RIA Compliance BlogOn June 4, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against deVere USA, Inc. (“deVere”), a registered investment adviser. The SEC’s Order alleges that deVere failed “to make full and fair disclosure to clients and prospective clients of material conflicts of interest regarding compensation obtained from third-party product and service providers.” The Order also alleges that deVere made inadequate disclosures in its Form ADV, did not conform its compliance program to its method of doing business, and did not follow compliance requirements adopted in its compliance manual. deVere submitted an offer of settlement in conjunction with the SEC’s Order. Continue reading ›
Articles Tagged with SEC Order
SEC Settles Charges With 13 Private Fund Advisers Over Filing Deficiencies
In June of this year, the Securities and Exchange Commission settled charges with 13 firms that serve as registered investment advisers to private funds for failing to file Form PF. The settling companies were: Bachrach Asset Management Inc., Bilgari Capital LLC, Brahma Management Ltd., Bristol Group Inc., CAI Managers & Co. L.P., Cherokee Investment Partners LLC, Ecosystem Investment Partners LLC, Elm Partners Management LLC, HEP Management Corp., Prescott General Partners LLC, RLJ Equity Partners LLC, Rose Park Advisors LLC, and Veteri Place Corp. According to the settlement orders, “the advisers failed to file annual reports on Form PF informing the agency about the funds they advise, including the amount of assets under management, fund strategy, performance, and use of borrowed money and derivatives.” Continue reading ›
Investment Adviser Settles Charges with the SEC Over Cherry-Picking Scheme
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 ›
SEC Fines Adviser Who Obtained Misleading Morningstar Rating
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 ›
Investment Adviser Settles Charges with the SEC for Selling Investments That Were Not in Compliance with Georgia Law
On November 22, 2017, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and Cease and Desist Order against an investment adviser, Gray Financial Group, Inc., its founder, Laurence O. Gray, and its co-CEO, Robert C. Hubbard, IV. The SEC alleged that Gray Financial, Gray, and Hubbard “offered and sold investments in a Gray Financial proprietary fund of funds… to four Georgia public pension clients, despite the fact that they knew, were reckless in not knowing, or should have known that these investments did not comply with the restrictions on alternative investments imposed by Georgia law.” This case brings attention to an investment adviser’s obligation to “know its clients,” including the obligation to be familiar with laws and contractual provisions that place limitations on the types and amounts of investments in which certain clients, such as pension plans, can invest.
The Public Retirement Systems Investment Authority Law (“the Act”), codified as O.C.G.A. §§ 47-20-80 through 47-20-87, allows certain large retirement systems to invest in alternative investments, such as venture capital funds and merchant banking funds, subject to certain restrictions. For example, the Act provides that such investments cannot in the aggregate exceed five percent of the retirement system’s assets at any time. The Act also provides that before a large retirement system can invest in an alternative investment, the alternative investment needs to have had or concurrently have four or more other investors not affiliated with the investment’s issuer. Continue reading ›
SEC Settles Charges with Investment Adviser for Unauthorized Allocation of Expenses
In August of this year, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-and-Desist Proceedings (“Order”) against Capital Dynamics, Inc. (“CDI”), a New York-based investment adviser. The SEC alleged that from March 2011 to July 2015, CDI allocated certain expenses to private funds it was advising when the funds’ governing documents did not authorize the funds to pay these expenses. CDI submitted an Offer of Settlement in conjunction with the Order.
According to the SEC’s complaint, CDI and its affiliates formed the private funds, collectively known as the “Solar Fund,” “to introduce a new investment program focused on clean energy and infrastructure.” The documents that governed the funds provided that CDI and the funds’ general partners were obligated to pay “normal operating expenses,” such as employee expenditures and fees for specified services. They could not charge these expenses to the funds. Continue reading ›
SEC Settles Charges with Barclays Capital for Overcharging Clients
On May 10, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Barclays Capital Inc. (“Barclays Capital”). The Order alleges that Barclays Capital, in its capacity as a dually-registered investment adviser and broker-dealer, overcharged advisory clients in the course of its wealth and investment management business. In conjunction with the Order, Barclays Capital submitted an Offer of Settlement where it agreed to pay about $97 million, which includes disgorgement and a penalty.
According to the SEC’s Order, Barclays Capital was the adviser and fiduciary to its advisory clients for two wrap fee programs: the Select Advisors Program and the Accommodation Manager Program, both of which were launched in September 2010. Starting in September 2010 and ending around the close of 2014, Barclays Capital assured Select Advisors Program clients in both client agreements and in its brochure that “Barclays Capital performed initial due diligence and ongoing monitoring of third-party managers it recommended to manage its clients’ assets using specific investment strategies.” Likewise, beginning in May 2011 and ending in March 2013, Barclays Capital assured Accommodation Manager Program clients that it conducted limited due diligence and monitoring of Accommodation Manager Program strategies. Continue reading ›
SEC Settles Charges with Investment Adviser for Failure to Disclose Conflicts of Interest Stemming From Revenue Sharing Arrangement
On March 8, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Voya Financial Advisors, Inc. (“Voya”), an SEC-registered investment adviser. The Order, to which Voya consented, obligates Voya to pay disgorgement of $2,621,324, prejudgment interest of $174,629.78, and a civil money penalty of $300,000.
The SEC’s Order claims that Voya did not inform its clients that it was receiving compensation from a third-party broker-dealer and that these receipts created a conflict of interest. Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) states that investment advisers are forbidden from participating in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” Section 207 provides that investment advisers are not allowed to “make any untrue statement of a material fact in any registration application or report filed with the Commission, or to omit to state in any such application or report any material fact which is required to be stated therein.” Finally, Rule 206(4)-7 under the Adviser’s Act compels investment advisers to “[a]dopt and implement written policies and procedures, reasonably designed to prevent violation” of the Adviser’s Act and the rules thereunder. Continue reading ›
SEC Settles Charges with 10 Investment Advisory Firms for Violating Pay-to-Play Rules
On January 17, 2017, the Securities and Exchange Commission (“SEC”) issued ten Orders Instituting Administrative and Cease-and-Desist Proceedings (“Orders”) against ten investment advisory firms. In each of its Orders, the SEC alleges that each investment advisory firm gave money to campaigns for politicians who, if elected, would have the power to determine the choice of investment advisers to oversee government assets, and subsequently gave investment advisory services to public pension funds. According to the SEC, these actions constituted violations of the Investment Advisers Act of 1940 (“Advisers Act”).
Rule 206(4)-5(a)(1), commonly known as the Pay-to-Play Rule, provides that investment advisers who are registered with the SEC, foreign private advisers, and exempt reporting advisers are not permitted to provide “investment advisory services for compensation to a government entity within two years after a contribution to an official of a government entity made by the investment adviser or any covered associate of the investment adviser.” This rule applies regardless of whether the investment adviser or covered person intended to sway the official. According to the SEC’s Orders, five of the investment advisory firms were SEC-registered investment advisers, while the remaining five were exempt reporting advisers. Thus, all ten of the investment advisory firms were subject to the provisions of Rule 206(4)-5(a)(1). Continue reading ›
SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)
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.