Articles Tagged with Investment Advisers

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A case involving real estate lending illustrates the perils of failing to comply with the securities laws.  Last fall the Securities and Exchange Commission filed a complaint against Paul Z. Singer, a Philadelphia-based lender, and his company, Singer Financial Corp. (“SFC”), alleging that from October 2012 to July 2015, Singer, “by and through SFC, raised $4.5 million from at least 70 investors through an illegal and unregistered offering of securities in the form of promissory notes.”

This is not the first time Singer and SFC have been alleged to have sold unregistered securities.  The Pennsylvania Securities Commission imposed penalties against SFC in 1997 and Singer and SFC in 2007 for violations of Pennsylvania’s securities laws pertaining to the unregistered offer and sale of securities.  Also, the New Jersey Bureau of Securities imposed a $5,000 fine against SFC in 2010 for selling unregistered securities. Continue reading ›

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Investment advisers’ use of clients’ usernames and passwords to access their clients’ accounts to observe the accounts’ performance has come under scrutiny in recent years.  In February 2017, the SEC Office of Compliance Inspections and Examinations (“OCIE”) disclosed in a Risk Alert that investment advisers’ use of client usernames and passwords can create compliance issues with the Custody Rule.  According to OCIE, an investment adviser’s “online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts.”  Accessing a client’s account using a client’s username and password often results in an investment adviser being able to withdraw funds and securities.

The North American Securities Administrators Association (“NASAA”) has also observed in recent years that if an investment adviser logs into a client’s account using the client’s personal information, “the investment adviser is in effect impersonating this client and has the same access to the account as the client.”  As a result, a number of issues arise when investment advisers use their clients’ personal information to gain access to online accounts, including custody, recordkeeping obligations, and potential violations of user agreements. Continue reading ›

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In response to FINRA’s Regulatory Notice 17-42, the Securities and Exchange Commission published a letter detailing its thoughts regarding some rule amendments FINRA proposed relating to its expungement procedures.  According to FINRA, “expungement of customer dispute information is an extraordinary measure, but it may be appropriate in certain circumstances.”  Nevertheless, critics of expungement have voiced their concern that FINRA’s current procedures for expungement may not be adequate.  In response, FINRA proposed the amendments to improve procedures involving expungement requests.

The proposed amendments include changes to FINRA Rule 12805, which outlines the conditions that arbitrators must satisfy prior to granting an expungement request.  Rule 12805 does not currently elaborate on how or when expungement relief may be requested during an underlying dispute with a customer.  The amendments would require a FINRA associated person who is named as a party in the underlying customer case to seek expungement while the customer case is ongoing.  If the associated person files an expungement request, he or she would be obligated to file either a $1,425 filing fee or the applicable filing fee provided in FINRA Rule 12900(a)(1), whichever is greater. Continue reading ›

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Last month, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Valor Capital Asset Management, LLC, a registered investment adviser, and its owner, Robert Mark Magee.  The SEC’s Order alleges that between July 2012 and May 2015, Magee “disproportionately allocated profitable or less unprofitable trades from Valor’s omnibus trading account to his personal accounts, while disproportionately allocating unprofitable or less profitable trades to Valor client accounts,” a practice known as “cherry-picking.”  Valor and Magee each submitted offers of settlement in conjunction with the Order.

According to the SEC’s Order, Valor had discretionary authority pertaining to the client accounts that were in Magee’s cherry-picking scheme.  Since Magee was Valor’s sole owner and employee, he was tasked with making trades and allocations for Valor’s clients’ accounts.  The SEC alleged that over a three-year period Magee mainly distributed the most unprofitable trades to clients’ accounts and mainly distributed the most profitable or less unprofitable trades to his own account.  The SEC also alleged that whenever Magee bought a block of securities using Valor’s omnibus account, he would delay allocating the block of securities “until after the relevant security’s intraday price changed.”  If the price increased, Magee allegedly would make a sale and allocate the trade to his own account, obtaining a gain.  If the price decreased, Magee allegedly would sell the security that same day and allocate the trade to Valor clients, resulting in a loss.  Alternatively, he would hold the security and allocate the purchase to Valor clients, which gave them an unrealized first-day loss. Continue reading ›

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The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities.  Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.

FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).”  FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.”  As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.

If the proposed rule is adopted, it will replace Rules 3270 and 3280.  The comment period ends on April 27, 2018. Continue reading ›

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On February 26, 2018, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order against EquityStar Capital Management, LLC, an unregistered investment adviser, and its owner, Steven Zoernack.  According to the SEC’s Order, EquityStar and Zoernack offered and sold investment interests in two unregistered investment funds from about May 2010 to about March 2014.  The SEC’s Order alleges that in the course of making these offers and sales, EquityStar and Zoernack “made material misrepresentations and omissions and engaged in a fraudulent scheme involving this and other deceptive conduct.”

Zoernack was tasked with writing and publishing marketing materials for the funds that EquityStar managed.  In these marketing materials, Zoernack allegedly claimed that the funds’ manager, whose name was not disclosed, had “an impeccable and unblemished past record with the SEC.”  According to the SEC, however, Zoernack was in fact the manager, and he had “two criminal fraud convictions, had previously filed for bankruptcy, and had numerous money judgments and liens against him.”  The Order also claims that Zoernack made various efforts to hide his criminal record and negative financial history, including paying a search-engine manipulator to make positive information about him appear before negative information in search engine results. Continue reading ›

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On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”).  The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.”  The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET.  While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives.  SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices.  CCOs and other senior staff in private advisory firms typically participate in the panels as well.  Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading ›

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On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its Examination Priorities for 2018.  The Examination Priorities cover “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.”  The five priorities that OCIE specifically listed are (1) issues crucial to retail investors, such as seniors and those saving for retirement, (2) compliance and risks in critical market infrastructure, (3) FINRA and MSRB, (4) cybersecurity, and (5) anti-money laundering programs.  This is not an exclusive list, and OCIE invited comments concerning how it can adequately promote compliance.

OCIE intends to continue to make shielding retail investors from fraud a priority.  OCIE plans to focus especially on senior investors and those saving for retirement.  For example, examiners will pay particular attention to firms’ internal controls that are intended to monitor their representatives, especially in relation to products targeted at senior investors.  OCIE will also focus on disclosure of the costs of investing, examination of investment advisers and broker-dealers who primarily offer advice through digital platforms, wrap fee programs, mutual funds and exchange traded funds, municipal advisors and underwriters, and the growth of the cryptocurrency and initial coin offering markets. Continue reading ›

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On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017.  Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”  They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws.  To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss.  The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes.  The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors.  The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading ›

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The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading ›

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