Enforcement

SEC Releases Examination Priorities for 2016

February 9, 2016 | Patricia Klusmeyer

The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities Exchange Commission (“SEC”) recently released its Examination Priorities for 2016. These examination priorities provide valuable insight into what OCIE perceives to be the greatest risk to investors and what it will be focusing its efforts on throughout the year. This year its overall goals stayed approximately the same as last year: 1) protecting investors saving for retirement; 2) assessing market-wide risks; and 3) using data analytics to identify and examine illegal activity.

In regards to its goal of protecting investors saving for retirement, OCIE intends to continue its Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) initiative which focuses on the suitability of investment recommendations made to investors, supervision and compliance procedures, conflicts of interest, and marketing practices. It will also continue to review the supervision procedures of branch offices of SEC-registered entities and fee selections which can lead to reverse churning. New areas of focus include exchange-traded funds (“ETFs”) which OCIE intends to examine for compliance with various regulatory requirements. It will focus on sales strategies, trading practices, disclosures, excessive portfolio concentration, and suitability, and will pay particularly close attention to niche or leveraged/inverse ETFs. In addition, variable annuities have become a large part of many investors’ retirement plans and OCIE intends to assess the suitability of these sales as well as the adequacy of disclosures. Lastly, OCIE will examine public pension advisers to ensure these advisers are not engaging in any pay-to-play activities or giving undisclosed gifts in return for appointments or other favors.

Hedge Fund Manager Settles Charges with SEC for Overcharging on Fees and Overvaluing Assets

January 26, 2016 | Patricia Klusmeyer

A Denver-based alternative fund manager was recently charged by the Securities Exchange Commission (“SEC”) with engaging in fraudulent behavior regarding the handling of its futures fund, The Frontier Fund (“TFF”). The alternative fund manager, Equinox Fund Management LLC (“Equinox”), allegedly overcharged management fees to its investors and overvalued certain assets.

Equinox is registered as an investment adviser with the SEC and thus owes its investors certain fiduciary duties, one of which is to act in the best interests of its investors by being accurate and complete with its registration statements and SEC filings. Equinox, however, allegedly failed to meet those duties by misrepresenting in their TFF registration statements that management fees were based on the net asset value of the assets, when in reality they were based on the notional trading value of the assets. The notional trading value takes into account both the amount invested and the amount of leverage used in the underlying investments, and is significantly higher than net asset value.

SEC Clarifies RIA Performance Advertising Obligations: The Virtus & Alpha Fiduciary Matters

January 19, 2016 | Patricia Klusmeyer

Last week we discussed the Lucia matter and the parameters it added for investment advisers to consider prior to utilizing performance advertisements. Today we will discuss two more administrative proceedings involving performance advertisements and the practical implications which can be taken from these cases.

The matter of Virtus Investment Advisers revolved around one of Virtus’ sub-advisers, F-Squared Investments. F-Squared was an investment adviser that had previously been fined by the SEC for allegedly advertising false inflated performance numbers of its most successful investment strategy, AlphaSector. AlphaSector consisted of an algorithm-based sector rotation strategy which traded nine industry exchange-traded funds from the S&P 500 Index. Virtus’ assets under management which utilized this strategy grew from $191 million at the end of 2009 to 11.5 billion by 2013. Unfortunately, F-Squared allegedly falsely stated that the AlphaSector strategy had a history dating back to 2001 and that it had historically outperformed the S&P 500 Index from 2001 to 2008. The SEC found that no assets had tracked the strategy from 2001 to 2008 and its back-tested performance data was miscalculated and substantially overstated results.

SEC Clarifies RIA Performance Advertising Obligations: The Lucia Matter

January 12, 2016 | Patricia Klusmeyer

Pursuant to Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-1, it is considered fraud for a registered investment adviser to publish, circulate, or distribute any advertisement which contains any untrue statement of material fact or which is false or misleading. One type of advertising that has been the focus of recent regulatory activity is performance advertising.

Performance advertisements are generally used by investment advisers to portray their past performance results to prospective clients. In order to be avoid misleading the prospective client, all material facts regarding the performance data and how it was calculated must be disclosed. This includes disclosing any material market conditions, the amount of advisory fees or other expenses that were deducted, whether results portrayed include reinvested dividends and other earnings, the investment strategies which were used to obtain the results, and any other material fact which may have impacted the results in any way.
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SEC Targets NY-Based RIA for Failure to Disclose Conflicts of Interest

January 6, 2016 | Patricia Klusmeyer

Investment advisers continue to get into regulatory trouble when it comes to failing to disclose conflicts of interest and related party transactions as required by both federal and state investment adviser law. Recently, the Securities and Exchange Commission (SEC) initiated proceedings against Fenway Partners, a New York-based registered investment adviser which served as adviser to three private equity funds. The conflicts arose around two related entities: Fenway Partners Capital Fund III, L.P., an affiliated fund, and Fenway Consulting Partners, an affiliate largely owned by the executives and owners of Fenway Partners.

Fenway Partners and Fenway Consulting Partners were both owned and managed in large part by respondents Peter Lamm, William Smart, Timothy Mayhew, and Walter Wiacek. The fund in question, Fund III, was operated by an Advisory Board consisting of independent limited partner representatives, pursuant to its organizational documents. According to the SEC allegations, the respondents failed to disclose several conflicts of interest and related party transactions to both the Advisory Board of Fund III and their fund investors.
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SEC Enforcement Actions Against Corporate Officers – Targeting or Responsible Monitoring?

July 31, 2015 | Shay Virtue

In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.
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SEC Vows To Be Aggressive in 2015

April 2, 2015 | Steve Parker

Last month at the Annual Conference of the Securities and Exchange Commission (“SEC”), the Commission revealed its enforcement statistics for 2014, including a record number of enforcement actions (755) and monetary relief obtained ($4.1 Million). The Commission also announced its current initiatives including a continued emphasis in the use of data analytics in both regulation and enforcement investigations. Among the areas of emphasis highlighted at this year’s conference were insider trading, financial reporting and auditing cases, inadequate internal controls for public companies, enhanced scrutiny of auditors and other reporting gatekeepers, and Foreign Corrupt Practices Act enforcement.

In addition, 30 trials were conducted in 2014 by the Commission, the most trials in over a decade. By contrast, the Commission tried only 6 cases in 2013. Two-thirds of the trials were in federal court, while one-third were before Administrative Law Judges.
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SEC fines RIA for failure to disclosure conflicts of interest on Form ADV

July 14, 2014 | Bryan Gort

In a consented-to Administrative Order dated July 2, 2014, the Securities and Exchange Commission fined a Missouri-based Registered Investment Adviser, SignalPoint Asset Management (“SignalPoint” or “SAM”), $215,000 for breaching its’ fiduciary duty to clients.

Prior to the formation of SignalPoint, the Principals of SignalPoint were registered as registered representatives and investment adviser representatives for a dually-registered broker-dealer and investment adviser. In 2008, the principals asked the dually-registered broker-dealer and investment adviser to allow them to have ownership and control of SignalPoint but were told that they could not have an ownership in an outside RIA.
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SEC Enforcement Actions in 2013

January 27, 2014 | Bryan Gort

The SEC has released the results of the 686 2013 enforcement actions it filed in federal court, which resulted in $3.4 billion in sanctions against offenders. Of the $3.4 billion, securities violators were required to disgorge illegal profits of approximately $2.257 billion and pay penalties of approximately $1.167 billion. The chairperson of the SEC, Mary Jo White, stated, “A strong enforcement program helps produce financial markets that operate with integrity and transparency, and reassures investors that they can invest with confidence.”

The 2013 total sanction amount is 10 percent higher than 2012 and 22 percent higher than 2011. In 2013, the SEC pursued many categories of enforcement actions including:

– Broker-dealers (121)
– Delinquent Filings (132)
– Foreign Corrupt Practices Act (5)
– Financial Fraud/Issuer Disclosure (68)
– Insider Trading (44)
– Investment Adviser/Investment Co. (140)
– Market Manipulation (50)
– Securities Offering (103)
– Other (23)

The SEC highlighted certain enforcement programs on which they had focused in 2013 and programs that they will emphasize for the foreseeable future. The SEC is focused on making sure gatekeepers, people that have special duties to ensure that the interests of investors are protected, safeguard and protect investors’ rights.
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SEC Hits Mid-Sized RIA’s for Compliance Violations, Signaling Continued Interest

December 6, 2011 | Steve Parker

The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.

OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
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