Registered Investment Adviser

SEC Institutes Charges Against Fund Manager for Custody Rule Violations

November 3, 2014 | Steve Parker

The Securities and Exchange Commission announced last week that it has charged Sands Brothers Asset Management, LLC and three of its officers with violating the custody rule as it relates to firms who manage funds in which their clients invest. Investment advisers who have custody, as defined by Rule 20642, must engage in certain “safekeeping practices.” If the adviser has custody by virtue of any reason other than the mere authority to deduct client fees from advisory accounts, one of the safekeeping requirements is that of obtaining an independent audit of fund assets. In the case of a private fund, that requirement can be met by the employment of an auditor approved by the Public Company Accounting Oversight Board who audits and reports to shareholders, (i.e., investors in the funds), annually and reports to shareholders within 120 days from the end of the fiscal year.

In its recent enforcement action, the SEC enforcement division alleged that Sands Brothers had been late in providing investors with audited financial statements. According to the Order instituting administrative proceeding, Sands Brothers was 40 or more days late in distributing the financial statements for ten different private funds for the fiscal year 2010. In the following year, the financial statements for those same funds were between six and eight months past due. In 2012, the financial statements for those funds were distributed approximately 90 days late.
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KENTUCKY COURT HOLDS THAT INVESTMENT MANAGER IS “INVESTMENT ADVISER” UNDER KENTUCKY SECURITIES ACT

October 30, 2014 | Steve Parker

Mark Twain is alleged to have said, “When the end of the world comes, I want to be in Kentucky because everything happens there twenty years later than it happens anywhere else.”

That bit of “wisdom” is more than a bit unfair to Kentucky, but it has proven true in connection with investment adviser law. In an interesting judicial opinion earlier this year, the Kentucky Court of Appeals reached the same conclusion that the federal courts reached over thirty years ago on essentially the same issue. The Kentucky Court held that an investment manager who was paid to manage the brokerage accounts of two clients was “an Investment Adviser” under the Kentucky Securities Act (“KSA”), even though he never discussed with or recommended securities transactions to the clients.The case demonstrates how concepts that are taken for granted and seem to be well-settled and beyond dispute by financial professionals, regulators and seasoned professionals in the investment adviser arena can sometimes lead to protracted and uncertain litigation.

The case is Lawrence Rosen v. Commonwealth of Kentucky, Department of Financial Institutions, et al.. At issue were enforcement charges by Kentucky’s Department of Financial Institutions (“DFI”) against one Lawrence Rosen (“Rosen”) who operated a sole proprietorship under the name Larry Rosen Company out of his home in Louisville, Kentucky. Rosen had entered into contracts with two clients under which Rosen would be compensated by payment of 10% of the gross proceeds of option sales, dividends, and interest received for all transactions that he made in the course of managing the accounts of the two clients. The contracts gave Rosen complete discretion over all securities traded in the accounts, meaning that he was not required to obtain any approval prior to implementing a transaction. Rosen performed both contracts by purchasing and selling securities in both clients’ accounts and by receiving the compensation as set forth in a contract. He conducted all these activities without registering under the KSA.
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SEC Announces Plans to Examine Never-Before Examined RIAs

March 13, 2014 | Steve Parker

On February 20, 2014, the Securities and Exchange Commission announced that it is launching an initiative, through its Office of Compliance Inspections and Examinations (“OCIE”), to conduct examinations of investment advisers that have been registered with the SEC for 3 or more years but who have never been examined. That same day, OCIE sent letters to all RIAs that have never been examined in order to provide them with information about the new initiative, which is being conducted under the National Exam Program (“NEP”).

The notice letter describes the two distinct approaches of the initiative as “risk assessment” and “focused reviews.” The former approach is designed to allow OCIE to obtain a better understanding of a particular RIA, and may include an overall review of the adviser’s activities with focus on the firm’s compliance program and disclosure documents and underlying facts. The latter, or “focus review” approach, includes a comprehensive risk-based examination of those advisers identified as having a higher risk area of business or operations. The focus-review examinations will focus on one or more of the firm’s compliance program, filings and other disclosure documents, marketing, portfolio management, and/or safety of client assets.

OCIE disclosed that not all RIAs receiving the letter would, in fact, be examined. Firms that receive the letter, however, would be well advised to prepare for an examination in any event, which usually means nothing more than maintaining and sharpening, where necessary, their policies and procedures so that they are adequate to assure compliance with SEC regulations, and contain clear and well-defined processes and responsibilities.
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Social Media Scam Artist Shut Down by SEC

January 9, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) recently filed a cease-and-desist order against an Illinois man, Anthony Fields, for scamming investors with a fictitious securities offering. Fields attempted to sell more than $500 billion in securities using various social media websites, including LinkedIn.

Fields claimed to be a representative of a “leading institutional broker-dealer” through his firms: Anthony Fields & Associates and Platinum Securities Brokers. He was not registered as a broker/dealer with the SEC nor was he licensed as an associate with a registered broker/dealer.

The SEC has claimed that Fields violated numerous securities regulations. Allegedly, he promoted fictitious bank guarantees by setting up an unfunded investment adviser and an unfunded broker-dealer. He registered both of these with the SEC; however, he did so by filing false applications in March 2010. He also failed to maintain adequate books and records or carry out proper compliance procedures. Finally, he overstated his assets under management by claiming he had $400 million when, in actuality, he had none.
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Regulators Issue Report on Investment Adviser Violations

October 30, 2011 | Steve Parker

With the increase in authority granted by the Dodd-Frank Act to state regulators over registered investment advisers, there has been a noticeable uptick in the number and intensity of state examinations of IA firms. In a national survey coordinated by NASAA, and released this fall, 40 state RIA examiners were found to have uncovered 3,543 violations in examinations of 825 firms during the first half of this year, an average of over 4 violations per firm. The survey found that registration and books and records violations predominated, with violations related to unethical practices and supervision not far behind.

Well over half of the firms examined were cited for registration violations, and 45% for books and record violations. The examinations also found significant numbers of violations in the areas of advertising, compliance with privacy rules, financial disclosure, fees charged and custody of funds.
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Departing Advisers Taking More Assets, Study Says

April 1, 2011 | Steve Parker

According to the 2011 Broker and Advisor Sentiment Index recently published by Fidelity Investments, investment advisers and brokers who moved to an independent firm or who started their own independent firm are more effective than ever in taking their assets with them when they switch firms. The study was conducted in late 2010. Its results showed that 1,046 respondents, including brokers and investment adviser representatives, who recently had moved to an independent reportedly took 70% of their client assets with them. In 2008, the number of total client assets taken was 61%. Moreover, the professionals reported that they voluntarily left part of their book behind.

The respondents gave further insights. More than half of them said that in the current economic climate, they found the independent model more attractive and concluded that it had the highest earning potential of all business models in the near term. Of those brokers and representatives that reportedly anticipate switching firms within the year, 63% said they would move to an independent business model, mainly for better pay. Another key change compared to the 2008 results is that larger number of teams of reps rather than individuals are making the transition to independent firms.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.