Compliance

Investment Adviser and Principals Sanctioned for Compliance Failures

July 9, 2015 | Shay Virtue

In a matter underscoring how important it is for investment advisers to dedicate sufficient resources and attention to their compliance program, the Securities and Exchange Commission (“SEC”) has sanctioned a firm for multiple compliance failures. On June 23, 2015 the SEC instituted cease-and-desist proceedings against Pekin Singer Strauss, a registered investment advisor firm boasting approximately $1.07 billion in AUM which primarily serves high-net-worth clients.

Among the violations cited, the order states that Pekin Singer failed to conduct timely annual compliance program reviews in 2009 and 2010 and failed to implement and enforce provisions of its policies and procedures and code of ethics during this same period. The firm has been ordered to pay a civil money penalty in the amount of $150,000.
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SEC Issues Guidance Update on Cybersecurity

May 29, 2015 | Steve Parker

Last month, the SEC division of Investment Management released Investment Management Guidance in which it discusses a number of measures that investment advisers may wish to consider when addressing cybersecurity risks. This guidance is just the last in a long list of guidance and alerts issued by the SEC and other regulators as to the need for financial firms to improve their policies and procedures dealing with cybersecurity threats.

Among the recommendations made in the current IM are that firms:

• Conduct a periodic assessment of the nature, sensitivity and location of information, what types of cybersecurity threats and vulnerabilities exist, what security controls and processes are currently in place, the impact that would occur in the event of compromise of information, and the effectiveness of the current structure confirms current structure for managing cyber security risks

Questions Surround Impact Of Labor Department Fiducuary Rule for Financial Advisers

May 22, 2015 | Steve Parker

In the wake of the re-proposal by the U.S. Department of Labor of its so-called “Fiduciary Rule,” there are a number of questions regarding how the rule if adopted, will impact those providing financial advice to employee benefit plans and other retirement plans including IRAs and ERISA plans in general. The most obvious impact of the rule would be to bring those not currently fiduciaries, including registered representatives of securities broker-dealers and the broker-dealer firms themselves, into the realm of fiduciary advice providers. The higher standard of care that would apply necessarily implies a need for more thorough disclosures of potential conflicts of interest, including incentivized compensation such as commissions, 12b-1 fees and the like.
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LPL Financial Ordered by FINRA to Pay $11.7 Million

May 15, 2015 | Steve Parker

Earlier this month, the Financial Industry Regulatory Authority (“FINRA”) announced that it had fined LPL Financial (“LPL”) $10 million for lack of supervision in several areas of its operations, including sales of ETFs, variable annuities, REITs, and other complex products. In addition, FINRA found LPL failed to monitor trades and failed to report them to FINRA and failed to deliver more than $14 million in trade confirmations to customers. FINRA also ordered LPL to repay certain customers $1.7 million in restitution relating to the purchases of ETFs. Among FINRA’s findings were that the firm did not have a system that monitored how long customers were holding ETFs in their accounts, information that would be important in formulating advice as to whether the ETFs should have been purchased in the first place and how long the client should be recommended to hold the ETFs in their portfolios. Additionally, even though LPL had created policies limiting the concentration of ETFs in customer accounts, it failed to enforce the limits it had established and had not trained its registered representatives on the risks of those products.

With respect to variable annuities, FINRA found that in several instances, LPL had permitted said annuities to be sold without proper disclosure of surrender fees. Additionally, although LPL employed an automated surveillance system, that system failed to adequately review transactions commonly known as mutual fund “switches,” which involve a redemption of one mutual fund in order to purchase another.
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SEC Charges Three Investment Adviser Firms with Improper Registration in Wyoming

March 23, 2015 | Chadd Reynolds

On February 4, 2015, the SEC issued cease and desist orders against three investment advisers that fraudulently maintained registration with the SEC by listing Wyoming as their principal place of business on their Forms ADV. These three incidences highlight Wyoming’s unusual landscape for investment advisers.

In order to explain the uniqueness of these orders, some background on investment adviser regulation will be provided. Originally, investment advisers were prohibited from registering with the SEC under the Investment Advisers Act if it managed under $25 million in assets or met a designated exemption. In July 2011, that threshold was increased to $100 million. If an investment adviser does not meet or exceed the $100 million threshold, it is still required to register with the states in which they maintain their principal place of business. Wyoming is unique in that it does not regulate investment advisers. Any investment adviser with its principal place of business in Wyoming must therefore, according to the amendments to Section 203A of the Investment Advisers Act, register with the SEC.
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Non-Registered Crowdfunding Site Reaches Settlement with SEC

January 26, 2015 | Chadd Reynolds

In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.

Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
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NASAA Unveils Electronic Filing Depository

January 26, 2015 | Chadd Reynolds

On December 15, 2014, the North American Securities Administrators Association (“NASAA”) launched an online electronic filing system to be used for issuers filling Form D, Rule 506 offerings with state securities regulators. The purposes of this new electronic filing depository (“EFD”) website, according to NASAA president William Beatty, are to provide an efficient and streamlined process for regulatory filings and to allow for increased transparency for investors.

Issuers seeking an exemption under Rule 506 must meet certain requirements in order to avoid having to register their public or private offerings with the SEC or state regulators. However, those issuers must still file a notice of exempt offering of securities, or “Form D,” with the SEC and state securities regulators. Instead of the longer and more tedious process of registering with securities regulators, Form D requires only limited information about the issuer, the investors, and the securities offered.
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Investment Adviser Settles with SEC Over False Advertising Claims

January 15, 2015 | Chadd Reynolds

On December 22, 2014, the SEC announced a settlement with F-Squared Investments (“F-Squared”) in which F-Squared will pay a civil penalty and disgorgement for violations of the anti-fraud provisions of the Investment Advisers Act by advertising falsely inflated performance numbers of its most successful exchange traded fund (“ETF”) investment strategy. Under the terms of the settlement, F-Squared, the largest U.S. marketer of index products using ETFs, agreed to disgorge $30 million and pay a $5 million penalty.

In October 2008, F-squared, along with its co-founder and former CEO, developed an investment strategy called AlphaSector. AlphaSector used data received from an algorithm to decide whether or not to buy or sell nine industry-focused ETFs. The algorithm was developed by an intern at a private wealth advisory firm, who told F-Squared’s CEO that it had been used before to manage the private wealth advisor’s client assets. The intern sent F-Squared’s CEO three separate data sets of hypothetical, back-tested weekly trends for each of the ETFs. This data was then used by an F-Squared employee to calculate hypothetical back-tested results for AlphaSector from April 2001 to September 2008.
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Investment Advisers and Social Media

January 2, 2015 | Chadd Reynolds

As the use of social media becomes more prevalent and popular, businesses and financial institutions have begun to utilize the new methods of communication that social media can provide. Many businesses already maintain blogs or interactive accounts like Twitter, Facebook, and Instagram as a method of marketing and interacting with clients or prospective customers. However, social media is a relatively new and constantly changing technology that can create unique and unforeseen risks to a businesses image and regulatory compliance policies. These risks are particularly acute for registered investment advisers.

In the broker-dealer world, FINRA has already adopted rules and issued regulatory notices designed to protect investors from false or misleading claims and representations and guide member firms on how to appropriately monitor their social media participation. Although not strictly applicable to pure RIAs, these rules should be viewed as best practices:

FINRA Rule 2210 and NASD Rule 3010 govern the supervision of a firm’s social media communications;

FINRA Rule 2111 requires that social media communications, if recommending a security, must be considered suitable for the targeted investors; and

Record keeping of all social media communications is required under FINRA Rule 4510.

Texas Charges RIA with Using Misleading Brochure and Advertisements

December 8, 2014 | Chadd Reynolds

On November 17th, the Texas State Securities Board’s Office of Inspections and Compliance charged Mowery Capital Management, LLC (“Mowery Capital”) and one of its investment adviser representatives (collectively “Respondents”) with fraud for failing to disclose certain conflicts of interests, charging excessive fees, plagiarizing advertising material, and other material misrepresentations. The complaint requests that the state Securities Commissioner revoke Respondents’ registration with the state, levy an administrative fine, and issue a cease and desist order prohibiting any further fraudulent behavior.

When registering as a registered investment adviser, a Form ADV must be completed and filed with the appropriate securities authority. Part 2 of the Form ADV, or the “Brochure,” acts as the primary disclosure document for clients and requires the applicant to write in plain English general information about the business (i.e. types of services offered, fee schedule, business and educational background of employees), including any possible conflicts of interest the applicant may have.
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