RIA Compliance BlogEarlier this month, the Securities and Exchange Commission (“SEC”) instituted an administrative proceeding against Blue Ocean Portfolios, LLC (“Blue Ocean”), an SEC-registered investment advisor with approximately $106 million in regulatory assets under management, and its Principal, CEO and Chief Compliance Officer, James A. Winkelmann, Sr. According to the allegations, Blue Ocean and Winkelmann began raising capital from clients of Blue Ocean in order to generate business proceeds for Blue Ocean in April, 2011. The adviser raised the funds by issuing a number of what it called “Royalty Units,” which were in fact interests that paid a minimum return to the investors with the prospect of a higher return if Blue Ocean’s advertising investment yielded successful new customers with annually recurring revenue.
Articles Tagged with Investment Advisers
CFPB Issues First Cybersecurity Order Against Payment Platform for Deceptive Practices
The Consumer Financial Protection Bureau (“CFPB”) recently instituted a cybersecurity enforcement action against an online payment platform, Dwolla, Inc., in the form of a consent order. This consent order is significant because it is the first time the CFPB has sought to institute an enforcement action in the cybersecurity arena after it was given the authority to do so under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), highlighting the increasing emphasis being placed by financial regulators on cybersecurity practices. The Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (“FINRA”), and the Federal Trade Commission (“FTC”), among others, have all been quite active in policing data security practices of financial institutions in recent years. The SEC even listed cybersecurity control procedures of registered broker-dealers and investment advisers as one of its examination priorities for 2016.
The Dodd-Frank Act gives CFPB supervisory authority over providers of consumer financial products or services. It also authorizes CFPB to take enforcement action to prevent unfair, deceptive or abusive acts or practices from these providers. In this case, Dwolla allegedly made several exaggerated claims regarding the strength of its data security practices that the CFPB found to be deceptive within the meaning of the Dodd-Frank Act.
Final DOL Fiduciary Rule Predicted to Significantly Alter Sale of Annuity Products
As the Department of Labor’s (“DOL’s”) proposed fiduciary rule awaits final adoption, market participants are starting to predict how it will affect retirement investment advice given that financial advisers such as broker-dealers, investment advisers, insurance companies, and other financial institutions, as well as their representatives, may soon be subjected to heightened fiduciary standards. Specifically, the sale of annuity products is predicted to face a large amount of change given its commission-based nature.
Currently, under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (“Code”), financial advisers are generally only fiduciaries if they provide investment advice or recommendations for compensation to employee benefit plans or participants and such advice is given on a regular basis and pursuant to a mutual understanding that the advice will serve as the primary basis for investment decisions and will be individualized to the particular needs of the plan. While investment advisers already have fiduciary duties under the Investment Advisers Act of 1940, the current narrow definition of fiduciary under ERISA and the Code generally does not encompass broker-dealers.
Investment Adviser Charged with Misleading SEC Regarding Examination
In August of this year the Securities and Exchange Commission (“SEC”) settled an administrative proceeding that related to statements an investment adviser made during the SEC’s on-site examination. The adviser at issue, Parallax Capital Partners, LLC, is a registered investment adviser that focuses primarily on mortgage-backed bonds and other similar fixed income securities. Parallax also advises a private fund in addition to providing advisory services to individuals and other entities. During an examination of Parallax that the SEC conducted in April 2011, the firm’s Chief Compliance Officer represented to the examination staff that he had performed and documented the annual compliance review required by Adviser’s Act Rule 206(4)-7 for the year 2010. The CCO further represented that the review and documentation had been conducted in February 2011, and provided the examination staff with a memorandum purportedly documenting the compliance review for 2010 that stated: “This memo documents that I have performed the review and reported significant compliance events and material compliance matters.”
The SEC examination staff was able to determine, by a review of the metadata attached to the compliance memorandum, that it had not been drafted in February 2011 as the CCO had represented, but instead that it had been created and completed in April 2011, just three days prior to the onsite examination and after Parallax received notice of the impending examination.
Continue reading ›
SEC Announces Cybersecurity Enforcement Action Against RIA
On September 22, the Securities and Exchange Commission (“SEC”) announced an important cybersecurity enforcement action that has broad implications to registered investment advisers. In a Settlement Order, the SEC found R.T. Jones Capital Equities Management, a St. Louis-based investment adviser, “willfully violated” the Safeguards Rule. From September 2009 through July 2013, the firm stored unencrypted, sensitive personally identifiable information (“PII”) of clients and others on its unencrypted, third party-hosted, web server.
In requiring that brokers-dealers, investment companies, and registered investment advisers guard against cybersecurity breaches, the SEC has relied on its authority under Sections 501, 504, and 505 of the Gramm-Leach-Bliley Act of 1999, to create the new regulations. The “Safeguard Rule” is Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)). Enforcement actions initiated by the SEC relating to computer security are often grounded in violations of the Safeguard Rule.
Continue reading ›
OCIE Announces 2015 Priorities in Second Round of Cybersecurity Examinations: New Risks for Securities Firms in Cybersecurity Compliance
The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) on Sept. 15, 2015 issued Risk Alert to announce its new focus on cybersecurity of securities firms and registered investment advisers. Cybersecurity programs of securities firms had best be strengthened, otherwise they may be subject to additional regulatory scrutiny according to the Risk Alert, which is meant to serve as helpful guidance for firms that need to create or heighten a cybersecurity program. The National Exam Program in 2014 conducted cybersecurity examinations on 106 securities firms. As a follow-up to the 2014 SEC security examinations The Risk Alert highlights certain additional measures the national registered entities need to be aware of when the SEC is conducting examinations.
A sample examination request with a list of information that the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations may review in conducting examinations of registered entities regarding cybersecurity matters may be viewed here.
Continue reading ›
SEC Charges Three Investment Adviser Firms with Improper Registration in Wyoming
On February 4, 2015, the SEC issued cease and desist orders against three investment advisers that fraudulently maintained registration with the SEC by listing Wyoming as their principal place of business on their Forms ADV. These three incidences highlight Wyoming’s unusual landscape for investment advisers.
In order to explain the uniqueness of these orders, some background on investment adviser regulation will be provided. Originally, investment advisers were prohibited from registering with the SEC under the Investment Advisers Act if it managed under $25 million in assets or met a designated exemption. In July 2011, that threshold was increased to $100 million. If an investment adviser does not meet or exceed the $100 million threshold, it is still required to register with the states in which they maintain their principal place of business. Wyoming is unique in that it does not regulate investment advisers. Any investment adviser with its principal place of business in Wyoming must therefore, according to the amendments to Section 203A of the Investment Advisers Act, register with the SEC.
Continue reading ›
SEC Plans to Increase Focus on Asset Managers in 2015
In a speech given at The New York Times Dealbook Opportunities for Tomorrow Conference in New York at the end of 2014, SEC Chair Mary Jo White detailed an extensive plan to increase the agency’s scrutiny of asset managers. Her speech highlighted many of the important issues currently facing the SEC in regulating the asset management industry and its planned response to those issues.
Chair White began by noting the evolution of the asset management industry and the tools currently utilized to protect investors and their assets. In 1940, when the Investment Advisers Act was first passed, there were a total of $4 billion in assets under management at 51 firms, compared to the now over $63 trillion of assets under management at over 22,000 firms. Chair White also noted that almost half of all U.S. households own mutual funds. In addition to mutual funds, asset managers also increasingly recommend modern, sophisticated products like ETFs and derivatives. Registered funds have significantly increased the size and complexity of derivates used in asset management.
Continue reading ›
SEC to Conduct Presence Exams for Never-Before Examined Investment Advisers in 2015
During the January 7th Practising Law Institute conference on Hedge Fund Compliance and Regulatory Challenges, the Director of the SEC Office of Compliance Inspections and Examinations (“OCIE”), Andrew Bowden, previewed some of the new priorities on which the SEC will focus in 2015. Some of the areas of focus include protecting investors, specifically those in or close to retirement, cyber security, and the use of data analytics to identify potential wrongdoers. One of the other priorities discussed was OCIE’s new initiative to use “presence exams” to examine certain investment advisers that have never been examined. Investment advisers who have been registered with the SEC for three or more years will potentially be selected for a presence exam.
Presence exams are less intensive, shorter exams, taking up about two-thirds the time of a regular SEC examination. These exams tend to be more narrow in scope and focus on specific areas of concern that the SEC may have. In October 2012, SEC staff created presence exams for investment advisers who were required to register with the SEC for the first time because of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). These newly required SEC registrants under Dodd-Frank included, for example, hedge fund advisers with more than $150 million in assets under management. Bowden stated that the SEC performed close to 400 of these exams and that OCIE’s goal to examine 25% of the investment advisers required to register with the SEC under Dodd-Frank by 2014 was met.
Continue reading ›
Investment Adviser Settles with SEC Over False Advertising Claims
On December 22, 2014, the SEC announced a settlement with F-Squared Investments (“F-Squared”) in which F-Squared will pay a civil penalty and disgorgement for violations of the anti-fraud provisions of the Investment Advisers Act by advertising falsely inflated performance numbers of its most successful exchange traded fund (“ETF”) investment strategy. Under the terms of the settlement, F-Squared, the largest U.S. marketer of index products using ETFs, agreed to disgorge $30 million and pay a $5 million penalty.
In October 2008, F-squared, along with its co-founder and former CEO, developed an investment strategy called AlphaSector. AlphaSector used data received from an algorithm to decide whether or not to buy or sell nine industry-focused ETFs. The algorithm was developed by an intern at a private wealth advisory firm, who told F-Squared’s CEO that it had been used before to manage the private wealth advisor’s client assets. The intern sent F-Squared’s CEO three separate data sets of hypothetical, back-tested weekly trends for each of the ETFs. This data was then used by an F-Squared employee to calculate hypothetical back-tested results for AlphaSector from April 2001 to September 2008.
Continue reading ›