Articles Posted in Guest Contributor

Earlier this month, the Securities and Exchange Commission announced that it had reached a settlement with Ross Shapiro, a former managing director of Nomura Securities International, Inc. (“Nomura”).  The SEC filed a complaint against Shapiro and two other defendants, Michael A. Gramins and Tyler G. Peters, in September of 2015.  The complaint alleged that between January 2010 and November 2013, Shapiro, Gramins, and Peters made misrepresentations to customers about the prices of residential mortgage-backed securities (“RMBS”) and manufactured housing asset-backed securities (“MHABS”), thereby violating the Securities Act of 1933 and the Securities Exchange Act of 1934.

An RMBS is a security whose underlying assets comprise residential loans.  Customers who invest in an RMBS typically obtain payments derived from the interest and principal payments on these loans.  Shapiro, Gramins, and Peters provided market information and sold RMBS and MHABS on behalf of Nomura, a FINRA-registered broker-dealer.  The customers in question were funds that invested in RMBS.

The SEC’s complaint alleged that Shapiro, Gramins, and Peters made various misrepresentations to customers regarding the prices at which Nomura bought and sold RMBS and MHABS and that they misrepresented the amount of compensation that Nomura would receive for arranging any trades.  For example, Shapiro, Gramins, and Peters allegedly deceived customers on numerous occasions regarding how much Nomura paid for RMBS and MHABS.  Shapiro, Gramins, and Peters also gave clients the impression that Nomura had paid a higher price for RMBS and MHABS than it actually had.  These misrepresentations were usually made via electronic communications such as instant messaging, emails, and online chats.

The Securities and Exchange Commission recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Massachusetts Financial Services Company (“MFS”), an SEC-registered investment adviser.  According to the SEC’s Order, MFS advertised hypothetical returns pertaining to its blended research stock ratings without informing clients that a number of the hypothetical portfolios’ superior returns were based on back-tested models.  Without admitting or denying the allegations in the SEC’s Order, MFS submitted an offer of settlement to resolve the matter.

According to the SEC’s Order, MFS has employed a quantitative-based research department since 2000.  In 2000, the department developed what MFS calls “blended research” strategies, which involve “combining fundamental and quantitative ratings to arrive at a blended stock score, and by using a portfolio optimization process that considers the blended scores along with risk and other portfolio constraints.”  As of May of this year, MFS had approximately $21 million in assets under management invested in blended research strategies.

The SEC’s Order alleges that from 2006 through 2015, MFS created research proofs based on the blended research analysis. The data and a bar chart describing the analysis were featured in MFS advertisements.  MFS subsequently used the bar chart in three different kinds of marketing materials: in a standard slide deck from 2006 through 2015, in responses to formal requests from clients starting in 2012, and in a white paper that discussed MFS’s blended research strategies.  These materials were marketed exclusively to institutional clients, prospective institutional clients, financial intermediaries, and investment consultants.

Oregon requires all investment advisers and broker-dealers to maintain errors and omissions insurance for at least $1 million. Under Section 59.175 “every applicant for a license or renewal of a license as a broker-dealer or state investment adviser shall file with the director proof that the applicant maintains an errors and omissions insurance policy.”  This law provides investors with recourse if they suffer losses because of an uninsured investment adviser. Presently, investment advisers in Oregon may obtain errors and omissions insurance through either the Oregon surplus lines, the Oregon risk retention markets, or both.  However, according to the Oregon Secretary of State’s Department of Consumer and Business Services, which oversees the Division of Finance and Securities Regulation, neither of those groups is “admitted” or authorized to conduct insurance business in Oregon.  As a result, the Department has decided that a temporary rule is necessary to help both Oregon investment advisers and insurance producers understand the steps they need to take to provide proof of insurance. Continue reading

As we recently highlighted, the Securities and Exchange Commission took enforcement action against three registered investment advisers for violating the pay-to-play rule applicable to advisers under the Investment Advisers Act.  Broker-dealers should be aware that in 2017 the Financial Industry Regulatory Authority announced the approval of  modifications to two rules – Rules 203 and 458, imposing similar prohibitions and limitations on capital acquisition brokers (“CABs”).  A CAB is a FINRA member firm that participates in a restricted amount of activities, such as “advising companies on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions.”  The rules will implement “’pay-to-play’ and related recordkeeping rules to the activities of member firms that have elected to be governed by the CAB Rules.”  The new rules went into effect on December 6, 2017. Continue reading

On April 12, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published a Risk Alert “providing a list of compliance issues relating to fees and expenses charged by SEC-registered investment advisers… that were the most frequently identified in deficiency letters sent to advisers.” According to OCIE, investment advisers often explain the terms of a client’s fees and expenses in their Form ADV and their advisory agreements. If an investment adviser does not follow these terms and participates in improper fee billing, that investment adviser may be violating the Investment Advisers Act of 1940. The Risk Alert is designed to compel investment advisers to evaluate their practices, as well as their policies and procedures, to help ensure compliance with the Advisers Act. Continue reading

On 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

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

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

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

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