RIA Compliance BlogBoth the SEC and the U.S. Department of the Treasury’s Financial Crime Enforcement Network (“FinCEN”) recently announced actions to delay or remove pending regulations that would have increased compliance obligations for RIAs. FinCEN announced that it was postponing the effective date of final rules regarding investment advisers’ obligations under anti-money laundering (“AML”) regulations. The SEC announced that it was withdrawing the proposed cybersecurity risk management rule for RIAs, investment companies, and BDCs. Continue reading ›
Articles Posted in Enforcement
Minnesota RIA Charged with Cherry-Picking
The SEC recently settled cherry-picking charges against a Minnesota investment adviser and its sole owner. North East Asset Management Group and its owner, Gregory Zandlo, settled the Commission’s claims without admitting or denying its findings.
The SEC found that, through his firm, Mr. Zandlo shifted profitable trades to certain accounts from December 2020 through May 2022. Specifically, the SEC claimed the defendants were shifting profitable trades to accounts belonging to the firm, Mr. Zandlo, or people related to Mr. Zandlo (collectively, “Favored Accounts”). Continue reading ›
Investment Adviser Settles SEC Case on Model Security
The SEC recently charged New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP (collectively, “Two Sigma”) with breaching their fiduciary duties for failing to reasonably address known vulnerabilities in their investment models. In its Order, the SEC also found compliance and supervisory failures related to those violations, plus violation of the Commission’s whistleblower protections via Two Sigma’s employee separation agreements.
Two Sigma is a large quantitative-analytics-based hedge fund manager using computer-based algorithmic investment models when managing or advising client investments. The SEC claims that, by March 2019, multiple Two Sigma employees had informed senior management that various Two Sigma personnel could freely change variable inputs of their algorithmic models. These unchecked input modifications would alter the algorithm’s predictions and trades without notifying the firm, its representatives, or its clients. This autonomy of various personnel to rewrite the models’ data could materially impact investment decisions for Two Sigma clients. Continue reading ›
Advisers Who Did Not File 13F Reports Face SEC Scrutiny
Last month, the SEC announced a series of settled enforcement actions against investment advisers who routinely failed to file 13F and 13H reports with the Commission. The actions are tied to the SEC’s announced examination priority to assess the accuracy and completeness of regulatory filings.
Depending on the frequency, aggregate amount of transacted securities, types of securities, or value of securities an investment adviser advises, advisers registered with the SEC are subject to many filing requirements. Of these, the most common are the 13F and 13H reports required pursuant to Section 13 of the Exchange Act.
SEC Announces Enforcement Activity Under New Marketing Rule
Last week, the SEC announced a series of enforcement actions tied to its ongoing sweep of investment adviser compliance with the new Marketing Rule. In total, nine firms settled claims that they violated Advisers Act Rule 206(4)-1, the “new Marketing Rule,” resulting in $1,240,000 in civil penalties.
We have previously written about the implementation of the new Marketing Rule, the announcement of the corresponding examination sweep program, and the subsequent enforcement actions that have resulted. While the previous enforcement actions have largely centered around investment advisers who have failed to adopt policies and procedures designed to prevent violations of the new Marketing Rule, the recent enforcement actions give greater insight into the real-world application of the new Marketing Rule. Namely, the actions detail marketing violations due to the use of third-party ratings by the investment advisers.
FinCEN Adopts Rules AML Rules for Investment Advisers
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.
SEC Announces Enforcement Results for 2023
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 Fines 9 RIAs for Marketing Rule Violations
Last week, the SEC brought and simultaneously settled nine (9) administrative enforcement actions against separate RIAs for violating Rule 206(4)-1, the “Marketing Rule,” and specifically the restrictions relating to the use of hypothetical performance. The firms were Artemis Wealth Advisors, LLC; Trowbridge Capital Partners, LLC; MRA Advisory Group; McElhenny Sheffield Capital Management, LLC; Macroclimate, LLC; Linden Thomas Advisory Services, LLC; Hansen & Associates Financial Group, Inc.; Elm Partners Management, LLC; BTS Asset Management Inc. and Banorte Asset Management, Inc.
The sanctioned advisory firms all continued to advertise the returns of model portfolios beyond the November 2022 mandatory compliance date without implementing procedures reasonably designed to achieve compliance with the new rule. For instance, the firms failed to implement policies and procedures designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience. Continue reading ›
SEC Fines Adviser Under New Marketing Rule
On August 21, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order imposing civil monetary penalties against Titan Global Capital Management USA LLC (“Titan”) for violations of the new investment adviser Marketing Rule, Rule 206(4)-1. The new rule had a mandatory compliance date of November 4, 2022, but advisers could voluntarily adopt the rule sooner.
Titan elected to comply with the new rule in June 2021; however, the firm did not adopt new policies and procedures or adapt its practices as required by the new rule. Between August 2021 and October 2022, Titan violated the new Marketing Rule by advertising hypothetical performance without adopting policies and procedures reasonably designed to ensure the hypothetical performance was relevant to client’s or prospective client’s financial situation and investment objectives and also by failing to provide information underlying the hypothetical performance as required by the new rule. Continue reading ›
SEC Enforcement Case Highlights Pitfalls Of Private Fund Advisory Fees
On June 20, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order against Insight Venture Management LLC (“Insight”). The SEC and Insight settled the matter to resolve allegations that the adviser charged excessive management fees caused by the adviser’s inaccurate application of its “permanent impairment” policy and that the adviser failed to disclose a conflict of interest related to these fee calculations.
Insight is an adviser that advises private equity funds. Limited partnership agreements (“agreements”) associated with some of these private equity funds stated that Insight charged management fees during the funds’ post-commitment period—the period during which a fund manager manages and looks to exit funds’ investments—based on the investor’s pro rata share of the funds’ invested capital. The agreements further stated that if Insight determined an investment suffered a “permanent impairment” in value, the adviser would remove an amount equal to the difference between the acquisition cost and the impaired value of the investment. This amount would be paid from the funds’ invested capital, which would in turn reduce the basis used to calculate fees paid by the fund to Insight. The agreements allotted Insight discretion to reverse the “permanent impairment” determination if the investment increased in value thereafter.
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