RIA Compliance BlogOn October 30, 2018 the Securities and Exchange Commission announced amendments to rules and forms designed to improve disclosures made to clients regarding variable annuities and variable life insurance contracts. According to the SEC, the purpose of the proposed amendments is to assist investors in comprehending the characteristics of variable annuities and variable life insurance contracts and the risks associated with those investment products. The proposed amendments would allow financial institutions who offer variable annuities and variable life insurance contracts to give a summary prospectus to investors, which would satisfy the financial institutions’ disclosure obligations. The SEC has invited the public to comment on both the proposed amendments and the hypothetical summary prospectus samples created and included in the proposed rule. The comment period will run through February 15, 2019. Continue reading ›
Articles Posted in Investment Adviser
FINRA Regulatory Notice Announces Commencement of 2019 Renewal Program
On October 31, 2018 the Financial Industry Regulatory Authority published Regulatory Notice 18-37, which announces the commencement of the 2019 Renewal Program for registered investment advisers and broker-dealers. The 2019 Renewal Program is set to begin on November 12, 2018. On that day, FINRA will release Preliminary Statements to all registered firms via E-Bill. Firms are required to remit full payment of their Preliminary Statements by December 17, 2018.
The Preliminary Statements contain various fees for renewal of state registrations and notice filings. For individuals who are renewing their broker-dealer registrations, FINRA will assess a fee of $45. For investment adviser firms and their representatives who are renewing their registrations, any IARD system fees will be featured on their preliminary statements. For FINRA-registered firms that have one or more branch offices, FINRA will assess a renewal fee of $20 per branch. FINRA will, however, waive one branch renewal fee for each FINRA-registered firm.
Firms may pay their Preliminary Statement fees via E-Bill, a wire transfer, or a check. FINRA’s preferred method of payment is E-Bill. If a firm does not pay the Preliminary Statement fees by December 17, it will be charged a late renewal fee. The late fee will amount to either 10 percent of a firm’s final renewal assessment or $100, whichever is greater, but the late fee can be no more than $5,000. FINRA also warns firms that failure to pay the Preliminary Statement fees by the December 17 deadline could result in the firms becoming unable to do business in the areas where they are registered.
SEC Settles Charges with Former Nomura Managing Director For Securities Fraud
Earlier this month, the Securities and Exchange Commission announced that it had reached a settlement with Ross Shapiro, a former managing director of Nomura Securities International, Inc. (“Nomura”). The SEC filed a complaint against Shapiro and two other defendants, Michael A. Gramins and Tyler G. Peters, in September of 2015. The complaint alleged that between January 2010 and November 2013, Shapiro, Gramins, and Peters made misrepresentations to customers about the prices of residential mortgage-backed securities (“RMBS”) and manufactured housing asset-backed securities (“MHABS”), thereby violating the Securities Act of 1933 and the Securities Exchange Act of 1934.
An RMBS is a security whose underlying assets comprise residential loans. Customers who invest in an RMBS typically obtain payments derived from the interest and principal payments on these loans. Shapiro, Gramins, and Peters provided market information and sold RMBS and MHABS on behalf of Nomura, a FINRA-registered broker-dealer. The customers in question were funds that invested in RMBS.
The SEC’s complaint alleged that Shapiro, Gramins, and Peters made various misrepresentations to customers regarding the prices at which Nomura bought and sold RMBS and MHABS and that they misrepresented the amount of compensation that Nomura would receive for arranging any trades. For example, Shapiro, Gramins, and Peters allegedly deceived customers on numerous occasions regarding how much Nomura paid for RMBS and MHABS. Shapiro, Gramins, and Peters also gave clients the impression that Nomura had paid a higher price for RMBS and MHABS than it actually had. These misrepresentations were usually made via electronic communications such as instant messaging, emails, and online chats.
Investment Adviser Agrees to Pay $1.9 Million Penalty for Misleading Statements in Advertising
The Securities and Exchange Commission recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Massachusetts Financial Services Company (“MFS”), an SEC-registered investment adviser. According to the SEC’s Order, MFS advertised hypothetical returns pertaining to its blended research stock ratings without informing clients that a number of the hypothetical portfolios’ superior returns were based on back-tested models. Without admitting or denying the allegations in the SEC’s Order, MFS submitted an offer of settlement to resolve the matter.
According to the SEC’s Order, MFS has employed a quantitative-based research department since 2000. In 2000, the department developed what MFS calls “blended research” strategies, which involve “combining fundamental and quantitative ratings to arrive at a blended stock score, and by using a portfolio optimization process that considers the blended scores along with risk and other portfolio constraints.” As of May of this year, MFS had approximately $21 million in assets under management invested in blended research strategies.
The SEC’s Order alleges that from 2006 through 2015, MFS created research proofs based on the blended research analysis. The data and a bar chart describing the analysis were featured in MFS advertisements. MFS subsequently used the bar chart in three different kinds of marketing materials: in a standard slide deck from 2006 through 2015, in responses to formal requests from clients starting in 2012, and in a white paper that discussed MFS’s blended research strategies. These materials were marketed exclusively to institutional clients, prospective institutional clients, financial intermediaries, and investment consultants.
Oregon Implements Temporary Rules Regarding Proof of E&O Insurance for Advisers
Oregon requires all investment advisers and broker-dealers to maintain errors and omissions insurance for at least $1 million. Under Section 59.175 “every applicant for a license or renewal of a license as a broker-dealer or state investment adviser shall file with the director proof that the applicant maintains an errors and omissions insurance policy.” This law provides investors with recourse if they suffer losses because of an uninsured investment adviser. Presently, investment advisers in Oregon may obtain errors and omissions insurance through either the Oregon surplus lines, the Oregon risk retention markets, or both. However, according to the Oregon Secretary of State’s Department of Consumer and Business Services, which oversees the Division of Finance and Securities Regulation, neither of those groups is “admitted” or authorized to conduct insurance business in Oregon. As a result, the Department has decided that a temporary rule is necessary to help both Oregon investment advisers and insurance producers understand the steps they need to take to provide proof of insurance. Continue reading ›
FINRA Pay-to-Play Rule Applies to Capital Acquisition Brokers
As we recently highlighted, the Securities and Exchange Commission took enforcement action against three registered investment advisers for violating the pay-to-play rule applicable to advisers under the Investment Advisers Act. Broker-dealers should be aware that in 2017 the Financial Industry Regulatory Authority announced the approval of modifications to two rules – Rules 203 and 458, imposing similar prohibitions and limitations on capital acquisition brokers (“CABs”). A CAB is a FINRA member firm that participates in a restricted amount of activities, such as “advising companies on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions.” The rules will implement “’pay-to-play’ and related recordkeeping rules to the activities of member firms that have elected to be governed by the CAB Rules.” The new rules went into effect on December 6, 2017. Continue reading ›
SEC Publishes Risk Alert Detailing the Most Common Advisory Fee and Expense Compliance Deficiencies
On April 12, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published a Risk Alert “providing a list of compliance issues relating to fees and expenses charged by SEC-registered investment advisers… that were the most frequently identified in deficiency letters sent to advisers.” According to OCIE, investment advisers often explain the terms of a client’s fees and expenses in their Form ADV and their advisory agreements. If an investment adviser does not follow these terms and participates in improper fee billing, that investment adviser may be violating the Investment Advisers Act of 1940. The Risk Alert is designed to compel investment advisers to evaluate their practices, as well as their policies and procedures, to help ensure compliance with the Advisers Act. Continue reading ›
SEC Settles Charges with Three Investment Advisers Over Violations of Pay-to-Play Rule
Last month three registered investment advisers settled with the Securities and Exchange Commission over charges they violated the pay-to-play rule, Investment Advisers Act Rule 206(4)-5. The Orders Instituting Proceedings were entered against EnCap Investments, L.P., Oaktree Capital Management, L.P., and Sofinnova Ventures, Inc. All three advisers submitted offers of settlement in connection with the Orders.
The Pay-to-Play Rule prohibits registered investment advisers and exempt reporting advisers from offering investment advisory services for compensation to a government entity for a period of at least two years after the investment adviser or a covered associate of the investment adviser makes a political contribution to an official of the government entity. An investment adviser violates the Pay-to-Play Rule regardless of whether the investment adviser intended to influence the government entity official. Continue reading ›
SEC Settles Charges with Investment Advisers and Representatives Over Use of Testimonials in Social Media
On July 10, 2018, the Securities and Exchange Commission published five Orders Instituting Administrative and Cease-and-Desist Proceedings against two registered investment advisers, three investment adviser representatives, and Leonard S. Schwartz, a marketing consultant. The Orders allege that the respondents violated the Investment Advisers Act’s Testimonial Rule (275.206(4)-1(a)(1)). The SEC also alleged that another investment advisory firm, Romano Brothers & Company (“Romano Brothers”), violated the Testimonial Rule by posting two videos on YouTube featuring client testimonials. The Testimonial Rule provides that investment advisers and their representatives are forbidden from publishing, circulating, or distributing advertising materials that directly or indirectly refer to client experiences about the investment adviser and its services. The SEC considers publication of client testimonials fraudulent because testimonials typically present a biased evaluation of an investment adviser’s services. Continue reading ›
SEC Settles Charges with Investment Adviser for Failing to Disclose Conflicts of Interest
On June 4, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against deVere USA, Inc. (“deVere”), a registered investment adviser. The SEC’s Order alleges that deVere failed “to make full and fair disclosure to clients and prospective clients of material conflicts of interest regarding compensation obtained from third-party product and service providers.” The Order also alleges that deVere made inadequate disclosures in its Form ADV, did not conform its compliance program to its method of doing business, and did not follow compliance requirements adopted in its compliance manual. deVere submitted an offer of settlement in conjunction with the SEC’s Order. Continue reading ›