Industry News

SEC Enforcement Division Releases Annual Report and Stress Priorities

December 21, 2017 | Elizabeth Dalziel

On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017. Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.” They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws. To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss. The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes. The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors. The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading ›

DOL Approves 18-Month Extension of Fiduciary Rule Transition Period

December 4, 2017 | Patricia Klusmeyer

The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading ›

Maryland Amends its Securities Act

November 30, 2017 | Elizabeth Dalziel

Earlier this year the Maryland General Assembly amended parts of the Maryland Securities Act and added some new sections to it. The amendments went into effect on October 1, 2017. Changes to the Maryland Securities Act include the creation of the Securities Act Registration Fund, adoption of the North American Securities Administrators Association’s Senior Model Act to address financial exploitation of seniors, and changes in fees for certain filing categories.

The amendments added a new section, Section 11-208, which establishes a Securities Act Registration Fund. The Fund’s purpose is “to help fund the direct and indirect costs of administering and enforcing the Maryland Securities Act.” The Fund will comprise registration fees, money that the State sets aside for the Fund in its budget, and any money accepted from any other source for the Fund’s benefit. The Fund cannot be used for any purpose other than administering and enforcing the Maryland Securities Act. Continue reading ›

Kansas Investment Adviser’s Recommendation of Nontraditional ETFs Deemed Unsuitable for Client Seeking Income and Growth

November 15, 2017 | Elizabeth Dalziel

Earlier this year, the Kansas Court of Appeals affirmed a district court decision holding that Mark R. Schneider (“Schneider”), an investment adviser representative and broker-dealer, violated the Kansas Uniform Securities Act by recommending nontraditional exchange-traded funds (“ETFs”) to a client whose investment objective was to produce income. Schneider was ordered to pay $94,720.60 in restitution and a $25,000 civil penalty.

For over 20 years, Schneider acted as investment adviser to Mary Lou and Jeffrey Silverman. Schneider oversaw the Silvermans’ assets, tax returns, and life insurance, and he had discretionary authority over their investments. In 2010, Mr. Silverman died, and Mrs. Silverman obtained $1,150,000 from Mr. Silverman’s life insurance policy. In May 2010, Schneider formulated a financial plan to help Mrs. Silverman garner income from investments she would make using the money from the life insurance policy. Continue reading ›

Morgan Stanley Announces Withdrawal From Broker Protocol

November 3, 2017 | Elizabeth Dalziel

On October 24, 2017, Morgan Stanley declared that it has decided to withdraw from the Protocol for Broker Recruiting (“Protocol”). Morgan Stanley stated that the Protocol is “replete with opportunities for gamesmanship and loopholes” and that the Protocol is “no longer sustainable.” It believes that leaving the Protocol will be beneficial for its growth as a company. However, it is expected that Morgan Stanley’s withdrawal from the Protocol might bring significant consequences to the investment management industry, including potentially the end of the Protocol itself. Continue reading ›

New SEC Co-Directors of Enforcement Identify Cyber Threats as the Greatest Threats to Financial Markets

October 24, 2017 | Elizabeth Dalziel

Earlier this year, Securities and Exchange Commission Chairman Jay Clayton appointed Stephanie Avakian and Steven Peikin as co-directors of the SEC’s Enforcement Division. In an interview with Reuters, Avakian and Peikin expressed particular concern about cyber threats and how the SEC should make cybersecurity an enforcement priority. According to Peikin, “The greatest threat to our markets right now is the cyber threat… That crosses not just this building, but all over the country.”

The SEC has expanded of investigations relating to cybercrimes. There also appears to be an increase in incidents of hackers attempting to gain access to brokerage accounts. In response, the SEC has begun obtaining statistics about cybercrimes to assess market-wide issues. Continue reading ›

SEC Charges Investment Adviser with Distributing False Account Statements to Investors

October 20, 2017 | Elizabeth Dalziel

On October 2, 2017, the Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California against Tweed Financial Services, Inc. (“TFSI”), an investment advisory firm, and its proprietor, Robert Russel Tweed (“Tweed”). The SEC’s complaint alleges that TFSI and Tweed “defrauded their clients by misleading them about how their money had been invested and how poorly those investments were performing.” According to the SEC, TFSI and Tweed violated the Investment Advisers Act of 1940 by deceiving their clients.

According to the SEC’s complaint, TFSI and Tweed formed Athenian Fund L.P., a private fund, in 2008. Twenty-four investors placed money in the Athenian Fund, and the fund raised approximately $1.7 million. The Athenian Fund’s private placement memorandum informed investors that money invested in Athenian Fund would be invested in a master fund that “had been established to trade stocks using an algorithmic trading platform developed by acquaintances of Tweed.” However, beginning in March 2010, Tweed transferred all of the Athenian Fund’s assets to another fund. In March 2011, TFSI and Tweed had the Athenian Fund loan $200,000 to a startup software company. The SEC alleged that these two ventures resulted in the Athenian fund losing approximately $800,000. Continue reading ›

FINRA Publishes Notice to Arbitrators and Parties Regarding Expungement Procedures

October 12, 2017 | Elizabeth Dalziel

In September 2017, the Financial Industry Regulatory Authority updated a previously published Notice related to FINRA Rules 12805 and 13805, which “establish procedures that arbitrators must follow before recommending expungement of customer dispute information related to arbitration cases from a broker’s Central Registration Depository (CRD®) record.” When details are expunged from the CRD system, those details are permanently deleted and cannot be accessed by members of the general public, regulators, or potential broker-dealer employers. As a result, FINRA regards expungement as an extreme remedy that should only be exercised in circumstances in which one of the three “narrow grounds specified in Rule 2080” are met. These three grounds are a finding that the claim, allegation or information is factually unfeasible or obviously erroneous, a finding that a registered person did not participate in the alleged investment-related misconduct, or a finding that the claim, allegation, or information is untrue.

The updates to the Notice added instructions regarding expungement requests before an underlying arbitration case has concluded. According to FINRA, a broker is not permitted to file an expungement request pertaining to customer dispute information until after the underlying customer arbitration involving the information has concluded. Likewise, a broker is forbidden from filing an expungement request in a distinct, expungement-only case before an underlying customer arbitration ends. The updates to the Notice also provide that FINRA allows the Director of the Office of Dispute Resolutions to deny use of the FINRA arbitration forum if the Director concludes that the subject matter of the dispute is unsuitable, or that consenting to hear the matter would create a risk to the health and safety of the parties and arbitrators. The updates conclude by saying that the Director has decided to not allow requests for expungement to be heard before the underlying customer arbitrations conclude in order to keep results consistent and to ensure efficiency. Continue reading ›

DOL Proposes Additional Extension of Fiduciary Rule Transition Period

September 12, 2017 | Patricia Klusmeyer

The Department of Labor (DOL) recently published its proposal to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. Currently only adherence to the impartial conduct standards is required for compliance with the Best Interest Contract (BIC) exemption during the transition period, as well as for certain other prohibited transaction exemptions issued or revised in connection with the Fiduciary Rule. Compliance with the full provisions of the BIC exemption and the other related exemptions is not required until the second phase of implementation of the Fiduciary Rule, which is currently set for January 1, 2018.

If adopted, the same requirements in effect now for compliance with the BIC exemption and related exemptions would remain in effect for the duration of the extended transition period. The DOL stated that the primary purpose for seeking to extend the transition period was to allow the DOL sufficient time to review the substantial commentary it has received and consider possible changes or alternatives to the Fiduciary Rule exemptions. The DOL noted its concern that without a delay in the applicability date, financial institutions would incur expenses attempting to comply with certain conditions or requirements of the newly issued or revised exemptions that are ultimately revised or repealed.

The DOL stated that it anticipates it will propose in the near future a “new and more streamlined class exemption built in large part on recent innovations in the financial services industry.” These recent innovations include the development of “clean shares” of mutual funds by some broker-dealers, which the DOL discussed approvingly in its first set of transition period FAQ guidance. “Clean shares” would not include any form of distribution-related payment to the broker, but would instead have uniform commission levels across different mutual funds that would be set by the financial institution. In this way, the firm could mitigate conflicts of interest by substantially insulating advisers from the incentive to recommend certain mutual funds over others. However, these types of innovations will take time to develop.

SEC Settles Charges with Investment Adviser Over Insufficient Disclosure of Fees

September 6, 2017 | Elizabeth Dalziel

On August 14, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease and Desist Proceedings (“Order”) against Coachman Energy Partners, LLC (“Coachman”), an investment adviser, and its owner, Randall D. Kenworthy (“Kenworthy”). According to the SEC’s Order, Coachman “failed to adequately disclose its methodology for calculating the management fees and management-related expenses it charged” to four oil and gas funds it managed. Coachman and Kenworthy submitted offers of settlement in conjunction with the Order.

The SEC found that from 2011 to 2014, Coachman acted as investment adviser to four funds specializing in oil and gas operations. Each fund was charged an annual management fee which made up 2 to 2.5% of the total capital contributions given to each fund as of the last day of the year. According to the SEC, however, Coachman’s offering materials and Forms ADV did not adequately disclose that the management fees were based upon year-end contributions. Rather, these documents implied that management fees and expenses were based upon “the average amount of capital contributions under management during the course of the year.” Therefore, the SEC alleged that Coachman and Kenworthy overbilled investors in the amount of $1,128,916.

The SEC also alleged that between 2013 and 2014, Coachman billed two of the funds management expenses based upon 1.5% of the total capital contributions given to these funds as of the last day of the year. However, the offering materials for these funds allegedly did not sufficiently inform investors that the funds would be obligated to pay Coachman for management expenses based on year-end capital contributions. Rather, these materials supposedly informed investors that management expenses were calculated using the average number of capital contributions under management for the whole year. The SEC alleges that this resulted in Coachman and Kenworthy overbilled clients in the amount of $449,294.