Books and Records

FinCEN Adopts Rules AML Rules for Investment Advisers

September 10, 2024 | Charlie Jarrett

The Financial Crimes Enforcement Network (“FinCEN”) adopted final rules to bring the majority of the investment advisory industry under the reporting requirements for illicit finance activity. The update brings “investment advisers,” as defined under the new rule, within the definition of “financial institution” for regulation under the Bank Secrecy Act (“BSA”).

The BSA has long attempted to safeguard the US financial system by monitoring and reporting certain activities and transactions. Under the new FinCEN Rule, certain investment advisers have the same regulatory requirements historically reserved for banks, broker-dealers, money transmitters, and casinos.

State-Registered RIAs Preparing for Compliance with the Corporate Transparency Act

September 4, 2024 | Katherine Oberlies

The Corporate Transparency Act (“Act”) became effective January 1, 2024. The goal of the Act is to provide a framework for the collection of beneficial ownership information from non-exempt entities in order to protect national security interests and bring the United States up to international standards.

The Act requires that all non-exempt corporations, limited liability companies, and similar entities report beneficial ownership information to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Under the Act, SEC-registered investment advisers are exempt entities. However, state-registered investment advisers are non-exempt under the current framework. State-registered investment advisers created before January 1, 2024, must file the report by January 1, 2025. State-registered investment advisers created on or after January 1, 2024, but before January 1, 2025, have 90 days after receiving notice of their creation to file the initial report. State-registered investment advisers created after January 1, 2025, will have 30 days after receiving notice of their creation to file the original report. Once submitted, there is no regular reporting requirement. However, you must report changes to beneficial ownership on an ongoing basis, in a timely manner, within 30 days of the change. Continue reading ›

Investment Adviser Fined and Ordered to Deregister for Fraud and Failure to Produce Records to SEC

September 3, 2024 | Katherine Oberlies

In September 2023, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against Lufkin Advisors, LLC, a now de-registered Registered Investment Adviser, and its President, Chauncey Forbush Lufkin, III (collectively, “Defendants”) in the U.S. District Court for the Southern District of Florida.

The SEC first alleged an ongoing fraudulent course of conduct for multiple years. To support this claim, they alleged that the Defendants

Failed to manage assets entrusted to them,
Lost control–due to a lost or forgotten password–of cryptocurrency assets valuing an estimated $10 million for at least a year without notification to the client(s),
Made investments with Mr. Lufkin’s spouse’s company without the appropriate conflict of interest disclosures,
Failed to account for withdrawals from private funds, and
Failed to monitor the value of investments in private funds.

First Circuit Ruling Gives SEC Victory in Long Fought Case

August 8, 2024 | Charlie Jarrett

Earlier this month, the United States Court of Appeals for the First Circuit issued a unanimous decision upholding a circuit court’s ruling in SEC v. Navellier & Associates, Inc.[i] This ruling granted the SEC summary judgment finding that Navellier & Associates, a Nevada based investment adviser, violated Section 206 of the Adviser’s Act.

For the past ten years, we have written about a series of SEC enforcement actions centered around the advertisement of performance returns tied to F-Squared, previously the U.S. largest marketer of ETF-based index products. The F-Squared and related cases not only established the SEC’s position regarding the publication of performance advertising but also recognized an investment adviser’s fiduciary duty when adopting statements made by third parties in advertisements. The SEC’s positions were codified under the new Marketing Rule adopted in 2021.

SEC Fines 5 RIAs Under New Marketing Rule

April 18, 2024 | Charlie Jarrett

On April 12, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced they had settled charges against 5 registered investment advisers for violations of the SEC’s Marketing Rule. The announcement follows prior enforcement actions for similar violations, which we have previously addressed: SEC Fines 9 RIAs for Marketing Rule Violations, SEC Fines Adviser Under New Marketing Rule, and SEC Announces Examinations Under New Marketing Rule.

Collectively, the 5 investment advisers, GeaSphere LLC; Bradesco Global Advisors Inc.; Credicorp Capital Advisors LLC; InSight Securities Inc., and Monex Asset Management Inc., were censured, ordered to cease and desist from further violations of the Investment Advisers Act of 1940, and pay civil penalties ranging from $20,000 to $100,000.

SEC Announces Enforcement Results for 2023

December 7, 2023 | Charlie Jarrett

With the end of the federal government’s fiscal year, the Securities and Exchange Commission (SEC) once again recently released results from the enforcement program, covering November 2022 through October 2023. The release included cumulative totals and highlighted individual cases and enforcement areas of concentration. The annual release serves as a roadmap for where the SEC is spending its resources, and what conduct will likely lead to enforcement actions.

During fiscal year 2023, the SEC’s Enforcement Division filed 3% more total enforcement actions than during 2022. This included an 8% increase in “stand-alone,” or original actions, along with increases in the number of “follow-on” administrative proceedings. These “follow-on” actions are typically filed after an associated criminal, civil, or other regulatory action, and look to impact an individual’s ability to conduct business in the securities industry.

SEC Announces Examination Priorities for 2024

October 26, 2023 | Charlie Jarrett

The Securities and Exchange Commission (SEC) recently released the 2024 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers, investment companies, and broker-dealers during the coming year.

As more advisers have returned to the office, the SEC has ramped up its in-person examinations while also leveraging technologies and virtual options to increase the efficiency of the examination program. Going forward, many advisers may experience a blend of in-person and virtual portions of an examination.

For FY24 examinations, the SEC will place a significant focus on how advisers abide by their duty of care and duty of loyalty under their fiduciary standard. Under this focus, the SEC will place an emphasis on (1) the advice provided to clients for complex or illiquid products, (2) the adviser’s process for ensuring that advice is provided in the client’s best interest, (3) how the adviser addresses conflicts of interests, including economic incentives, and (4) how disclosures are made to clients and prospective clients regarding all materials facts necessary for the clients to make informed decisions. Continue reading ›

SEC Provides Details on RIA Examination Program and Process

September 13, 2023 | Charlie Jarrett

The SEC’s Division of Examinations recently released general guidance, in the form of a Risk Alert, for how the registered investment adviser examination program operates, how examination targets are selected, and how the scope of examinations is determined.

With over 15,000 investment advisers registered with the SEC, the SEC has developed a risk-based approach for determining what investment advisers are selected for examination and the depth of the subsequent exam. This risk-based process has allowed the SEC to examine approximately 15% of the registered investment adviser population over the last few years, even as the population of SEC registered has increased by 13% over the last three years.[1]

SEC Announces What to Expect for Newly Registered Investment Advisers

April 6, 2023 | Charlie Jarrett

The SEC’s Division of Examinations recently released their Observations from Examinations of Newly-Registered Advisers. Issued as a Risk Alert, the release provides guidance for what investment advisers new to SEC registration should expect, but also warns were previously examined advisers failed to meet the SEC’s expectations.

The SEC typically initiates an examination of new-to-SEC registration investment advisers within the first year of registration. In our experience, this can occur as soon as six months after the registration is approved. The purpose of these examinations is as much informative as it is about enforcing the securities regulations. In the SEC’s own words, “[s]uch examinations allow the staff to: provide advisers with information about the Division’s examination program, conduct preliminary risk assessments, facilitate discussions regarding the advisers’ operations and risk characteristics, and promote compliance with applicable statutes and regulations.”[1]

What to Expect: SEC Announces Examination Priorities for 2023

March 7, 2023 | Charlie Jarrett

The Securities and Exchange Commission (SEC) recently released the 2023 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers during the coming year.

Over the last few years, the SEC has adopted several new rules that include compliance obligations. As the implementation dates for these new rules have passed, the SEC will prioritize examining how investment advisers have incorporate the rules into their compliance programs. While impacting a limited number of investment advisers, the amended rules include changes to the Derivates Rule and Fair Valuation Rule.[1] Continue reading ›