RIA Compliance Blog
Last month, the SEC announced a series of settled enforcement actions against investment advisers who routinely failed to file 13F and 13H reports with the Commission. The actions are tied to the SEC’s announced examination priority to assess the accuracy and completeness of regulatory filings.
Depending on the frequency, aggregate amount of transacted securities, types of securities, or value of securities an investment adviser advises, advisers registered with the SEC are subject to many filing requirements. Of these, the most common are the 13F and 13H reports required pursuant to Section 13 of the Exchange Act.
Section 13(f)(1) of the Exchange Act requires institutional investment managers to file quarterly reports if they exercise discretionary authority over 13(f) securities with an aggregate value of at least $100 million. The SEC publishes the list of qualifying 13(f) securities on a quarterly basis. Investment advisers can fall under the definition of “institutional investment manager” if they have discretionary authority for a client. Commonly, investment advisers incorrectly believe that they are not considered institutional investment managers, that ETFs are not considered 13(f) securities, or that they are not responsible for reporting because they use sub-advisers or some other third-party to manage their client accounts.
Similarly, Section 13(h)(1) of the Exchange Act requires large traders to file quarterly reports with the SEC. A large trader is an individual or firm who has discretionary authority over at least one account and trades in NMS Securities totaling either (i) 2 million shares or $20 million worth of shares a day, or (ii) 20 million shares or $200 million worth of shares a month.
In the recent enforcement actions, the SEC sanctioned nine investment advisers for failing to file the required 13F reports since at least 2020. Additionally, two of these advisers also failed to file required 13H reports. Collectively, the SEC imposed $3.4 million in civil penalties against the sanctioned investment advisers.
Across the enforcement actions, the SEC alleged that the investment advisers failed to file 13F reports from at least 2020 through the first and second quarter of 2024. In all situations, the SEC found that the investment advisers were considered institutional investment managers, and they exercised discretionary authority over 13(f) securities during the same period. In some situations, the SEC found that the investment advisers managed several hundred million dollars in 13(f) securities, well in excess of the $100 million qualifying amount. While the SEC alleged that the activity occurred from 2020 through 2024, the SEC noted that at least one adviser failed to file the required 13F reports prior to 2020, dating as far back as 2007.
Two of the sanctioned investment advisers additionally were considered large traders and failed to file the required 13H reports covering the same period.
The SEC enforcement actions show not only how important it is for investment advisers to understand and satisfy their filing obligations, but also the risk-based assessment that investment advisers should consider when deciding whether to self-report violations to the SEC. Of the twelve investment advisers involved in the SEC release, three advisers self-reported their violations to the SEC. In deciding what penalties to impose, the SEC noted the self-reporting for these advisers, and as a result, two of the self-reporting advisers did not face civil penalties. Of note, the remaining self-reporting adviser faced the largest civil penalty imposed by the SEC during this sweep, $725,000, but this adviser was one of the two advisers who also failed to file the 13H reports. Not coincidentally, this adviser also managed the greatest amount of regulatory assets under management at $95 billion. While this adviser was not able to avoid a civil penalty, the penalty imposed was likely reduced to reflect the self-reporting.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with required regulatory filings and complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.