RIA Compliance BlogOn July 10, 2018, the Securities and Exchange Commission published five Orders Instituting Administrative and Cease-and-Desist Proceedings against two registered investment advisers, three investment adviser representatives, and Leonard S. Schwartz, a marketing consultant. The Orders allege that the respondents violated the Investment Advisers Act’s Testimonial Rule (275.206(4)-1(a)(1)). The SEC also alleged that another investment advisory firm, Romano Brothers & Company (“Romano Brothers”), violated the Testimonial Rule by posting two videos on YouTube featuring client testimonials. The Testimonial Rule provides that investment advisers and their representatives are forbidden from publishing, circulating, or distributing advertising materials that directly or indirectly refer to client experiences about the investment adviser and its services. The SEC considers publication of client testimonials fraudulent because testimonials typically present a biased evaluation of an investment adviser’s services. Continue reading ›
Articles Tagged with SEC
Wells Fargo Settles Charges with SEC For Misconduct in Sale of Market-Linked Investments
On June 25, 2018, Wells Fargo Advisors, LLC agreed to an Order settling charges brought by the Securities and Exchange Commission relating to Wells Fargo’s use of Market-Linked Investments (“MLIs”). According to the Order Instituting Administrative and Cease-and-Desist Proceedings, beginning in January 2009 and ending in about June 2013, Wells Fargo and its predecessor “improperly solicited customers to redeem their market-linked investments (“MLI”) early and purchase new MLIs without adequate analysis or consideration of the substantial costs associated with such transactions.” Continue reading ›
SEC Settles Charges with Investment Adviser for Failing to Disclose Conflicts of Interest
On 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 ›
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 ›
SEC No-Action Letter Addresses Financial Exploitation of Clients
On June 1, 2018, the Securities and Exchange Commission’s Division of Investment Management issued a No-Action Letter to the Investment Company Institute. The ICI asked the Division to assure that it would not recommend enforcement against a mutual fund or its transfer agent if the transfer agent temporarily withheld a disbursement from a “Specified Adult’s” mutual fund account based on a reasonable suspicion that the Specified Adult is being or is about to be financially exploited. According to FINRA Rule 2165, which is cited in the No-Action Letter, a “Specified Adult” is “a natural person age 65 and older; or … a natural person age 18 and older and who the transfer agent reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Continue reading ›
SEC Directors Stress Importance of Budget Request to Expand and Improve Investment Adviser Examinations
On May 16, 2018, SEC Co-Directors Stephanie Avakian and Stephen Piekin appeared before the Subcommittee on Capital Markets, Securities, and Investment, a subcommittee of the House of Representatives’ Committee on Financial Services. At this meeting, Avakian and Peikin emphasized the importance of the budget increases requested by the SEC in February of this year. The Commission’s Fiscal Year 2019 Congressional Budget Justification; Annual Performance Plan and Fiscal Year 2017 Annual Performance Report includes budget requests for each SEC division, including the Office of Compliance Inspections and Examinations. As part of OCIE’s budget request, the SEC requested funding for “13 restored positions to focus on examinations of investment advisers and investment companies.”
According to the SEC, the number of registered investment advisers, as well as the amount of assets that they manage, has significantly increased in the last few years. The SEC also anticipates that the number of registered investment advisers and the complexity of these investment advisers will continue to grow throughout 2018 and 2019. Moreover, a hiring freeze, which began at the beginning of 2017, has caused the number of compliance staff to decrease. The SEC anticipates that it will need funding to restore 100 positions that were lost because of the hiring freeze. Therefore, the SEC believes that without the requested funding, SEC staff will be unable to address its growing responsibilities adequately. Continue reading ›
SEC’s 12b-1 Self-Reporting Deadline Looms
In February, the Securities and Exchange Commission’s Enforcement Division announced the Share Class Selection Disclosure Initiative (the “SCSD Initiative”), encouraging investment advisers to self-report violations of federal securities laws. Specifically, the SEC is concerned with protecting advisory clients from undisclosed conflicts of interest related to 12b-1 fees charged by advisers. The SEC requests that investment advisers self-report violations of the federal securities laws relating to certain mutual fund share class selection issues prior to June 12, 2018, in exchange for more lenient treatment regarding the violations. A detailed explanation of Eligibility for the SCSD Initiative is available here. In May, the SEC also published a list of frequently asked questions and answers related to the SCSD Initiative.
Under Section 206 of the Investment Advisers Act of 1940, investment advisers have a fiduciary duty to act in their clients’ best interests. Included is an affirmative duty for the adviser to fully disclose all material facts, such as conflicts of interest. The SEC is concerned with conflicts associated with mutual fund share class selection, which the SCSD Initiative aims to address. In the SCSD Initiative, the SEC cautions that investment advisers must be mindful of their duties when recommending and selecting share classes for clients. Of particular concern are conflicts related to 12b-1 fees earned in the selection of classes of funds – conflicts which must be disclosed to clients. As explained by the SEC, a conflict of interest arises when an adviser receives compensation for selecting a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate. Such a conflict of interest must be disclosed. Compensation received either directly or indirectly through an affiliated broker-dealer is subject to scrutiny under the SCSD Initiative. As such, if the adviser failed to disclose a conflict of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients, such funds are subject to disgorgement, and civil monetary penalties may be appropriate. Continue reading ›
Lender’s $4.5 Million of Promissory Notes Were Unregistered Securities
A case involving real estate lending illustrates the perils of failing to comply with the securities laws. Last fall the Securities and Exchange Commission filed a complaint against Paul Z. Singer, a Philadelphia-based lender, and his company, Singer Financial Corp. (“SFC”), alleging that from October 2012 to July 2015, Singer, “by and through SFC, raised $4.5 million from at least 70 investors through an illegal and unregistered offering of securities in the form of promissory notes.”
This is not the first time Singer and SFC have been alleged to have sold unregistered securities. The Pennsylvania Securities Commission imposed penalties against SFC in 1997 and Singer and SFC in 2007 for violations of Pennsylvania’s securities laws pertaining to the unregistered offer and sale of securities. Also, the New Jersey Bureau of Securities imposed a $5,000 fine against SFC in 2010 for selling unregistered securities. Continue reading ›
Investment Advisers Cautioned not to Use Client Usernames and Passwords to Access Accounts
Investment advisers’ use of clients’ usernames and passwords to access their clients’ accounts to observe the accounts’ performance has come under scrutiny in recent years. In February 2017, the SEC Office of Compliance Inspections and Examinations (“OCIE”) disclosed in a Risk Alert that investment advisers’ use of client usernames and passwords can create compliance issues with the Custody Rule. According to OCIE, an investment adviser’s “online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts.” Accessing a client’s account using a client’s username and password often results in an investment adviser being able to withdraw funds and securities.
The North American Securities Administrators Association (“NASAA”) has also observed in recent years that if an investment adviser logs into a client’s account using the client’s personal information, “the investment adviser is in effect impersonating this client and has the same access to the account as the client.” As a result, a number of issues arise when investment advisers use their clients’ personal information to gain access to online accounts, including custody, recordkeeping obligations, and potential violations of user agreements. Continue reading ›
Texas Prioritizes Regulation of Cryptocurrencies
Over the last two months, the Texas State Securities Board (“Securities Board”) has published four emergency cease and desist orders alleging violations of the Texas Securities Act involving the offer and sale of cryptocurrencies. The fact that the Securities Board has issued four orders pertaining to cryptocurrencies shows that the Securities Board intends to make regulation of cryptocurrencies a priority. It is also expected that Texas could “take the lead” in regards to state regulation of cryptocurrencies. This follows last year’s announcement by the Securities and Exchange Commission that it intends to make the regulation of cryptocurrencies a priority this year in light of the fact that the cryptocurrency market has been growing over the years.
The Securities Board issued its first order involving cryptocurrencies on December 20, 2017 against a foreign firm called USI-Tech Limited. According to the order, USI-Tech Limited and its agents offered Texas investors investments “in a series of Bitcoin mining contracts.” The order alleged that these offers violated the Texas Securities Act because the investments, which were determined to be securities, were not registered in Texas. USI-Tech Limited’s agents also allegedly were not registered as Texas dealers or agents, and no applicable exceptions applied. The order also alleged that USI-Tech Limited and its agents made material misrepresentations and omissions concerning the offers. Continue reading ›