SEC Tag Archives — Page 12 of 22

FINRA Releases Annual Regulatory and Examination Priorities Letter, Part I

January 12, 2017 | Elizabeth Dalziel

On January 4, 2017, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“Priorities Letter”). The Priorities Letter notifies firms about issues that FINRA intends to examine in 2017. It is also intended to let firms know which of these issues are relevant to their businesses so that the firms can improve their compliance with FINRA rules and their risk management programs.

According to the Priorities Letter, FINRA draws its examination priorities from both observations made in the course of regulation and suggestions from a variety of outside sources. Evidence has shown that many FINRA-registered firms have found past Priorities Letters helpful in making sure their business is in compliance with FINRA rules. Finally, FINRA assures readers of the Priorities Letter that in formulating an examination, FINRA looks to factors such a firm’s “business model, size and complexity of operations, and the nature and extent of a firm’s activities against the priorities outlined in this letter.”

FINRA intends to prioritize the following issues in 2017. Continue reading ›

Asset Management Company and its Owner Charged With Fraud

December 22, 2016 | Elizabeth Dalziel

On December 1, 2016, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint for injunctive and other relief in the United States District Court for the Southern District of Florida against Onix Capital LLC (“Onix Capital”), an asset management company, and its owner, a Chilean national by the name of Alberto Chang-Rajii (“Chang”). The complaint alleges that Onix Capital and Chang “violated the federal securities laws by fraudulently raising approximately $7.4 million from investors based on material misrepresentations regarding the investments offered, the use of the funds raised, and the background and financial success of Chang himself.”

Onix Capital was not an SEC-registered adviser, nor was Chang registered as an investment adviser or broker-dealer. However, the SEC alleged that Onix Capital and Chang violated the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC alleged that Chang, “for compensation, engaged in the business of advising… investors… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” and therefore met the definition of an “investment adviser” subject to the anti-fraud provisions of the Advisers Act. Continue reading ›

FINRA Charges Oppenheimer & Co. for Multiple Compliance Failures

December 2, 2016 | Elizabeth Dalziel

On November 17, 2016, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a Letter of Acceptance, Waiver and Consent (“AWC”), in which Oppenheimer & Co., Inc. (“Oppenheimer”) agreed to settle numerous charges. Pursuant to the AWC, Oppenheimer will be fined $1.575 million. It will also be required to make remediation payments of $703,122 to seven arbitration claimants and $1,142,619 to customers who qualified for but did not receive applicable sales charge waivers pertaining to mutual funds.

Many of the violations related to FINRA Rule 4530. Rule 4530(f) requires FINRA members promptly to provide FINRA with copies of certain civil complaints and arbitration claims. Rule 4530(b) provides that if a FINRA member realizes that it or an associated person has violated any securities or investment-related laws that have widespread or potential widespread impact to the firm, the member must notify FINRA. The notification should take place within either 30 calendar days after the determination is made or 30 calendar days after it reasonably should have been made.

According to FINRA’s findings, Oppenheimer failed to file in excess of 350 of these required filings. Moreover, FINRA found that when Oppenheimer did make the required filings, the disclosures were, on average, more than four years late.

FINRA Proposes Rule Designed to Combat Financial Exploitation of Seniors and Other “Specified Adults”

November 23, 2016 | Elizabeth Dalziel

In October 2015, the Financial Services Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a proposal (“Proposal”) to amend its Customer Account Information Rule (“Rule 4512”) and to adopt a new Financial Exploitation of Specified Adults Rule (“Proposed Rule 2165”). Based on a study published in 2011 and a survey published in 2013, FINRA determined that financial exploitation of seniors and other vulnerable adults is a serious and growing problem that must be addressed. As of now, a small number of states have already enacted legislation that is designed to help detect and prevent financial exploitation of seniors. As discussed previously, the North American Securities Administrators Association (“NASAA”) recently adopted a model act that is intended to provide states with guidance for drafting legislation or regulations to protect seniors and other vulnerable adults from financial exploitation.

FINRA, however, believes there needs to be a uniform, national standard regarding a financial institution’s obligations in helping to prevent financial exploitation of seniors and other vulnerable adults. Thus, FINRA first published its Proposal in October 2015 and requested comments on it. After receiving 40 comment letters from both individuals and institutions, FINRA filed the Proposal with the Securities and Exchange Commission in October 2016. The SEC began a comment period on November 7, 2016, and it will end on November 28, 2016.

The proposed amendments to Rule 4512 and Proposed Rule 2165 pertain to the accounts of “Specified Adults.” A “Specified Adult” is defined as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Thus, the Proposal applies to accounts held by seniors and other vulnerable adults.

SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)

November 7, 2016 | Parker MacIntyre

A new limited broker/dealer classification framework at the federal level has been created as the result of a recent SEC Order approving a FINRA rule proposal seeking to address the longstanding industry desire for augmented exemptive relief and/or limited registration classifications for broker/dealers that restrict their activities to certain designated corporate finance transactions. The new federal broker/dealer registration category known as Capital Acquisition Brokers (“CABs”), which some observers have dubbed a “lite” form of broker/dealer registration, is the latest development in this area of securities regulation, and follows a recent string of federal and state no-action letters providing exemptive relief to so-called Mergers and Acquisitions (“M&A”) Brokers. However, enthusiasm for the new CAB Rules should be tempered somewhat in that: (1) the CAB Rules do not provide exemptive relief—i.e., they do not allow firms to avoid registration but instead set up a form of registration that is meant to be somewhat less onerous; (2) CAB registration still requires that CAB firms adhere to many of the same strictures required of full broker/dealers; and (3) opting to be regulated as a CAB may require reassessment as time goes on to the extent that a firm’s business activities change. While formally approved by the SEC, FINRA’s CAB Rules are not as yet effective. FINRA will publish the effective date in an upcoming Regulatory Notice. The full set of CAB Rules approved by the SEC may be found online at http://www.finra.org/sites/default/files/SR-FINRA-2015-054-amendment-2.pdf.

Investment Advisers Charged for Failure to Disclose Conflicts of Interest Arising From Receipt of Forgivable Loans

September 27, 2016 | Elizabeth Dalziel

On July 18, 2016, the Securities and Exchange Commission (“SEC”) settled charges against two SEC-registered investment advisers (“investment advisers”). The investment advisers, Advantage Investment Management, LLC (“AIM”) and Washington Wealth Management, LLC (“WWM”) failed to disclose receipt of revenue from third-party broker-dealers in the form of forgivable loans and the consequent conflicts of interest.

Investment advisers are prohibited from engaging in any transaction, practice, or course of business that operates as a fraud upon any client or prospective client under Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”). They are also prohibited from making any untrue statement of a material fact or omitting any material fact in any report filed with the SEC under Section 207 of the Advisers Act. Continue reading ›

SEC Continues Increased Focus on RIA Performance Advertising

September 19, 2016 | Patricia Klusmeyer

The F-Squared Investments matter continues to have far-reaching consequences for those investment advisers who used F-Squared’s falsely inflated and improperly labeled backtested performance results in advertisements. As discussed previously, in November of 2015 Virtus Investment Advisers was fined $16.5 million for including the false and misleading performance results in its own advertisements and filings with the Securities Exchange Commission (“SEC”). More recently, the SEC charged Cantella & Co. (“Cantella”), a Boston-based investment adviser that licensed F-Squared’s Alpha Sector strategy, with securities violations for employing F-Squared’s false track record in its marketing materials.

F-Squared is an investment adviser that creates and markets index products using exchange-traded funds (“ETFs”). It sub-licenses these indexes to various unaffiliated investment advisers who manage assets pursuant to those indexes. In 2014 F-Squared admitted in a settled SEC administrative proceeding that it had materially misrepresented the performance results of its largest ETF strategy, AlphaSector, by labeling these results as actual results from a seven-year period when they were in fact hypothetical results derived through backtesting. In addition, F-Squared claimed that the strategy had outperformed the S&P 500 Index from 2001 to 2008 when in fact the hypothetical data contained a calculation error that falsely inflated results by 350 percent. F-Squared agreed to pay disgorgement of $30 million and a penalty of $5 million to settle the claim.

Court Affirms SEC’s Sanction of Investment Adviser Over Fraudulent Performance Advertising

September 7, 2016 | Patricia Klusmeyer

The U.S. Circuit Court of Appeals for the District of Columbia recently denied a petition to review an order of the Securities Exchange Commission (“SEC”) imposing sanctions against Raymond J. Lucia and investment adviser Raymond J. Lucia Companies, Inc. (“Lucia Companies”) for violations of the Investment Advisers Act of 1940 and the advertising rule thereunder, Rule 206(4)-1. In denying the motion, the DC Circuit affirmed the SEC’s broadened views on the use of back-tested performance in marketing and advertising materials.

As discussed previously, this case involves the improper use by an investment adviser of back-tested performance data in retirement-planning seminars. Raymond J. Lucia, and Lucia Companies allegedly used a hypothetical inflation rate that was lower than actual historical rates to make their performance results more favorable. In addition, the performance data allegedly failed to reflect the deduction of advisory fees and was not calculated in a manner fully consistent with the advertised investment strategy. As a result, the SEC barred Raymond J. Lucia from the securities industry and imposed civil penalties of $300,000.

Performance-Based Fee Threshold Will Change Effective August 15, 2016

August 2, 2016 | Steve Parker

Pursuant to an order entered by the Securities and Exchange Commission (“SEC”) on June 14, 2016, the exemption contained under Rule 205-3 of the Investment Advisers Act (“Advisers Act”), which allows registered investment advisers to charge performance-based compensation to clients notwithstanding the general prohibition against same contained in Section 205(a)(1) of the Advisers Act, will be slightly modified. This modification is the result of a provision in the Dodd-Frank Act (“Dodd Frank”) implementing a provision of that act under Rule 205-3, which requires the SEC to adjust the dollar amounts contained in the exemption for inflation and to round the adjustment to the nearest $100,000.00. This adjustment must occur every five years.

Private Equity Fund Adviser Sanctioned for Acting as Unregistered Broker-Dealer

July 28, 2016 | Steve Parker

Last month the Securities and Exchange Commission (“SEC”) sanctioned a registered investment adviser and its managing member for violating the Investment Adviser’s Act of 1940 (“Adviser’s Act”) and for acting as an unregistered broker-dealer in connection with the services the adviser provided to a private fund that it managed and the fees charged for those services.

Blackstreet Capital Management, LLC (“Blackstreet”) serves as the manager of two private equity funds (the “Funds”). In the Funds’ governing documents, Blackstreet disclosed to the Funds’ investors that it would charge fees for brokerage services rendered in connection with acquiring portfolio companies. Blackstreet did, in fact, perform brokerage services including soliciting transactions, identifying buyers and sellers, negotiating and structuring transactions, arranging for financing, and executing transactions. In exchange for those services it received over $1.8 million.