Articles Posted in Investment Adviser

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

Last year, the Securities and Exchange Commission announced that it was creating a Retail Strategy Task Force as part of the Enforcement Division’s continuing endeavors to shield retail investors.  The newly created Task Force has already in 2018 published an Investor Alert relating to Ponzi schemes, as discussed below.

The Enforcement Division has had “a long and successful history of bringing cases involving fraud targeting retail investors.”  In recent years, it has seen a substantial number of cases pertaining to fraud that impacted retail investors, such as the sale of structured products that were not suitable to the relevant retail investor and microcap pump-and-dump schemes.  The Retail Strategy Task Force will put into practice the education obtained from those cases in order to pinpoint “large-scale misconduct affecting retail investors.” Continue reading

Last month, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Valor Capital Asset Management, LLC, a registered investment adviser, and its owner, Robert Mark Magee.  The SEC’s Order alleges that between July 2012 and May 2015, Magee “disproportionately allocated profitable or less unprofitable trades from Valor’s omnibus trading account to his personal accounts, while disproportionately allocating unprofitable or less profitable trades to Valor client accounts,” a practice known as “cherry-picking.”  Valor and Magee each submitted offers of settlement in conjunction with the Order.

According to the SEC’s Order, Valor had discretionary authority pertaining to the client accounts that were in Magee’s cherry-picking scheme.  Since Magee was Valor’s sole owner and employee, he was tasked with making trades and allocations for Valor’s clients’ accounts.  The SEC alleged that over a three-year period Magee mainly distributed the most unprofitable trades to clients’ accounts and mainly distributed the most profitable or less unprofitable trades to his own account.  The SEC also alleged that whenever Magee bought a block of securities using Valor’s omnibus account, he would delay allocating the block of securities “until after the relevant security’s intraday price changed.”  If the price increased, Magee allegedly would make a sale and allocate the trade to his own account, obtaining a gain.  If the price decreased, Magee allegedly would sell the security that same day and allocate the trade to Valor clients, resulting in a loss.  Alternatively, he would hold the security and allocate the purchase to Valor clients, which gave them an unrealized first-day loss. Continue reading

The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities.  Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.

FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).”  FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.”  As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.

If the proposed rule is adopted, it will replace Rules 3270 and 3280.  The comment period ends on April 27, 2018. Continue reading

On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”).  The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.”  The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET.  While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives.  SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices.  CCOs and other senior staff in private advisory firms typically participate in the panels as well.  Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading

The amendments to Form ADV, Part 1 that became effective October 1, 2017 are presenting some registered investment advisers with unforeseen problems as we move into “annual amendment season” in 2018.  As we previously highlighted among those changes to Form ADV is the requirement for advisers to disclose estimated percentages of assets held within separately managed accounts in twelve categories of assets.

Advisers with more than $10 billion in regulatory assets under management are required to report the same data as of mid-year and year-end.  Smaller firms must report the same data as of year-end only.

This has not proved a simple exercise for some firms.  Many have assumed that the custodians of their clients’ assets would readily be able to categorize their clients’ holdings and provide them reports summarizing the data.  Continue reading

On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its Examination Priorities for 2018.  The Examination Priorities cover “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.”  The five priorities that OCIE specifically listed are (1) issues crucial to retail investors, such as seniors and those saving for retirement, (2) compliance and risks in critical market infrastructure, (3) FINRA and MSRB, (4) cybersecurity, and (5) anti-money laundering programs.  This is not an exclusive list, and OCIE invited comments concerning how it can adequately promote compliance.

OCIE intends to continue to make shielding retail investors from fraud a priority.  OCIE plans to focus especially on senior investors and those saving for retirement.  For example, examiners will pay particular attention to firms’ internal controls that are intended to monitor their representatives, especially in relation to products targeted at senior investors.  OCIE will also focus on disclosure of the costs of investing, examination of investment advisers and broker-dealers who primarily offer advice through digital platforms, wrap fee programs, mutual funds and exchange traded funds, municipal advisors and underwriters, and the growth of the cryptocurrency and initial coin offering markets. Continue reading

On November 22, 2017, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and Cease and Desist Order against an investment adviser, Gray Financial Group, Inc., its founder, Laurence O. Gray, and its co-CEO, Robert C. Hubbard, IV.  The SEC alleged that Gray Financial, Gray, and Hubbard “offered and sold investments in a Gray Financial proprietary fund of funds… to four Georgia public pension clients, despite the fact that they knew, were reckless in not knowing, or should have known that these investments did not comply with the restrictions on alternative investments imposed by Georgia law.”  This case brings attention to an investment adviser’s obligation to “know its clients,” including the obligation to be familiar with laws and contractual provisions that place limitations on the types and amounts of investments in which certain clients, such as pension plans, can invest.

The Public Retirement Systems Investment Authority Law (“the Act”), codified as O.C.G.A. §§ 47-20-80 through 47-20-87, allows certain large retirement systems to invest in alternative investments, such as venture capital funds and merchant banking funds, subject to certain restrictions.  For example, the Act provides that such investments cannot in the aggregate exceed five percent of the retirement system’s assets at any time.  The Act also provides that before a large retirement system can invest in an alternative investment, the alternative investment needs to have had or concurrently have four or more other investors not affiliated with the investment’s issuer. Continue reading

On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017.  Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”  They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws.  To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss.  The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes.  The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors.  The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading

The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading