Industry News

SEC Charges Investment Adviser With Defrauding Clients Regarding Advisory Fees

August 29, 2017 | Elizabeth Dalziel

On August 22, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Central District of California against Jeremy Drake (“Drake”), an investment adviser. The complaint alleges that Drake lied to two clients, a high-profile professional athlete and his wife, regarding their annual management fees. The complaint also alleges that Drake used extensive measures to back up his deception, including sending “false and misleading emails” and “a number of fabricated documents.”

According to the SEC’s complaint, Drake’s alleged misconduct occurred when he was an investment adviser representative of HCR Wealth Advisers (“HCR”), a Los Angeles-based registered investment adviser. In September 2009, the clients entered into an “Investment Advisory Agreement” with HCR. The agreement, which was signed by Drake on behalf of HCR, provided that the clients would pay an annual management fee of 1% of the clients’ assets under management. Evidence shows that the clients paid a 1% management fee for the entire period when they were clients of HCR. Continue reading ›

Court Orders Hedge Fund Advisers to Pay $12.9 Million in SEC Fraud Case

August 22, 2017 | Elizabeth Dalziel

On August 2, 2017, a federal court in Connecticut ordered Steven Hicks (“Hicks”), a hedge fund manager, and his hedge fund advisory firms to pay almost $13 million. This payment includes disgorgement and a penalty. In 2010, the Securities and Exchange Commission (“SEC”) filed a complaint against Hicks and his two hedge fund advisers, Southridge Capital Management LLC (“Southridge Capital”) and Southridge Advisors, LLC (“Southridge Advisors”). The complaint alleged that Hicks, Southridge Capital, and Southridge Advisors committed fraud by placing investor money in illiquid securities when investors were told that “at least 75% of their money would be invested in unrestricted, free-trading shares.”

According to the SEC’s complaint, starting in 2003, Hicks started soliciting investors. He told them that 75% of any money they invested in two funds he was starting would be invested in unrestricted, free-trading shares. Free-trading shares are shares that are eligible to be sold. Evidence shows that some potential investors were also told that the funds would invest “in short-term transactions that would take only 10 or 15 days, such as equity line of credit (‘ELC’) deals.” Continue reading ›

Recent DOL Action: Proposed Delay of Fiduciary Rule and New Transition Period Guidance

August 18, 2017 | Patricia Klusmeyer

The Department of Labor (DOL) recently indicated in a court filing that it has submitted a proposed rule to the Office of Management and Budget (OMB) to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. This proposal is currently under review by the OMB.

The DOL also recently released a new set of FAQ guidance regarding compliance with the Fiduciary Rule during the transition period when providing advice to IRAs, plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), and other plans covered by section 4975 of the Internal Revenue Code (Code). Most of the questions dealt specifically with the prohibited transaction exemption under ERISA section 408(b)(2) for service providers to ERISA plans. Continue reading ›

Date Drawing Near for Compliance with SEC Amendments to Form ADV and Recordkeeping Rules

August 8, 2017 | Elizabeth Dalziel

Beginning October 1, 2017, registered investment advisers are required to use revised form ADV, which requests certain information not sought on previous versions of the form. Advisers will also have to comply with amendments to Rule 204-2 under the Investment Advisers Act of 1940 (“Advisers Act”). With the compliance date less than three months away, advisers should examine whether to modify their internal policies and procedures pertaining to Form ADV reporting and recordkeeping, and also should begin the process of collecting the new information and assuring that the information remains available for future Form ADV filings.

The amendments to Form ADV changed the requirements of Item 5 of Part 1A of Form ADV and Section 5 of Schedule D. The amendments will obligate investment advisers to disclose the estimated percentage of regulatory assets under management (“RAUM”) held in separately managed accounts (“SMAs”) and to indicate those assets “that are invested in twelve broad asset categories.” Investment advisers with $10 billion or more in RAUM connected to SMAs will be obligated to report both mid-year and end-of-year percentages for each category. Investment advisers with fewer than $10 billion in RAUM connected to SMAs will only be obligated to report only end-of-year percentages. The amendments to Form ADV will also require investment advisers to disclose the identity of custodians that make up 10 percent or more of an investment adviser’s total SMA RAUM. Continue reading ›

New Wyoming Investment Adviser Registration Law Impacts SEC Registration Requirements

July 18, 2017 | Elizabeth Dalziel

The State of Wyoming recently enacted a statute that requires most investment advisers doing business in the state, and investment adviser representatives of those advisers, to register. The law subjects the state law registrants to examination in Wyoming by the Secretary of State. Investment advisers who do not have a place of business in Wyoming but have had more than five Wyoming clients during the preceding twelve months are also required to register. Solicitors for state-registered advisers will be required to register but are exempt from the examination requirements.

As a result of this new statute, investment advisers who are eligible for registration with the Securities and Exchange Commission (“SEC”) because they manage more than $25 million in assets are now prohibited from registering with the SEC unless they also manage in excess of $100 million. The result is that “mid-sized advisers,” or advisers that register between $25 million and $100 million, are no longer required to register with the SEC. Continue reading ›

Nevada Enacts Statutory Amendments Creating Fiduciary Obligations for Investment Advisers and Broker-Dealers

July 12, 2017 | Elizabeth Dalziel

On June 2, 2017, Brian Sandoval, the Governor of Nevada, approved proposed amendments to a Nevada statute that regulates so-called “financial planners.” According to the statute in question, a “financial planner” is “a person who for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.” Before the amendments, the statute carved out exclusions for investment advisers and broker-dealers from the definition of a financial planner. The amendments, however, will remove those exclusions. This will result in investment advisers and broker-dealers being identified as financial planners. The amendments became effective on July 1, 2017.

The amendments will also result in investment advisers and broker-dealers having a fiduciary duty with respect to advice they give Nevada clients. According to another Nevada statute, a financial planner must “disclose to a client, at the time advice is given, any gain the financial planner may receive… if the advice is followed.” A financial planner is also required to make a comprehensive examination of each initial client and continually update information regarding a client’s financial situation and goals.

Investment advisers and broker-dealers with Nevada clients may also face potential liability if certain conditions are met. Nevada law provides that if a client incurs losses after receiving advice from a financial planner, that client can recover from the financial planner if specified circumstances are present. For a client to recover, it must be established that either the financial planner breached any part of his or her fiduciary duty, the financial planner was grossly negligent in choosing the method of action advised, in light of the client’s circumstances that the financial planner knew, or the financial planner broke any Nevada law in endorsing the investment or service.

SEC Charges Broker-Dealer for Violations Relating to Suspicious Activity Report Filings

July 11, 2017 | Elizabeth Dalziel

On June 5, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Alpine Securities Corporation (“Alpine”), a Salt Lake City-based broker-dealer. The complaint alleges that Alpine failed to file Suspicious Activity Reports (“SARs”) in the manner prescribed by the Bank Secrecy Act (“BSA”). According to the SEC’s complaint, Alpine’s alleged misconduct “facilitated illicit actors’ evasion of scrutiny by U.S. regulators and law enforcement, and provided them with access to the markets they might otherwise have been denied.”

The BSA obligates a broker-dealer to file SARs with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to report transactions that the broker-dealer knows or suspects involve funds obtained from illegal activities or that were used to conceal such activities. Broker-dealers are also obligated, under the “SAR Rule” (31 C.F.R. § 1023.320), to file SARs if they know or suspect that a transaction’s purpose was to evade BSA obligations or that the transaction did not have an obvious business or lawful purpose. Broker-dealers are also required to file SARs if they know or suspect that a transactions’ purpose is to instigate criminal activity. In addition, both FinCEN, under the SAR Rule, and the Financial Industry Regulatory Authority (“FINRA”), under FINRA Rule 3310, require that broker-dealers establish and enforce anti-money laundering programs that are tailored to guarantee compliance with the BSA and its regulations. Since Alpine was a FINRA-member firm, it was obligated to comply with FINRA’s rule regarding the adoption and enforcement of an anti-money laundering program.

The SEC alleged that while Alpine had adopted an anti-money laundering compliance program, it did not adequately put this compliance program into practice. For example, evidence showed that Alpine’s records included information revealing incidents of “money laundering, securities fraud, or other illicit financial activities relating to [Alpine’s] customers and their transactions.” These constituted so-called “material red flags” and were required to be reported in Alpine’s SARs. However, the SEC alleged that at least 1,950 of Alpine’s SARs did not report these material red flags. Evidence also showed that Alpine filed SARs on about 1,900 deposits of a security, but did not file SARs upon the subsequent liquidation of deposits.

SEC Charges Investment Adviser for Overbilling Clients to Pay Personal Expenses

July 10, 2017 | Elizabeth Dalziel

On May 30, 2017, the United States District Court for the Eastern District of New York entered a final consent judgment against Marc D. Broidy (“Broidy”) and his investment advisory firm, Broidy Wealth Advisors, LLC (“BWA”). The Securities and Exchange Commission (“SEC”) had filed a complaint alleging that Broidy and BWA “intentionally overbilled clients and used the excess fees to pay for, among other things, Broidy’s personal expenses.” The complaint also alleged that Broidy converted assets from clients’ trusts, also for the purpose of paying personal expenses.

The SEC alleged that from about February 2011 to February 2016, Broidy and BWA overbilled approximately $643,000 in connection with advisory services to five clients. The SEC also alleged that Broidy and BWA made conscious efforts to conceal the overbilling. BWA’s Form ADV and Investment Advisory Contracts stated that clients would typically be billed anywhere from 1 percent to 1.5 percent of their assets under management on a quarterly basis. However, Broidy and BWA charged clients significantly more than these percentages. Continue reading ›

SEC Proposes Amendments to Investment Advisers Act Regarding Small Business Investment Companies

June 29, 2017 | Elizabeth Dalziel

The Securities and Exchange Commission (“SEC”) recently announced a proposal to amend Rules 203(l)-1 and 203(m)-1 of the Investment Advisers Act of 1940 (“Advisers Act”). The purpose of these proposed amendments is to “reflect changes made by… the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”).” The FAST Act amended sections 203(l) and 203(m) of the Advisers Act to provide advisers to small business investment companies (“SBICs”), venture capital funds, and certain private funds with additional avenues to registration exemption.

SBICs are commonly defined as privately-owned investment companies that are licensed and regulated by the Small Business Administration (“SBA”). They typically provide a vehicle for funding small businesses through both equity and debt. Section 203(b)(7) of the Advisers Act provides that investment advisers who only advise SBICs are exempt from registration. Moreover, investment advisers who use the SBIC exemption are not obligated to comply with the Advisers Act’s reporting and recordkeeping provisions, and they are not subject to SEC examination. Continue reading ›

Supreme Court Rules that SEC’s Ability to Seek Disgorgement is Subject to a Five-Year Statute of Limitations

June 13, 2017 | Elizabeth Dalziel

On June 5, 2017, the United States Supreme Court, in a unanimous decision, ruled that disgorgement, a remedy that the SEC frequently utilizes to recover so-called “ill-gotten gains” from respondents in enforcement proceedings, is subject to 28 U.S.C. § 2642’s five-year statute of limitations for “an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” As discussed previously, the Supreme Court agreed to hear the underlying case, SEC v. Kokesh (“Kokesh”), after a split in the appellate judicial circuits over whether SEC disgorgement was a “penalty” subject to the five-year statute of limitations.

The Supreme Court’s decision in Kokesh is not the first time that the Supreme Court has placed limitations on the SEC’s enforcement powers. In Gabelli v. SEC, a case from 2013, the Supreme Court ruled that civil monetary penalties were subject to the five-year statute of limitations.