SEC Tag Archives — Page 15 of 22

Common Mistakes to Avoid in Form ADV Annual Updates

January 22, 2016 | Patricia Klusmeyer

Filing annual updating amendments to Form ADV is an important requirement for all registered investment advisers. All information contained in Parts 1 and 2 of Form ADV must be both accurate and complete. Unfortunately, this is not always the case, and the Securities Exchange Commission (“SEC”) and state regulators have not hesitated in bringing enforcement actions against investment advisers who misrepresent or fail to disclose certain information in their annual filings and amendments.

Based on 1170 routine state-coordinated investment adviser examinations in 2015, as reported by the North American Securities Administrators Association (“NASAA”), the most common errors that are routinely found on Form ADVs include inconsistencies between Form ADV Part 1 and Part 2, inconsistencies between fees charged and fees listed on the ADV, inconsistencies between services provided and services described in ADV, misrepresentations in business description, overstatements or understatements of assets under management, and failure to disclose conflicts of interest.

SEC Clarifies RIA Performance Advertising Obligations: The Virtus & Alpha Fiduciary Matters

January 19, 2016 | Patricia Klusmeyer

Last week we discussed the Lucia matter and the parameters it added for investment advisers to consider prior to utilizing performance advertisements. Today we will discuss two more administrative proceedings involving performance advertisements and the practical implications which can be taken from these cases.

The matter of Virtus Investment Advisers revolved around one of Virtus’ sub-advisers, F-Squared Investments. F-Squared was an investment adviser that had previously been fined by the SEC for allegedly advertising false inflated performance numbers of its most successful investment strategy, AlphaSector. AlphaSector consisted of an algorithm-based sector rotation strategy which traded nine industry exchange-traded funds from the S&P 500 Index. Virtus’ assets under management which utilized this strategy grew from $191 million at the end of 2009 to 11.5 billion by 2013. Unfortunately, F-Squared allegedly falsely stated that the AlphaSector strategy had a history dating back to 2001 and that it had historically outperformed the S&P 500 Index from 2001 to 2008. The SEC found that no assets had tracked the strategy from 2001 to 2008 and its back-tested performance data was miscalculated and substantially overstated results.

SEC Clarifies RIA Performance Advertising Obligations: The Lucia Matter

January 12, 2016 | Patricia Klusmeyer

Pursuant to Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-1, it is considered fraud for a registered investment adviser to publish, circulate, or distribute any advertisement which contains any untrue statement of material fact or which is false or misleading. One type of advertising that has been the focus of recent regulatory activity is performance advertising.

Performance advertisements are generally used by investment advisers to portray their past performance results to prospective clients. In order to be avoid misleading the prospective client, all material facts regarding the performance data and how it was calculated must be disclosed. This includes disclosing any material market conditions, the amount of advisory fees or other expenses that were deducted, whether results portrayed include reinvested dividends and other earnings, the investment strategies which were used to obtain the results, and any other material fact which may have impacted the results in any way.
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SEC Targets NY-Based RIA for Failure to Disclose Conflicts of Interest

January 6, 2016 | Patricia Klusmeyer

Investment advisers continue to get into regulatory trouble when it comes to failing to disclose conflicts of interest and related party transactions as required by both federal and state investment adviser law. Recently, the Securities and Exchange Commission (SEC) initiated proceedings against Fenway Partners, a New York-based registered investment adviser which served as adviser to three private equity funds. The conflicts arose around two related entities: Fenway Partners Capital Fund III, L.P., an affiliated fund, and Fenway Consulting Partners, an affiliate largely owned by the executives and owners of Fenway Partners.

Fenway Partners and Fenway Consulting Partners were both owned and managed in large part by respondents Peter Lamm, William Smart, Timothy Mayhew, and Walter Wiacek. The fund in question, Fund III, was operated by an Advisory Board consisting of independent limited partner representatives, pursuant to its organizational documents. According to the SEC allegations, the respondents failed to disclose several conflicts of interest and related party transactions to both the Advisory Board of Fund III and their fund investors.
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Investment Adviser Charged with Misleading SEC Regarding Examination

November 12, 2015 | Steve Parker

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.
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SEC Announces Cybersecurity Enforcement Action Against RIA

October 27, 2015 | Alison Burns

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.
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SEC Judge Rules on the Extent of Liability for Compliance Officers

October 6, 2015 | Alison Burns

On August 5th, 2015 in a decision that has implications for registered investment advisers and broker-dealers, SEC judge Cameron Elliot ruled on an enforcement action regarding the extent of liability for Compliance Officers in In the Matter of Judy K. Wolf, available here. Sanctions were not imposed against Ms. Wolf due to the violation being “decisively outweighed by the remaining public interest factors: egregiousness, degree of harm, and deterrence.” However, it was found that Wolf purposefully lied about her records violation.

In In the Matter of Judy K. Wolf, Judge Elliot stated he believed the further sanction against Wolf would be pursuit of “the low-hanging fruit” that is compliance officers.
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OCIE Announces 2015 Priorities in Second Round of Cybersecurity Examinations: New Risks for Securities Firms in Cybersecurity Compliance

October 1, 2015 | Alison Burns

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.
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SEC Enforcement Action Underscores Importance Of Gift Policies

September 16, 2015 | Steve Parker

A recent enforcement action settled in an administrative proceeding brought by the Securities and Exchange Commission (“SEC”) underscores the importance for investment advisers to adopt and follow rules designed to prohibit inappropriate gifts to and from clients by investment adviser personnel. In a matter previously discussed on our blog, Guggenheim Partners Investment Management, LLC (“Guggenheim”) settled charges, without admitting or denying any violations that it had failed to adopt, or implement reasonable compliance procedures as required by Rule 206(4)-7 under the Investment Adviser’s Act designed to regulate gifts and entertainment provided to and from the adviser or its personnel.

More specifically, the SEC’s Order instituting administrative proceedings recited that Guggenheim’s compliance manual adopted a rule that required supervised persons to seek and obtain approval of the Chief Compliance Officer before personnel could receive any gift above an established de minimis value that was defined in the manual as being $250.00 or less. Despite this policy, between 2009 and 2012 at least seven Guggenheim employees took 44 or more flights on private planes of Guggenheim clients, none of which were reported to the Chief Compliance Officer as required by the policy. The compliance log reflected only one such flight that was only recorded because the flight had been mentioned to the Chief Compliance Officer after the flight occurred. The Commission found that Guggenheim failed to enforce its own policies with respect to gifts and entertainment and failed to implement compliance policies and procedures regarding gifts and entertainment.
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Investment Adviser Settles Charges of Failure to Disclose Conflicts of Interest

September 4, 2015 | Steve Parker

Last month, the Securities and Exchange Commission (SEC) announced that registered investment adviser Guggenheim Partners Investment Management, LLC had consented to settle charges that it breached its fiduciary duty to its clients in connection with a $50 million loan made by a client to one of Guggenheim’s senior executives. Specifically, Guggenheim failed to disclose the existence of the loan and the conflicts of interests created by the loan, to its clients. Guggenheim agreed to pay a total of $20 million dollars to settle the charges.

According to the order instituting the administrative proceeding, the senior executive borrowed the funds from an advisory client so that he could make a personal investment in another corporation that was being acquired by Guggenheim’s parent company. The client who made the loan was one of several advisory clients of Guggenheim that invested, at Guggenheim’s recommendation, in two unrelated transactions. The client who made the loan, however, was permitted to invest in the unrelated transactions on different terms than the investors who had not made a loan to Guggenheim.
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