Articles Posted in Industry News

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The SEC recently entered a cease-and-desist order against an SEC-registered investment adviser Federal Prep Advisors, Inc. (“Federal Prep”) and its principal regarding its rollover recommendations from Thrift Savings Plan (“TSP”) accounts to advisory Individual Retirement Accounts (“IRAs”). The SEC determined that Federal Prep did not adequately evaluate and disclose the costs associated with the TSP and its services or the available investment options under the TSP, among other things.[1]

The Thrift Savings Plan is a defined contribution retirement plan for federal employees and members of the uniformed services, and generally has lower fees compared to private employer-sponsored 401(k) plans. From at least June 2020 until around June of 2023, Federal Prep advised approximately 300 clients to rollover assets from a TSP account to an IRA managed by Federal Prep.

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The SEC recently announced its annual Examination Priorities for the 2025 year. This annual release provides insight into the areas that the SEC plans to highlight when inspecting investment advisers, investment companies, broker-dealers, and other entities subject to examination by the SEC’s Division of Examinations. For investment advisers, the 2025 priorities largely are unchanged from the announced 2024 priorities, which we have previously discussed.

For FY25, the SEC again intends to focus on investment advisers who have never been examined, newly registered investment advisers, and investment advisers who have not been examined recently.

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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.

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Last week, the SEC announced a series of enforcement actions tied to its ongoing sweep of investment adviser compliance with the new Marketing Rule. In total, nine firms settled claims that they violated Advisers Act Rule 206(4)-1, the “new Marketing Rule,” resulting in $1,240,000 in civil penalties.

We have previously written about the implementation of the new Marketing Rule, the announcement of the corresponding examination sweep program, and the subsequent enforcement actions that have resulted. While the previous enforcement actions have largely centered around investment advisers who have failed to adopt policies and procedures designed to prevent violations of the new Marketing Rule, the recent enforcement actions give greater insight into the real-world application of the new Marketing Rule. Namely, the actions detail marketing violations due to the use of third-party ratings by the investment advisers.

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The Financial Crimes Enforcement Network (“FinCEN”) adopted final rules to bring the majority of the investment advisory industry under the reporting requirements for illicit finance activity. The update brings “investment advisers,” as defined under the new rule, within the definition of “financial institution” for regulation under the Bank Secrecy Act (“BSA”).

The BSA has long attempted to safeguard the US financial system by monitoring and reporting certain activities and transactions. Under the new FinCEN Rule, certain investment advisers have the same regulatory requirements historically reserved for banks, broker-dealers, money transmitters, and casinos.

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In November 2022, the U.S. Securities and Exchange Commission (“SEC”) adopted new rule 14Ad-1, which requires that institutional investment managers that are subject to the reporting requirements of section 13(f) of the Exchange Act annually report each say-on-pay vote over which the manager had voting power on the Form N-PX. Institutional investment managers include any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person (“Institutional Managers”). Any Institutional Managers that are required to file Form 13F must disclose any say-on-pay votes over which it exercised voting power on Form N-PX. The types of say-on-pay votes that must be reported include votes on approval of executive compensation, on the frequency of that compensation, and on approval of “golden parachute” compensation connected to a merger or acquisition.

The SEC adopted a two-part test to determine whether an Institutional Manager “exercised voting power” over a security and thus must report a say-on-pay vote on Form N-PX. Accordingly, an Institutional Manager must report a say-on-pay vote for a security if the manager: (1) has the power to vote, or direct the voting of, a security; and (2) exercises this power to influence a voting decision for the security. Even if an Institutional Manager did not exercise voting power over any say-on-pay votes, it must still file a notice on the Form N-PX indicating that it does not have any proxy votes to report. Continue reading ›

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On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that drastically changes the employment landscape by banning most types of noncompete provisions nationwide and rendering some existing ones unenforceable. The rule was adopted following a review of the non-competition landscape by the FTC. That review of noncompetes and their impact on the employment market and US economy was extensive. The FTC estimated that 1 in 5 Americans are subject to noncompetes as part of their employment.[i] In total, the FTC received over 26,000 comments regarding the proposed ban on noncompetes, over 25,000 commentors supported the proposed ban on noncompetes.[ii] Continue reading ›

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On April 12, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced they had settled charges against 5 registered investment advisers for violations of the SEC’s Marketing Rule. The announcement follows prior enforcement actions for similar violations, which we have previously addressed: SEC Fines 9 RIAs for Marketing Rule Violations, SEC Fines Adviser Under New Marketing Rule, and SEC Announces Examinations Under New Marketing Rule.

Collectively, the 5 investment advisers, GeaSphere LLC; Bradesco Global Advisors Inc.; Credicorp Capital Advisors LLC; InSight Securities Inc., and Monex Asset Management Inc., were censured, ordered to cease and desist from further violations of the Investment Advisers Act of 1940, and pay civil penalties ranging from $20,000 to $100,000.

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Last month, the Financial Crimes Enforcement Network (FinCEN) released notice of a proposed rule that would impose new requirements on certain investment advisers under the Bank Secrecy Act (BSA). Specifically, the new rule would include some advisers within the rule’s definition of “financial institution,” thereby bringing those new advisers within the scope of the rule, which sets out requirements for complying with the US Treasury Department’s counter-terrorism financing and anti-money laundering (collectively, “AML”) program.  FinCen proposed a similar rule in 2015, but that rule never became effective.

This proposed rule is another step in a larger effort by FinCen to collect more relevant information that would allow for better AML enforcement and follows on the heels of the Corporate Transparency Act (“CTA”), which became effective on January 1, 2024. The CTA requires most US companies to submit reports relating to the beneficial ownership of the company. The impetus for the new rule proposal, according to a statement issued by FinCEN’s director, is the concern that foreign adversaries may be taking advantage of vulnerabilities within the US financial system, and a recognition that, collectively, US advisers manage many trillions of dollars. Continue reading ›

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In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.

Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.

Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years. Continue reading ›

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