SEC Tag Archives — Page 14 of 22

New Registration Requirements for Developers & Supervisors of Algorithmic Trading Strategies

May 13, 2016 | Patricia Klusmeyer

The Securities and Exchange Commission (“SEC”) recently approved a proposed Financial Industry Regulatory Authority (“FINRA”) rule change which will require associated persons responsible for the design, development, and significant modification of algorithmic trading strategies, or the supervision of such activities, to register as Securities Traders. This development highlights the increasing regulatory and enforcement focus FINRA & the SEC are placing on the use of trading algorithms in the financial services industry.

Currently, associated persons are required to register as Securities Traders if they are engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities with respect to off-exchange transactions in equity, preferred or convertible debt securities. FINRA is expanding this requirement to include associated persons who are: 1) primarily responsible for the design, development or significant modification of algorithmic trading strategies; or 2) responsible for the day to-day supervision or direction of such activities.

SEC Fines Investment Adviser Over Lack of Heightened Supervision

May 13, 2016 | Steve Parker

Last month the Securities and Exchange Commission (SEC) instituted and simultaneously settled an administrative enforcement case in which a civil penalty of $225,000.00 was assessed against Cambridge Investment Research Advisors, Inc. (Cambridge). The action illustrates the importance of designing and implementing effective heightened supervision programs for investment adviser representatives who have a history of allegations of rules violations or other misconduct or disclosure items on the Form U-4.

The case stemmed from an incident that was the subject of a separate SEC proceeding filed in 2013 against Richard P. Sandru, who was an investment adviser representative operating from Cambridge’s Perrysburg, Ohio branch office. In that proceeding, Sandru was found to have forged clients’ signatures on financial planning agreements or, in some cases, adding client charges to the agreements without the clients’ knowledge and without obtaining additional signatures from the clients authorizing the additional charges. Sandru’s conduct, which the SEC characterized as a fraudulent scheme to misappropriate client funds, took place between 2009 and 2011 and potentially affected 47 advisory clients, from whom Sandru allegedly misappropriated “at least $308,850.00.” Sandru was, at this time, an OSJ of Cambridge and supervised two other Cambridge representatives and other administrative assistants.

Proposed Rule 147 Still in Limbo

May 6, 2016 | Bob Terry

In 1974 the Securities and Exchange Commission (“SEC”) adopted Rule 147 as a “safe-harbor” for intrastate offerings under Section 3(a)(11) of the Securities Act of 1933 (the “Act.”) On October 30, 2015, the SEC proposed sweeping changes to Rule 147. Notably, the proposed Rule 147 would be “decoupled” from Section 3(a)(11), instead being proposed under the SEC’s general exemptive authority in Section 28 of the Act.

Substantively, the proposal – while still limited to offerings entirely within one state – significantly liberalizes the restrictions on intrastate offerings contained in the current Rule 147 and Section 3(a)(11). First, it allows general solicitation across state lines (i.e., using the Internet), whereas such solicitation is now widely seen as problematic due to the current statutory and regulatory prohibition against offers outside the offering state. The new rule does not prohibit interstate offers, but simply requires that all sales be made to residents of one state.

Also, the current Rule 147 provides that an issuer can make offers or sales only (i) in the state in which it is incorporated or organized; (ii) in the state where its principal office is located; (iii) in the state in which it earns 80% or its revenues and has 80% of its assets; and (iv) if 80% of the proceeds of the offering are used in the state. The proposed Rule 147 basically requires only one of these standards to be met. The proposal also eliminates the requirement that the issuer be incorporated in the state.

SEC Enforcement Case Arises From “Free Dinner” Seminar Fraud

April 18, 2016 | Steve Parker

Earlier this month, the Securities and Exchange Commission (SEC) filed a civil lawsuit against four individuals who are alleged to have defrauded seniors through so-called “Free Dinner” investment seminars conducted by their investment adviser firm. The SEC alleged that Joseph Andrew Paul and John D. Ellis, Jr., who managed and jointly owned Paul-Ellis Investment Associates, LLC (PEIA), created materially false and fraudulent marketing material in order to induce Florida residents to attend the “Free Dinner” seminar. More specifically, the SEC alleged that the marketing materials included performance return statistics that were not consistent with the actual track record of the firm, but rather had been copied and pasted from another advisory firm’s website.

The individuals were also alleged to have recruited James S. Quay of Atlanta, Georgia and Donald H. Ellison of Palm Beach, Florida, who allegedly used the false material to mislead seniors who responded to the “Free Dinner” invitation. The SEC further alleges that Mr. Quay used an alias, Stephen Jameson in order to conceal his true identity. Mr. Quay was previously involved and was held liable in an enforcement action brought by the SEC in 2012. Before that, Quay was an active sales agent in a multi-million dollar Ponzi scheme operated by an attorney in Atlanta, Georgia. According to the SEC, Quay was also convicted of tax fraud in 2005.

SEC Creates Office of Risk and Strategy

March 21, 2016 | Steve Parker

As part of its overall goal to increase its ability to examine registered investment advisers, earlier this month the Security and Exchange Commission (“SEC”) announced that it has created a new office within the Office of Compliance Inspections and Examinations (“OCIE”) designed to consolidate the SEC’s current operation in the area of market surveillance, quantitative analysis and risk assessment. The newly created office — the Office of Risk and Strategy — will also provide operational risk management and organizational strategy for OCIE. The SEC also announced that it had selected Peter B. Driscoll to lead the new Office of Risk and Strategy. He will manage members of the investment advisor/investment company examination staff dedicated to the new office.

The SEC currently examines annually about 10% of all 11,000 registered investment advisers. The newly created Office of Risk and Strategy is part of a series of steps designed to heighten RIA oversight. The SEC has announced that it plans to in increase the number of examiners of investment advisers by almost 20% this year, bringing the number to 630. Informally, commissioners have also suggested that the Commission may require RIAs to hire third parties to conduct private compliance reviews.

For many years, and to an increasing degree over the past few years, the SEC’s examination program has been driven by risk evaluations derived in part from data-driven surveillance and reviews. According to the director of OCIE, Marc Wyatt, the new Office of Risk and Strategy will lead the SEC’s existing risk-based, data-driven exam program in a way which he describes will bring a “transparent approach to protecting investors.” Continue reading ›

SEC Charges Fund Manager with Fraudulently Misleading Investors

March 11, 2016 | Patricia Klusmeyer

The Securities and Exchange Commission (“SEC”) recently brought an administrative proceeding against unregistered fund manager Steven Zoernack and his firm, EquityStar Capital Management, LLC (“EquityStar”), for engaging in allegedly fraudulent conduct in violation of federal securities and investment adviser laws. Mr. Zoernack and EquityStar allegedly concealed Mr. Zoernack’s criminal history, used false identities, and distributed false and misleading marketing materials, among other things, in their bid to lure investors.

As alleged, Mr. Zoernack created EquityStar in May of 2010 to serve as the investment adviser for two private investment funds, Global Partners and Momentum. Between 2011 and 2014 Mr. Zoernack actively sought investors for the two funds, managing to sell approximately $5.6 million of interests in Global Partners and Momentum. As EquityStar’s managing member and sole employee, he handled all activities of the firm and drafted all marketing and offering materials. In the furtherance of these activities, Mr. Zoernack allegedly made many material misrepresentations to investors and prospective investors regarding himself and EquityStar.

FINRA Files Revised Pay-to-Play Rule Proposal with SEC

February 15, 2016 | Patricia Klusmeyer

The Financial Industry Regulatory Authority (“FINRA”) recently filed its revised pay-to-play rules proposal with the Securities Exchange Commission (“SEC”). Investment advisers have been awaiting FINRA’s pay-to-play rules ever since the SEC announced last year that it would not recommend enforcement action against an investment adviser or its associated persons for the payment to a third party for the solicitation of a government entity for investment advisory services until either FINRA or the Municipal Securities Rulemaking Board (“MSRB”) had adopted its own pay-to-pay rules for broker-dealers.

Pay-to-play activities involve the practice of making cash or in kind contributions, or soliciting others to make those contributions, to state or local officials or other government entities as an incentive for the receipt of government contracts. Pursuant to Rule 206(4)-5, investment advisers are prohibited from providing a government entity with investment advisory services for compensation within two years of contributing monetarily to that government entity. In addition, and of particular interest here, under Rule 206(4)-5 investment advisers may not provide payment to any third party to solicit a government entity for investment advisory services on behalf of the investment adviser unless that third party is a registered investment adviser, a registered broker-dealer, or a registered municipal adviser.

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.

SEC Publishes Guidance on Avoiding Mischaracterization of 12b-1 Fees

February 3, 2016 | Patricia Klusmeyer

The Securities and Exchange Commission (“SEC”) recently published guidance on the characterization of mutual fund fees, specifically 12b-1 distribution fees and sub-accounting fees, as part of their ongoing Distribution-in-Guise Initiative. Pursuant to Rule 12b-1 under the Investment Company Act of 1940, payments made by mutual funds (“funds”), to financial intermediaries from fund assets for the distribution of fund shares must be paid pursuant to a Rule 12b-1 plan that has been approved and adopted by the fund’s shareholders and Board of Directors (“Board”). In recent years the SEC has noticed that there are various fees being paid to intermediaries, in addition to distribution fees, that are being characterized as non-distribution-related fees and are not being paid pursuant to a Rule 12b-1 plan. Those fees include sub-transfer agent fees, administrative sub-accounting fees, and other shareholder servicing fees (collectively “sub-accounting fees”).

While these sub-accounting fees may in some cases be valid non-distribution-related fees, if they directly or indirectly compensate at all for any distribution-related activities, they are improperly labeled. Because of the importance of this issue given that fund fees directly impact investor returns and inherently involve conflicts of interest, the SEC has published guidance to assist funds in ensuring that distribution-related fees are being properly labeled and disclosed in a Rule 12b-1 plan as required. This potential problem was brought to the SEC’s attention after a recent sweep examination of various market participants including mutual funds, investment advisers, transfer agents, and broker-dealers.

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.