RIA Compliance Blog
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 ›
Wells Fargo Settles Charges with SEC For Misconduct in Sale of Market-Linked Investments
On June 25, 2018, Wells Fargo Advisors, LLC agreed to an Order settling charges brought by the Securities and Exchange Commission relating to Wells Fargo’s use of Market-Linked Investments (“MLIs”). According to the Order Instituting Administrative and Cease-and-Desist Proceedings, beginning in January 2009 and ending in about June 2013, Wells Fargo and its predecessor “improperly solicited customers to redeem their market-linked investments (“MLI”) early and purchase new MLIs without adequate analysis or consideration of the substantial costs associated with such transactions.” 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 ›
SEC Settles Charges With 13 Private Fund Advisers Over Filing Deficiencies
In June of this year, the Securities and Exchange Commission settled charges with 13 firms that serve as registered investment advisers to private funds for failing to file Form PF. The settling companies were: Bachrach Asset Management Inc., Bilgari Capital LLC, Brahma Management Ltd., Bristol Group Inc., CAI Managers & Co. L.P., Cherokee Investment Partners LLC, Ecosystem Investment Partners LLC, Elm Partners Management LLC, HEP Management Corp., Prescott General Partners LLC, RLJ Equity Partners LLC, Rose Park Advisors LLC, and Veteri Place Corp. According to the settlement orders, “the advisers failed to file annual reports on Form PF informing the agency about the funds they advise, including the amount of assets under management, fund strategy, performance, and use of borrowed money and derivatives.” Continue reading ›
SEC No-Action Letter Addresses Financial Exploitation of Clients
On June 1, 2018, the Securities and Exchange Commission’s Division of Investment Management issued a No-Action Letter to the Investment Company Institute. The ICI asked the Division to assure that it would not recommend enforcement against a mutual fund or its transfer agent if the transfer agent temporarily withheld a disbursement from a “Specified Adult’s” mutual fund account based on a reasonable suspicion that the Specified Adult is being or is about to be financially exploited. According to FINRA Rule 2165, which is cited in the No-Action Letter, a “Specified Adult” is “a natural person age 65 and older; or … a natural person age 18 and older and who the transfer agent reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Continue reading ›
SEC Directors Stress Importance of Budget Request to Expand and Improve Investment Adviser Examinations
On May 16, 2018, SEC Co-Directors Stephanie Avakian and Stephen Piekin appeared before the Subcommittee on Capital Markets, Securities, and Investment, a subcommittee of the House of Representatives’ Committee on Financial Services. At this meeting, Avakian and Peikin emphasized the importance of the budget increases requested by the SEC in February of this year. The Commission’s Fiscal Year 2019 Congressional Budget Justification; Annual Performance Plan and Fiscal Year 2017 Annual Performance Report includes budget requests for each SEC division, including the Office of Compliance Inspections and Examinations. As part of OCIE’s budget request, the SEC requested funding for “13 restored positions to focus on examinations of investment advisers and investment companies.”
According to the SEC, the number of registered investment advisers, as well as the amount of assets that they manage, has significantly increased in the last few years. The SEC also anticipates that the number of registered investment advisers and the complexity of these investment advisers will continue to grow throughout 2018 and 2019. Moreover, a hiring freeze, which began at the beginning of 2017, has caused the number of compliance staff to decrease. The SEC anticipates that it will need funding to restore 100 positions that were lost because of the hiring freeze. Therefore, the SEC believes that without the requested funding, SEC staff will be unable to address its growing responsibilities adequately. Continue reading ›
SEC’s 12b-1 Self-Reporting Deadline Looms
In February, the Securities and Exchange Commission’s Enforcement Division announced the Share Class Selection Disclosure Initiative (the “SCSD Initiative”), encouraging investment advisers to self-report violations of federal securities laws. Specifically, the SEC is concerned with protecting advisory clients from undisclosed conflicts of interest related to 12b-1 fees charged by advisers. The SEC requests that investment advisers self-report violations of the federal securities laws relating to certain mutual fund share class selection issues prior to June 12, 2018, in exchange for more lenient treatment regarding the violations. A detailed explanation of Eligibility for the SCSD Initiative is available here. In May, the SEC also published a list of frequently asked questions and answers related to the SCSD Initiative.
Under Section 206 of the Investment Advisers Act of 1940, investment advisers have a fiduciary duty to act in their clients’ best interests. Included is an affirmative duty for the adviser to fully disclose all material facts, such as conflicts of interest. The SEC is concerned with conflicts associated with mutual fund share class selection, which the SCSD Initiative aims to address. In the SCSD Initiative, the SEC cautions that investment advisers must be mindful of their duties when recommending and selecting share classes for clients. Of particular concern are conflicts related to 12b-1 fees earned in the selection of classes of funds – conflicts which must be disclosed to clients. As explained by the SEC, a conflict of interest arises when an adviser receives compensation for selecting a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate. Such a conflict of interest must be disclosed. Compensation received either directly or indirectly through an affiliated broker-dealer is subject to scrutiny under the SCSD Initiative. As such, if the adviser failed to disclose a conflict of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients, such funds are subject to disgorgement, and civil monetary penalties may be appropriate. Continue reading ›