnwrappedTM Examination Tools Database – 2016 Information.  
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SEC Chair Mary Jo White Announces Departure Plans


SEC Chair Mary Jo White, after nearly four years as the agency’s head, announced that she intends to leave at the end of the Obama Administration.  Under Chair White’s leadership, the Commission strengthened protections for investors and the markets through transformative rulemakings that addressed major issues highlighted by the financial crisis.  The Commission also instituted a new approach to enforcement that has resulted in greater accountability and record actions through, among other things, the use of admissions of wrongdoing and enhanced data analytics and technology. Chair White, who was appointed by President Barack Obama, became the 31st Chair of the SEC in April 2013, and is one of the SEC’s longest serving Chairs.

With SEC Chair White’s departure, there will be three vacancies on the Commission. The SEC is made up of five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. The Chairman and Commissioners may continue to serve approximately 18 months after terms expire if they are not replaced before then. To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman, the SEC's top executive.

There are currently two vacancies on the Commission. President Obama nominated Lisa Fairfax and Hester Peirce for the Commission In October, 2015, but they have yet to be confirmed by the Senate. In May, 2016, the Senate Banking Committee approved Lisa Fairfax, a Democrat, and Hester Peirce, a Republican, by voice vote off the Senate floor, six weeks after the panel initially tried and failed to advance the pair out of committee.

The nominees remain in limbo, however, as a procedural step known as a “hold,” had been placed on Hester Peirce. As the Senate usually considers Democratic and Republican nominees together, to ensure partisan balance at the commission, it currently appears that advancing the nominees will be up to the new Trump administration.

Commissioner Kara M. Stein, whose term expires in 2017, was appointed by President Barack Obama to serve as a Democratic Member of the SEC.  Commissioner Stein joined the Commission after serving as Senior Policy Advisor for securities and banking matters to U.S. Sen. Jack Reed.

Commissioner Michael S. Piwowar, also appointed by President Barack Obama, was the Republican chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs under Senators Mike Crapo (R-ID) and Richard Shelby (R-AL). He was the lead Republican economist on the four SEC-related titles of the Dodd-Frank Act and the JOBS Act. His term expires in 2018.

Mary Jo White’s Tenure at the SEC

To enhance accountability of those who violate the securities laws, Chair White implemented the Commission’s first-ever policy to require admissions of wrongdoing in certain cases where heightened accountability and acceptance of responsibility is appropriate.  Thus far, the Commission has required admissions from more than 70 defendants, including 44 entities and 29 individuals.

During Chair White’s tenure, the Commission brought more than 2,850 enforcement actions, more than any other three-year period in the Commission’s history, and obtained judgments and orders totaling more than $13.4 billion in monetary sanctions.  The Commission charged over 3,300 companies and over 2,700 individuals, including CEOs, CFOs, and other senior corporate officers.

The record number of enforcement actions over the last three fiscal years against companies and senior executives involved many “first of their kind” cases in asset management, market structure and public finance.  Other major cases involved insider and abusive trading, violations of anti-corruption rules and misconduct in accounting and financial reporting.  In the last year alone, the Commission brought a record 868 enforcement actions.  And for the first time, the Commission devoted significant resources and emphasis on using cutting edge data analytics to uncover and investigate misconduct resulting in numerous enforcement actions involving insider trading, asset management and complex financial instruments.

As a result of the successful whistleblower program, the Commission has awarded more than $100 million, since inception — virtually all during Chair White’s tenure — to whistleblowers who provided key original information that led to successful enforcement actions.

Under Chair White’s leadership, the Commission made significant enhancements to its examination program, including increasing staff by about 20 percent by hiring new examiners where funding permitted and redeploying staff from other program areas to heighten focus on the fast-growing investment management industry.

The exam program also increased its use of advanced quantitative techniques to enable examiners to detect misconduct by more quickly analyzing large amounts of data.  Over the past year, the examination program conducted more than 2,400 formal examinations of registrants, an increase over each of the prior seven fiscal years.  The Commission also enhanced technology in its examination program through the National Exam Analytics Tool (NEAT), which enables examiners to analyze large volumes of trading data much more efficiently.

Chair White serves as a member of the Financial Stability Oversight Council and on several other domestic and international organizations, including the International Organization of Securities Commissions, the Financial Stability Board, the International Financial Reporting Standards Foundation Monitoring Board, the Financial and Banking Information Infrastructure Committee, and the Federal Housing Finance Oversight Board.
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Movie Producer Charged with Defrauding Hedge Fund Investors

The SEC has charged a former movie producer and self-proclaimed private equity executive with defrauding investors in hedge funds and using the money he stole to support his extravagant lifestyle.  According to the SEC’s complaint, David R. Bergstein of Hidden Hills, California, stole millions from investors in 2011 and 2012 and used the money for purchases with a firearms dealer, an antique watch and jewelry retailer, and a bonsai tree nursery.  The SEC’s complaint alleges that the scheme relied on a series of intricate transactions by Weston Capital Asset Management, then a registered investment adviser, with two of its unregistered hedge funds, Weston Capital Partners Master Fund II Ltd. and the Wimbledon Fund SPC Class TT Segregated Portfolio.

In one transaction, the SEC alleges that Bergstein misappropriated at least $2.3 million of money that was purportedly meant for investments in medical-billing businesses and helped Weston Capital Asset Management conceal the true nature of the transaction from Weston investors.  In a second allegedly fraudulent transaction, Bergstein stole more than $3.5 million of funds also purportedly meant, in part, for investments in medical-billing businesses.

“The use of elaborate corporate transactions to mask old-fashioned theft of investor monies will not prevent the SEC from enforcing the federal securities laws and protecting investors,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Violators will be held to account no matter the artifice used to perpetrate their frauds.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Bergstein and Keith D. Wellner, who was formerly Capital Asset Management’s general counsel, chief compliance officer, and chief operating officer.  Wellner previously settled SEC charges filed in federal district court in Florida (Litigation Release No LR-23026) and has been barred from working in the securities industry (Release No. IA-3887).

The SEC’s complaint charges Bergstein with violating Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) and aiding and abetting violations by Weston Capital Asset Management of Section 206 of the Investment Advisers Act of 1940 and Rule 206(4)-8.  The SEC is seeking injunctions, the return of allegedly ill-gotten gains, and monetary penalties. [Please
login to IA Act UnwrappedTM to view Case 1:16 –cv-08701 SEC v. David R. Bergstein and LR-23026 in the Enforcement Case Database, and Release No. IA-3887 in the Releases Database.]  Top 


IA Fraudulently Overbilled Clients, Stole Assets for Personal Expenses


The SEC has charged a Los-Angeles based investment advisory firm and its owner with fraudulently overbilling clients and stealing assets from their trusts to pay personal expenses. According to the SEC’s complaint, Marc D. Broidy and his firm Broidy Wealth Advisors (BWA), intentionally overbilled clients and used the excess fees to pay for, among other things, Broidy's personal expenses, including his home mortgage, trips overseas, and lease payments on two new Mercedes-Benz vehicles.

Under the terms set forth in BWA's Form ADV and its Investment Advisory Contracts with clients, BWA's clients should have been charged an annual fee, ranging from 1% to 1.5% of their assets under management, billed on a quarterly basis. Instead, Broidy billed them at much higher rates, resulting in overbilling of advisory fees of approximately $643,000.

Broidy covered up his overbilling scheme by altering the management fees reported on Forms 1099 issued by brokerage firms before sending those forms to clients or their accountants. Broidy also sent one of BWA's brokerage firms a number of false and misleading documents in an attempt to cover up his overbilling.

Broidy later misappropriated $865,318 in assets from trusts for which he was trustee, again using the funds to pay for personal expenses. To cover up his personal use of the trusts' assets, Broidy purported to sell to the trusts shares that he personally owned in two privately-held, risky, start-up companies. However, Broidy never transferred these shares to the trusts.

Broidy also made material misrepresentations and omissions to advisory clients regarding their investments in privately-held companies with which he was affiliated. Specifically, he omitted information about the financial and operational status of those companies, his compensation for soliciting investments, and his role as a board member of those companies.

“As alleged in our complaint, Broidy fell well short of his fiduciary obligations as an investment adviser by misappropriating money and failing to disclose important conflicts of interest to his clients,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced criminal charges against Broidy.

The SEC’s complaint charges Broidy and his firm with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 as well as Sections 206(1) and (2) of the Investment Advisers Act of 1940. The SEC seeks permanent injunctions and penalties against Broidy and his firm and an officer-and-director bar against Broidy.
[Please login to the IA Act UnwrappedTM Enforcement Case Database to view Litigation Release 23679, SEC v. Marc D. Broidy and Broidy Wealth Advisors, LLC]  Top 


SEC Proposes Amendments to Require Use of Universal Proxy Cards


On Oct. 26, 2016, the Commission voted to propose amendments to the proxy rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees.  The proposal gives shareholders the ability to vote by proxy for their preferred combination of board candidates, similar to voting in person.
 
“The proposed changes would allow shareholders to vote by proxy in a manner that more closely replicates how they can vote in person at a shareholder meeting,” said SEC Chair Mary Jo White.  “This change would allow shareholders through the proxy process to more fully exercise their vote for the director nominees they prefer.”

The proposed rules would require proxy contestants to provide shareholders with a proxy card that includes the names of both management and dissident director nominees.  The rules would apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business development companies.  In addition, the proposed rules would require management and dissidents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for dissidents, and prescribe presentation and formatting requirements for universal proxy cards.

To further facilitate shareholder voting in director elections, the Commission also voted to propose amendments to the proxy rules to ensure that proxy cards specify the applicable shareholder voting options in all director elections and require that proxy statements disclose the effect of a shareholder’s election to withhold its vote. The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.   Top 


OCIE Examining Whistleblower Rule Compliance


OCIE has issued a National Exam Program Risk Alert regarding compliance with the Whistleblower Rule. The Risk Alert notes that OCIE Staff is examining registrants’ compliance with key whistleblower provisions arising out of the Dodd-Frank Act. The SEC recently has brought several enforcement actions charging violations of Rule 21F-17 of the Commission’s whistleblower regulations. OCIE Staff is examining registered investment advisers and registered broker-dealers, reviewing, among other things, compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17. This review is included in examinations as Staff deem appropriate.

Registrants are encouraged to consider the issues identified in the Risk Alert to evaluate whether their compliance manuals, codes of ethics, employment agreements, severance agreements, and other documents contain language that may be inconsistent with Rule 21F-17.

Recent Enforcement actions have identified certain provisions of confidentiality or other agreements required by employers as contributing to violations of Rule 21F-17 because they contained language that, by itself or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the Commission concerning possible securities law violations. This potential chilling effect can be especially pronounced when such documents (e.g., severance agreements) provide that an employee may forfeit all benefits if he or she violates any terms of the agreement. Remedial actions taken in recent Enforcement actions have included:

[Please login to the IA Act UnwrappedTM Examination Tools Database - 2016 Information to view the Whistleblower Rule Compliance Risk Alert in its entirety.]   Top 


Modernizing and Enhancing Investment Company & Investment Adviser Reporting


Changes include a new monthly portfolio reporting form, Form N-PORT, new Form N-CEN to replace Form N-SAR, and new Form N-LIQUID to notify the SEC regarding a fund’s level of illiquid assets


On October 13, 2016, the Commission voted to adopt changes to modernize and enhance the reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).  The new rules will enhance the quality of information available to investors and will allow the SEC to more effectively collect and use data reported by funds, promote effective liquidity risk management across the open-end fund industry and enhance disclosure regarding fund liquidity and redemption practices.

The new rules are part of the Commission’s initiative to enhance its monitoring and regulation of the asset management industry. The Commission took an important first step in August, adopting final rules to enhance the reporting and disclosure of information provided by investment advisers, including new required reporting about separately managed accounts and their use of derivatives and borrowing.

In addition, the SEC has proposed reforms to limit the amount of leverage that funds are permitted to obtain through the use of derivatives and require investment adviser business continuity and transition planning. SEC Staff is developing recommendations for the final rules in these areas, and is also considering ways to implement annual stress testing by large investment advisers and large funds. SEC Chair Mary Jo White noted that she expects the SEC to consider the final rules on derivatives in the near term, with action to follow on the others as soon as possible.

“These new rules represent a sweeping change for the industry by requiring strong transparency provisions and enhanced investor protections,” said SEC Chair Mary Jo White.  “Funds will more effectively manage liquidity risk and both Commission staff and investors will receive additional and better quality information about fund holdings.”

The reporting modernization rules will enhance data reporting for mutual funds, ETFs and other registered investment companies.  With these rules, registered funds will be required to file a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that will require census-type information.  The information will be reported in a structured data format, which will allow the Commission and the public to better analyze the information.  The rules also will require enhanced and standardized disclosures in financial statements and will add new disclosures in fund registration statements relating to a fund’s securities lending activities.

The liquidity risk management rules are designed to promote effective liquidity risk management for mutual funds and ETFs, reducing the risk that funds will not be able to meet shareholder redemptions and mitigating potential dilution of the interests of fund shareholders.  The new rules will require mutual funds and ETFs to establish liquidity risk management programs that address multiple elements, including classification of the liquidity of fund portfolio investments and a highly liquid investment minimum.  The rules also strengthen the 15 percent limit on illiquid investments and will require enhanced disclosure regarding fund liquidity and redemption practices.

The swing pricing rule will permit mutual funds to use swing pricing – the process of adjusting a fund’s net asset value to pass on to purchasing or redeeming shareholders costs associated with their trading activity.

The new rules and forms will be published on the Commission’s website and in the Federal Register. 

FACT SHEET
Investment Company Reporting Modernization
SEC Open Meeting October 13, 2016


Action -
The Commission will consider whether to adopt new rules and forms, as well as amendments to existing rules and forms that would enhance transparency and modernize reporting requirements for mutual funds, ETFs and other registered investment companies.  The new rules would improve the access and quality of information available to the Commission and investors about fund investments.  The rules would also enable the Commission to more effectively collect and use data, as well as enhance its ability to conduct more targeted examinations, which would ultimately benefit investors.   The recommendations are part of an initiative to enhance the SEC’s monitoring and regulation of the asset management industry.

Highlights of the Investment Company Rules and Forms - The new rules and forms would enhance data reporting for mutual funds, ETFs and other registered investment companies.

Portfolio Reporting - A new monthly portfolio reporting form, Form N-PORT, would require registered funds other than money market funds to provide portfolio-wide and position-level holdings data to the Commission on a monthly basis.  The form would require monthly reporting of the fund’s investments, including:

Information contained on reports for the last month of each fund’s fiscal quarter would be available to the public after 60days.  The Commission would also rescind Form N-Q, on which funds currently report certain portfolio holdings for the first and third fiscal quarters.

Census Reporting - A new annual reporting form, Form N-CEN, would require registered funds to annually report certain census-type information to the Commission and would replace the form currently used to report fund census information (Form N-SAR).  The form would streamline and update information reported to the Commission to reflect current information needs, such as requiring more information on exchange-traded funds and securities lending.  Reports would be filed annually within 75 days of the end of the fund’s fiscal year, rather than semi-annually as is currently required by Form N-SAR for most funds.

Structured Data Format - Funds would report portfolio and census information in a structured data format, which would improve the ability of the Commission and the public to aggregate and analyze information across all funds and to link the reported information with information from other sources.  The Commission currently receives this type of reporting for both money market funds, through Form N-MFP, and certain private fund advisers, through Form PF.

Reporting on Fund Financial Statements - The Commission will consider adopting amendments that would require enhanced and standardized disclosures in financial statements that are required in fund registration statements and shareholder reports.  The amendments would include specific information related to derivatives, similar to the information about derivatives that would be required in the monthly portfolio holdings reports.  Current requirements do not require specific information for many types of derivatives, including swaps, futures, and forwards.

Additionally, in order to make fund derivatives holdings easier to review, the amended rules would require derivative disclosures to be displayed prominently in the financial statements, rather than in the notes.

Increased Disclosure Concerning Securities Lending Activities
- The Commission will consider adopting amendments to fund registration statements requiring disclosures relating to fund securities lending activities, including income and fees from securities lending, and the fees paid to securities lending agents in the prior fiscal year.  These specific requirements with respect to fees would increase the comparability of securities lending fees between funds.

What’s Next - The new rules and forms would be published on the Commission’s website and in the Federal Register.  Most funds would be required to begin filing reports on new Forms N-PORT and N-CEN after June 1, 2018, while fund complexes with less than a $1 billion in net assets would be required to begin filing reports on Form N-PORT after June 1, 2019.

FACT SHEET
Liquidity Risk Management Programs and Swing Pricing
SEC Open Meeting Oct. 13, 2016


Action - The Commission will consider whether to adopt a new rule and form, and amendments designed to promote effective liquidity risk management across the open-end fund industry.  The Commission also will consider rule and form amendments that would permit certain open-end funds to use “swing pricing.”  Additionally, the amendments would enhance disclosure regarding fund liquidity and redemption practices and would enhance funds’ management of their liquidity risks, which would strengthen our securities markets and better protect investors. The recommendations are part of an initiative to enhance the SEC’s monitoring and regulation of the asset management industry.

Highlights of the Rulemaking - A fundamental feature of open-end funds is that they allow investors to redeem their shares daily.  Funds must maintain sufficiently liquid assets in order to meet shareholder redemptions while also minimizing the impact of those redemptions on the fund’s remaining shareholders.

Liquidity Risk Management Programs - Rule 22e-4 would require mutual funds and other open-end management investment companies, including ETFs, to establish liquidity risk management programs.  The rule would exclude money market funds from all requirements of this rule and ETFs that qualify as “in-kind ETFs” from certain requirements.  The liquidity risk management program would be required to include multiple elements, including:

Assessment, Management, and Periodic Review of a Fund’s Liquidity Risk:  Funds would be required to assess, manage, and periodically review their liquidity risk, based on specified factors.  Liquidity risk would be defined as the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund.

Classification of the Liquidity of Fund Portfolio Investments:  Each fund would be required to classify each of the investments in its portfolio.  The classification would be based on the number of days in which the fund reasonably expects the investment would be convertible to cash in current market conditions without significantly changing the market value of the investment, and the determination would have to take into account the market depth of the investment.  Funds would be required to classify each investment into one of four liquidity categories: highly liquid investments, moderately liquid investments, less liquid investments, and illiquid investments.  Additionally, funds would be permitted to classify investments by asset class, unless market, trading, or investment-specific considerations with respect to a particular investment are expected to significantly affect the liquidity characteristics of that investment as compared to the fund’s other portfolio holdings within that asset class.

Determination of a Highly Liquid Investment Minimum: 
A fund would be required to determine a minimum percentage of its net assets that must be invested in highly liquid investments, defined as cash or investments that are reasonably expected to be converted to cash within three business days without significantly changing the market value of the investment.  The fund also would be required to implement policies and procedures for responding to a highly liquid investment minimum shortfall, which must include board reporting in the event of a shortfall.

Limitation on Illiquid Investments: 
A fund would not be permitted to purchase additional illiquid investments if more than 15 percent of its net assets are illiquid assets.  An illiquid investment is an investment that the fund reasonably expects cannot be sold in current market conditions in seven calendar days without significantly changing the market value of the investment.  The determination would have to follow the same process as the other liquidity classifications, and funds would have to review their illiquid investments at least monthly.  If a fund breaches the 15 percent limit, the occurrence must be reported to the board, along with an explanation of how the fund plans to bring its illiquid investments back within the limit within a reasonable period of time, and if it is not resolved within 30 days, the board must assess whether the plan presented to it is in the best interest of the fund and its shareholders.

Board Oversight:  A fund’s board, including a majority of the fund’s independent directors, would be required to approve the fund’s liquidity risk management program and the designation of the fund’s adviser or officer to administer the program.  The fund’s board also would be required to review, at least annually, a written report on the adequacy of the program and the effectiveness of its implementation.

Form N-LIQUID:  The new form would generally require a fund to confidentially notify the Commission when the fund’s level of illiquid assets exceeds 15 percent of its net assets or when its highly liquid investments fall below its minimum for more than a brief period of time.

Swing Pricing - Swing pricing is the process of adjusting a fund’s net asset value per share to pass on to purchasing or redeeming shareholders certain of the costs associated with their trading activity.  It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be another tool to help funds manage liquidity risks.  Pooled investment vehicles in certain foreign jurisdictions currently use forms of swing pricing.  The reforms will permit open-end funds (except money market funds or ETFs) to use swing pricing.

A fund that chooses to use swing pricing would adjust its net asset value by a specified amount– the swing factor – once the level of net purchases into or net redemptions from the fund has exceeded a specified percentage or percentages of the fund’s net asset value known as the swing threshold.  A fund’s swing pricing policies and procedures would have to specify the process for how the fund’s swing factor and swing threshold would be determined (taking into account certain considerations) and establish and disclose an upper limit on the swing factor used, which may not exceed two percent of net asset value per share.

The amendments also would require the fund’s board to approve the fund’s swing pricing policies and procedures and periodically review a written report that would have to, among other things, review the adequacy of the fund’s swing pricing policies and procedures and the effectiveness of their implementation.  The board also would be required to approve the funds’ swing factor upper limit, swing pricing threshold, and any changes thereto.

Additional Disclosure and Reporting Requirements


The Commission will consider amendments to the registration form used by open-end management investment companies and two reporting forms.

Form N-1A - Amendments to the registration form used by open-end funds (Form N-1A) would require funds to describe their procedures for redeeming fund shares, the number of days in which the fund typically expects to pay redemption proceeds, and the methods for meeting redemption requests.  Amendments to Form N-1A and Regulation S-X would also address financial statement and performance reporting related to swing pricing, and would require funds that use swing pricing to provide an explanation of a fund’s use of swing pricing in its registration statement.

Form N-PORT - Amendments to the portfolio holdings reporting form (Form N-PORT) would require a fund to report the aggregated percentage of its portfolio representing each of the four classification categories.  Funds also would be required to report position-level liquidity classification information to the Commission and information regarding a fund’s highly liquid investment minimum on a confidential basis.

Form N-CEN - Amendments to the census reporting form (Form N-CEN) would require funds to disclose information regarding the use of lines of credit and interfund borrowing and lending, and would require an ETF to report if it is an in-kind ETF under the rule.  The swing pricing amendments would add a new item to Form N-CEN that would require a fund to report information regarding the use of swing pricing, including a fund’s swing factor upper limit.

What’s Next - The new rules and forms, and amendments to rules and forms, would be published on the Commission’s website and in the Federal Register.  Most funds would be required to comply with the liquidity risk management program requirements on Dec. 1, 2018, while fund complexes with less than a $1 billion in net assets would be required to do so on June 1, 2019.  The Commission is delaying the effective date of the amendments that would permit funds to use swing pricing.  The final amendments, if adopted, would become effective 24 months after publication in the Federal Register.  The compliance date for the form amendments would differ by form.   Top 

Hedge Fund Firm and Supervisor Charged with Failing to Prevent Insider Trading
"By disgorging the illicit profits ...this settlement ensures that [they] will not be rewarded for their negligence."

On October 13, 2016, the Commission announced that a hedge fund advisory firm and a senior research analyst have agreed to settle charges related to their failures to detect insider trading by one of their employees.

The SEC’s order finds that San Francisco-based Artis Capital Management failed to maintain adequate policies and procedures to prevent insider trading at the firm.  Artis Capital and specifically the employee’s supervisor Michael W. Harden failed to respond appropriately to red flags that should have alerted them to the misconduct.  The employee, Matthew G. Teeple, was later charged along with his source David Riley as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Teeple and Riley also were charged by criminal authorities and have since received prison sentences.

Artis Capital agreed to settle the SEC’s charges by disgorging the illicit trading profits that Teeple generated for the firm totaling $5,165,862, plus interest of $1,129,222 and a penalty of $2,582,931.  Harden agreed to pay a $130,000 penalty and is suspended from the securities industry for 12 months.

“Hedge fund advisory firms and supervisors must take all reasonable measures necessary to prevent insider trading, yet Artis Capital and Harden failed to take any action at all in response to Teeple’s highly profitable and suspiciously-timed trading recommendations,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

Joseph G. Sansone, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “By disgorging the illicit profits that Artis Capital obtained through Teeple’s misconduct, this settlement ensures that the firm and Harden will not be rewarded for their negligence.” Artis Capital and Harden consented to the SEC’s order without admitting or denying the findings.
[Please login to the IA Act UnwrappedTM Releases Database to view Release No. IA-4550 In the Matter of Artis Capital Management, LP and Michael W. Harden]  Top  


SEC Enforcement Results for FY 2016

Increase in Actions Involving Investment Advisers

On October 11, 2016, the Commission announced that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.
 
The new single year high for SEC enforcement actions for the fiscal year that ended September 30 included the most ever cases involving investment advisers or investment companies (160) and the most ever independent or standalone cases involving investment advisers or investment companies (98).  The agency also reached new highs for Foreign Corrupt Practices Act-related enforcement actions (21) and money distributed to whistleblowers ($57 million) in a single year.

The agency also brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties.

 “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions,” said SEC Chair Mary Jo White.  “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”

The SEC’s most significant enforcement actions in fiscal year 2016 include:

“This has been a strong year for the Enforcement Division, with groundbreaking insider trading and FCPA cases and other important actions across the full spectrum of the securities laws,” added Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Through their hard work and steadfast dedication to our mission, the Division’s committed staff have helped protect investors and made our markets fairer and more reliable.”

The agency also brought impactful first-of-their-kind actions in fiscal year 2016, including charges against: a firm solely for failing to file Suspicious Activity Reports when appropriate;  an audit firm for auditor independence failures predicated on close personal relationships with audit clients; municipal advisors for violating the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act and the municipal advisor antifraud provisions of the Dodd-Frank Act; a private equity adviser for acting as an unregistered broker; and an issuer of retail structured notes for misstatements and omissions.  In addition, fiscal year 2016 included a first-of-its-kind trial victory: the first federal jury trial by the SEC against a municipality and one of its officers for violations of the federal securities laws.

Overview - Uncovering Misconduct by Investment Advisers and Investment Companies


No-Action Regarding Performance of Certain Engagements under the Custody Rule


The Division of Investment Management has issued a new no-action letter extending relief concerning the performance of certain engagements under Advisers Act Rule 206(4)-2 (the Custody Rule) by auditors in light of the Public Company Accounting Oversight Board’s (PCAOB's) Temporary Rule providing for its inspection of auditors related to audits of brokers or dealers.

On three prior occasions, the staff of the Division of Investment Management provided no-action relief concerning the performance of certain engagements under Rule 206(4)-2 by auditors engaged to audit the financial statements of a broker or a dealer. Absent adoption by the PCAOB of a permanent program for the inspection of broker and dealer auditors, the no-action position taken in the most recent no-action letter expires on December 31, 2016.  The new no-action letter issued to Robert Van Grover, Esq., Seward & Kissel LLP on October 4, 2016, extends the no-action relief until December 31, 2019 or a date earlier when the Commission approves a PCAOB-adopted permanent program.

The Custody Rule requires auditors performing certain engagements for purposes of an investment adviser's compliance to be registered with, and subject to regular inspection by, the PCAOB as of the commencement of the professional engagement period and as of each calendar year-end.

In the 2013 no-action letter, Division of Investment Management Staff stated that, in light of the PCAOB’s Temporary Rule providing for its inspection of auditors related to audits of brokers or dealers, it would not recommend enforcement action to the Commission against an investment adviser who, for purposes of compliance with the Custody Rule, engages an auditor to (1) perform a surprise examination of an investment adviser who maintains, or who has custody because a related person maintains, client funds or securities as qualified custodian in connection with advisory services provided to clients, (2) prepare an internal control report, or (3) audit the financial statements of a pooled investment vehicle in connection with the annual audit provision, as long as such auditor was registered with the PCAOB and was engaged to audit the financial statements of a broker or a dealer as of the commencement of the professional engagement period of the respective engagement and as of each calendar-year end.
[Please login to view the new no-action letter, and prior related no-action letters noted above, in the IA Act UnwrappedTM No-Action Letter Database.]  Top 

 

Headline News

IM Posts New Q&A Regarding the Pay to Play Rule
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IA Settles with SEC for Improperly Allocating Expenses to its Private Equity Fund Clients
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Outsourced CCO Sanctioned, Suspended and Fined for False Form ADV Filings
Relied on Estimates from CIO Not Verified for Accuracy
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False ADV Filings & Failure to Maintain Books & Records
CCO Responsibilities Outsourced, but Lamm - as COO and CCO's direct supervisor - still liable
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Amended Form ADV and Other-Than-Annual Amendments Raises Questions
DIM Issues No Enforcement Action Response
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Updates

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

Staff Responses to Questions about the Pay to Play Rule 
Updated Q&A regarding Capital Acquisition Brokers (CABs) offers no-action relief
FAQs updated under IA Act UnwrappedTM Regulatory Database Rule 206(4)-5 and added to the Examination Tools Database - 2017 Information

IA-4748 In the Matter of Stephen S. Eubanks

IA-4747 In the Matter of Institutional Investors Advisory Company

IA-4746 In the Matter of Capital Dynamics, Inc.

IA-4745 In the Matter of David I. Osunkwo
Added to the IA Act UnwrappedTM Releases Database and to Regulatory Database Rule 204-2 Risks/Significant Enforcement Cases

IA-4744 In the Matter of Diane W. Lamm
Added to the IA Act UnwrappedTM Releases Database and to Regulatory Database Rule 204-2 Risks/Significant Enforcement Cases

LR-23905 SEC v. Southridge Capital Management LLC, et al.

IA-4743 In the Matter of Coachman Energy Partners, LLC, and Randall D. Kenworthy

Information Update for Advisers Filing Certain Form ADV Amendments
IM Information Update IM-INFO-2017-06 
Added to the IA Act UnwrappedTM Examination Tools Database - 2017 Information, and linked to Regulatory Database Rule 204-1: Form ADV Amendments

IA-4742 In the Matter of Bryan Wayne Anderson

IA-4737 In the Matter of Bradley T. Smegal

IA-4741 In the Matter of Donald J. Lester

IA-4740 In the Matter of Steven V. McClatchey

Observations from Cybersecurity Examinations
OCIE National Exam Program Risk Alert
Summary of observations from OCIE's examinations conducted pursuant to the Cybersecurity Examination Initiative
Added to the IA Act UnwrappedTM Examination Tools Database - 2017 Information

IA-4739 In the Matter of Black Diamond Asset Management LLC and Robert Wilson

IA-4738 In the Matter of John Thomas Capital Management Group, LLC, et al
Order Cancelling Oral Argument

IA-4736 In the Matter of Cadaret, Grant & Co., Inc.

IA-4735 In the Matter of Lynn Tilton, Patriarch Partners, LLC, et al

IA-4734 In the Matter of Columbia River Advisors, LLC, Benjamin J. Addink and Donald A. Foy
Added to the IA Act UnwrappedTM Releases Database and to Risks/Significant Enforcement Cases under Regulatory Database Rule 206(4)-2 Custody

IA-4733 In the Matter of Brian Kimball Case, Bradway Financial, LLC, and Bradway Capital Management, LLC
Added to the IA Act UnwrappedTM Releases Database and to Risks/Significant Enforcement Cases under Regulatory Database Rules 203(m)-1, 206(4)-2, 206(4)-7 & 206(4)-8