Compliance

Investment Adviser Settles Charges of Failure to Disclose Conflicts of Interest

September 4, 2015 | Steve Parker

Last month, the Securities and Exchange Commission (SEC) announced that registered investment adviser Guggenheim Partners Investment Management, LLC had consented to settle charges that it breached its fiduciary duty to its clients in connection with a $50 million loan made by a client to one of Guggenheim’s senior executives. Specifically, Guggenheim failed to disclose the existence of the loan and the conflicts of interests created by the loan, to its clients. Guggenheim agreed to pay a total of $20 million dollars to settle the charges.

According to the order instituting the administrative proceeding, the senior executive borrowed the funds from an advisory client so that he could make a personal investment in another corporation that was being acquired by Guggenheim’s parent company. The client who made the loan was one of several advisory clients of Guggenheim that invested, at Guggenheim’s recommendation, in two unrelated transactions. The client who made the loan, however, was permitted to invest in the unrelated transactions on different terms than the investors who had not made a loan to Guggenheim.
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SEC Enforcement Actions Against Corporate Officers – Targeting or Responsible Monitoring?

July 31, 2015 | Shay Virtue

In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.
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FINRA Amendments to Relax Filing Rules Governing Retail Communications

July 24, 2015 | Shay Virtue

FINRA has recently released Regulatory Notice 15-16 which contains proposed amendments to the rules currently governing public communications they will make reporting by FINRA member firms regarding public communications less onerous due to more lenient filing requirements. If the proposed amendments are adopted, the rules proposed to be amended are FINRA Rules 2210, 2214 and 2213.

FINRA Rule 2210 relates to communications of a firm with the public. Under the current regime new firms are required, at least 10 days prior to making any retail communications, to file such communications with FINRA for the first year of the firm’s membership. Under the proposed amendment, new firms would only be required to file their websites and any material changes thereto within 10 days of first use of the website for the first year of the firm’s membership. This proposed change was prompted by FINRA’s recognition that the primary form of retail communications is now done through the firm’s websites and that the 10-day waiting period served no significant investor protection function.
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Investment Adviser and Principals Sanctioned for Compliance Failures

July 9, 2015 | Shay Virtue

In a matter underscoring how important it is for investment advisers to dedicate sufficient resources and attention to their compliance program, the Securities and Exchange Commission (“SEC”) has sanctioned a firm for multiple compliance failures. On June 23, 2015 the SEC instituted cease-and-desist proceedings against Pekin Singer Strauss, a registered investment advisor firm boasting approximately $1.07 billion in AUM which primarily serves high-net-worth clients.

Among the violations cited, the order states that Pekin Singer failed to conduct timely annual compliance program reviews in 2009 and 2010 and failed to implement and enforce provisions of its policies and procedures and code of ethics during this same period. The firm has been ordered to pay a civil money penalty in the amount of $150,000.
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SEC Issues Guidance Update on Cybersecurity

May 29, 2015 | Steve Parker

Last month, the SEC division of Investment Management released Investment Management Guidance in which it discusses a number of measures that investment advisers may wish to consider when addressing cybersecurity risks. This guidance is just the last in a long list of guidance and alerts issued by the SEC and other regulators as to the need for financial firms to improve their policies and procedures dealing with cybersecurity threats.

Among the recommendations made in the current IM are that firms:

• Conduct a periodic assessment of the nature, sensitivity and location of information, what types of cybersecurity threats and vulnerabilities exist, what security controls and processes are currently in place, the impact that would occur in the event of compromise of information, and the effectiveness of the current structure confirms current structure for managing cyber security risks

Questions Surround Impact Of Labor Department Fiducuary Rule for Financial Advisers

May 22, 2015 | Steve Parker

In the wake of the re-proposal by the U.S. Department of Labor of its so-called “Fiduciary Rule,” there are a number of questions regarding how the rule if adopted, will impact those providing financial advice to employee benefit plans and other retirement plans including IRAs and ERISA plans in general. The most obvious impact of the rule would be to bring those not currently fiduciaries, including registered representatives of securities broker-dealers and the broker-dealer firms themselves, into the realm of fiduciary advice providers. The higher standard of care that would apply necessarily implies a need for more thorough disclosures of potential conflicts of interest, including incentivized compensation such as commissions, 12b-1 fees and the like.
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LPL Financial Ordered by FINRA to Pay $11.7 Million

May 15, 2015 | Steve Parker

Earlier this month, the Financial Industry Regulatory Authority (“FINRA”) announced that it had fined LPL Financial (“LPL”) $10 million for lack of supervision in several areas of its operations, including sales of ETFs, variable annuities, REITs, and other complex products. In addition, FINRA found LPL failed to monitor trades and failed to report them to FINRA and failed to deliver more than $14 million in trade confirmations to customers. FINRA also ordered LPL to repay certain customers $1.7 million in restitution relating to the purchases of ETFs. Among FINRA’s findings were that the firm did not have a system that monitored how long customers were holding ETFs in their accounts, information that would be important in formulating advice as to whether the ETFs should have been purchased in the first place and how long the client should be recommended to hold the ETFs in their portfolios. Additionally, even though LPL had created policies limiting the concentration of ETFs in customer accounts, it failed to enforce the limits it had established and had not trained its registered representatives on the risks of those products.

With respect to variable annuities, FINRA found that in several instances, LPL had permitted said annuities to be sold without proper disclosure of surrender fees. Additionally, although LPL employed an automated surveillance system, that system failed to adequately review transactions commonly known as mutual fund “switches,” which involve a redemption of one mutual fund in order to purchase another.
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SEC Charges Three Investment Adviser Firms with Improper Registration in Wyoming

March 23, 2015 | Chadd Reynolds

On February 4, 2015, the SEC issued cease and desist orders against three investment advisers that fraudulently maintained registration with the SEC by listing Wyoming as their principal place of business on their Forms ADV. These three incidences highlight Wyoming’s unusual landscape for investment advisers.

In order to explain the uniqueness of these orders, some background on investment adviser regulation will be provided. Originally, investment advisers were prohibited from registering with the SEC under the Investment Advisers Act if it managed under $25 million in assets or met a designated exemption. In July 2011, that threshold was increased to $100 million. If an investment adviser does not meet or exceed the $100 million threshold, it is still required to register with the states in which they maintain their principal place of business. Wyoming is unique in that it does not regulate investment advisers. Any investment adviser with its principal place of business in Wyoming must therefore, according to the amendments to Section 203A of the Investment Advisers Act, register with the SEC.
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Non-Registered Crowdfunding Site Reaches Settlement with SEC

January 26, 2015 | Chadd Reynolds

In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.

Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
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NASAA Unveils Electronic Filing Depository

January 26, 2015 | Chadd Reynolds

On December 15, 2014, the North American Securities Administrators Association (“NASAA”) launched an online electronic filing system to be used for issuers filling Form D, Rule 506 offerings with state securities regulators. The purposes of this new electronic filing depository (“EFD”) website, according to NASAA president William Beatty, are to provide an efficient and streamlined process for regulatory filings and to allow for increased transparency for investors.

Issuers seeking an exemption under Rule 506 must meet certain requirements in order to avoid having to register their public or private offerings with the SEC or state regulators. However, those issuers must still file a notice of exempt offering of securities, or “Form D,” with the SEC and state securities regulators. Instead of the longer and more tedious process of registering with securities regulators, Form D requires only limited information about the issuer, the investors, and the securities offered.
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