Investment Adviser

Text and Chat Messages Key in Hiding Forex Traders Bid-Rigging Scheme

January 13, 2020 | Steve Parker

A federal court in the Southern District of New York is currently considering a motion filed last month that would overturn a jury verdict convicting a former Forex Trader at JP Morgan, Akshay Aiyer, of conspiring to rig bids in Forex transactions. The motion argues that the testimony of alleged co-conspirators Christopher Cummins of Citigroup and Jason Katz of Barclays was unreliable and false, and should not serve as a valid basis for the conviction.

Another aspect of the case that should be of interest to compliance officers of financial services firms was the role that text messages and group chats played in the trial of Mr. Aiver. During the trial in November 2019, Mr. Cummins testified that he and defendant Aiyer communicated via text message and private chat rooms in order to avoid being caught by the banks’ compliance personnel. Cummins pled guilty in 2017 but testified as a cooperating witness for the U.S. Justice Department in the case against Aiyer.

The cases against the US traders are only a part of a larger scheme involving other banks as well. In May 2017, the European Union levied fines totaling €1.7 Billion on Barclays, Citigroup, JPMorgan, Royal Bank of Scotland and Mitsubishi UFJ. The only firm not fined by the EU was UBS, who first detected and reported the fraudulent scheme. The importance of being able to monitor and detect these types of communications cannot be ignored.

SEC Issues Clarifying Guidance on New Form CRS

December 5, 2019 | Parker MacIntyre

The SEC’s Divisions of Investment Management and Trading & Markets have issued guidance in the form of a set of Frequently Asked Questions (or “FAQs”) addressing the upcoming implementation of the newly-created SEC Form CRS Relationship Summary (“Form CRS”).

As previously profiled on this blog, Form CRS is a new SEC disclosure document that will be applicable to both RIAs and broker/dealers offering services to retail investors. Indeed, for RIAs, the new Form CRS will function as a new Part 3 to the RIA’s existing Form ADV. The purpose of Form CRS is to summarize basic information about the firm’s services, fees, and costs, as well as its conflicts of interest and material disciplinary events. As noted, Form CRS obligations only arise for firms dealing with “retail investors,” which the SEC defines as “natural persons” or their legal representatives, who seek to receive or receive services “primarily for personal, family or household purposes.” Full implementation of Form CRS is slated for June 30, 2020.

RIAs Mull SEC’s Proposed Changes to Cash Solicitation Rule

November 15, 2019 | Parker MacIntyre

As discussed in our most recent posting on this blog, the SEC has proposed a wholesale rewrite of its existing advertising and cash solicitation rules. While that last post delved into the specifics of the SEC’s proposed amendment of its advertising rule, in this installment, we take up the Commission’s plans for revamping its cash solicitation rule.

The SEC’s Release No. IA-5407, published on November 4^th, aims to modernize both rules to reflect the dramatic changes seen in technology and the advisory industry since the initial adoption of these rules decades ago. While just a proposal for now, it offers the best view into what any ultimate final rules will probably look like. At this stage, RIAs and other industry participants are closely reviewing both proposed rules, and many will be submitting public comments to the SEC as permitted pursuant to the Commission’s public comment process. While the public comment process runs a fixed 60 days, the ultimate publication of final rules is at the SEC’s discretion.

SEC Releases Proposal to Revamp RIA Advertising and Solicitation Rules

November 7, 2019 | Parker MacIntyre

On November 4^th, the SEC released for public comment proposed replacements to its decades-old advertising and cash solicitation rules. The proposed rules, which are accompanied by almost 500 pages of explanatory text, are now subject to the SEC’s “notice and comment” process, whereby interested persons will have 60 days to file comments to the SEC, after which time the SEC will likely issue final versions of the new rules. While the content of the final rules ultimately adopted by the SEC may differ substantially from the versions now being circulated, the current proposals are the most likely outcome at this point in time and offer valuable insight into the SEC’s thinking in this area.

According to the SEC, both the advertising and cash solicitation rules are ripe for updates and modernization as a result of “changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.” Notably, the advertising rule (Advisers Act Rule 206(4)-1) has been largely untouched since its adoption in 1961. Likewise, the cash solicitation rule (Advisers Act Rule 206(4)-3) has not been amended since its adoption in 1979. In this installment of our blog, we will outline some of the more salient points of the SEC’s proposal to replace the advertising rule. Look for our discussion of the proposed cash solicitation rule amendment in an upcoming post.

South Carolina Adopts New Private Fund Adviser Exemption

October 30, 2019 | Parker MacIntyre

In a recent administrative order, the Securities Division (the “Division”) of the South Carolina Office of the Attorney General has adopted a new exemption from investment adviser registration for private fund advisers. This move is significant as, until now, South Carolina was one of fewer than 10 states not providing some form of exemptive relief to private fund advisers. New private fund advisers seeking to set up operations in South Carolina may utilize the new exemption immediately. Additionally, existing private fund advisers currently registered with the Division may invoke the exemption and de-register so long as such advisers are in compliance with the exemption’s provisions and all other applicable law. As the southeastern United States has become an increasingly popular venue for private fund advisers in recent years, South Carolina’s new exemption should be well-received by the private capital industry.

As noted, most states exempt private fund advisers from registration obligations arising under those states’ “Blue Sky” investment advisory laws. Such obligations arise as a result of the fund manager (typically a separate legal entity serving as the fund’s General Partner or Managing Member) exercising control over and managing the fund’s securities portfolio. In other words, because the fund manager has discretionary authority to manage the fund’s investment portfolio, and receives compensation for this service (typically in the form of a management fee and a performance allocation), the fund manager generally satisfies the definition of an “investment adviser” under prevailing law.

SEC Wins Judgment Against RIA and Permanently Bars its Principal for “Cherry-Picking” Scheme

October 17, 2019 | Parker MacIntyre

In a recently-announced administrative proceeding, the SEC has entered a permanent securities industry bar against Joseph B. Bronson, effectively preventing Bronson from ever again associating with any investment adviser, broker, dealer, or municipal securities dealer/advisor. The SEC Order barring Bronson—consented to by Bronson—comes on the heels of an August final judgment against Bronson and his former RIA, Strong Investment Management, obtained by the SEC in a civil case filed in a California federal district court. This final judgment against Bronson and his RIA was especially harsh as it found him and the firm jointly and severally liable for nearly $1 million in disgorgement plus $100,000 in prejudgment interest. Bronson was also individually ordered by the court to pay a $184,000 civil penalty.

The Bronson case is instructive as it highlights an especially egregious case of fraudulent conduct and fiduciary disregard in the form of a “cherry-picking” scheme that—while invisible to Bronson’s clients—did not go unnoticed by the regulators. In a nutshell, over a four-year period, Bronson utilized his firm’s omnibus trading account at two different broker/dealers to effect a bald-faced cherry-picking scheme, whereby he entered block trades via the omnibus account, waited to see the trades’ intra-day performance, and then disproportionately allocated the winning trades to his own personal accounts and the losers to client accounts.

SEC Announces $37.9 Million Settlement with Two RIAs over Conflicts of Interest Violations

October 8, 2019 | Parker MacIntyre

The SEC has just concluded settlement negotiations with two large RIA subsidiaries of the Bank of Montreal, resulting in a total settlement of almost $38 million—with $25 million of that in disgorgement. The SEC’s announcement and administrative order resolves enforcement proceedings against BMO Harris Financial Advisors, Inc. (“BMO Harris”) and BMO Asset Management Corp. (“BMO Asset”)(together, the “BMO Advisers”) involving conflicts of interest violations under the Advisers Act antifraud provisions.

The SEC’s administrative settlement with the BMO Advisers marks yet another significant action by the Commission against RIAs for failing to disclose material conflicts of interest. As fiduciaries, RIAs must seek to avoid conflicts of interest with clients, and, at a minimum, must fully disclosure all material conflicts. The SEC enforces violations of this requirement pursuant to Advisers Act Section 206(2), which prohibits RIAs from engaging in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”

OCIE Publishes New Compliance Risk Alert for RIAs Addressing Trading Practices

September 16, 2019 | Parker MacIntyre

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a new Risk Alert on September 4^th urging RIAs to review their compliance policies and procedures addressing principal trading and agency cross trading transactions.

We pay close attention to OCIE’s periodic Risk Alerts as these publications provide RIAs with not only a view of the results of recent OCIE exam, but also an insight into future exam priorities. This blog has provided commentary on all three of OCIE’s Risk Alerts for RIAs published thus far in 2019.Those alerts have focused on topics as diverse as hiring practices, customer record storage, and privacy notices.

This new Risk Alert encourages RIAs to revisit their policies and procedures designed to prevent violations of Advisers Act Section 206(3) and Rule 206(3)-2. Section 206(3) of the Advisers Act prohibits an adviser from engaging in the following trading activities, unless done with the consent of a client after receipt of written notice: (i) buying or selling a security from a client while acting as “principal for his own account” (“principal trading”); and (ii) acting as a broker for a person other than the client in order to effect a securities transaction between the client and the other person (“agency cross trading”).

SEC Publishes New Guidance for SEC-Registered Advisers on Meeting Their Proxy Voting Obligations

September 10, 2019 | Parker MacIntyre

In what is turning out to be a busy summer at the SEC for issuing new rules and interpretations applicable to RIAs, the Commission has just released detailed guidance clarifying the proxy voting obligations of SEC-registered advisers. This latest release comes on the heels of the agency’s landmark package of releases issued on June 5^th, which, for RIAs, included rules implementing the new Form CRS (a/k/a Form ADV, Part 3) and a major interpretive release clarifying the fiduciary duty owed to clients by all advisers. This latest release aims to clarify an adviser’s obligations arising under Advisers Act Rule 206(4)-6 (“the Proxy Rule”) relating to voting proxies for clients, specifically in the context of using the services of a “proxy advisory firm.”

The Proxy Rule provides that it is a “fraudulent, deceptive, or manipulative act” for an SEC-registered adviser to “exercise voting authority with respect to client securities” unless the adviser adopts and implements written policies and procedures designed to ensure that such voting is done in the “best interest of clients.” The Proxy Rule also requires certain disclosures be made to clients regarding any voting done for them. Notably, the Proxy Rule does not require advisers to vote client securities. Indeed, many advisers choose to escape the coverage of the Proxy Rule by simply not—in any instance—voting client securities. However, for advisers exercising any voting authority over client securities—even one share—the Proxy Rule swings into effect. Accordingly, all such advisers opting to vote client securities will need to be in full compliance with the Proxy Rule—and should pay close attention to the SEC’s new guidance on this matter. Continue reading ›

SEC Sues Large RIA for Fraud in Latest Mutual Fund Revenue Sharing Case

August 29, 2019 | Parker MacIntyre

The SEC has filed fraud charges against a large ($85 billion AUM) registered investment adviser for its failure to disclose material conflicts of interest in connection with a “revenue sharing” arrangement with its clearing broker. The SEC’s Complaint against the adviser, Boston-based Commonwealth Equity Services, LLC, d/b/a Commonwealth Financial Network (“Commonwealth”), was filed in Massachusetts federal district court, and alleges that Commonwealth received over $100 million in revenue sharing from the clearing broker while failing to properly apprise its advisory clients of the full nature of the revenue sharing arrangement and the inherent conflicts of interest implicated by it. The Commonwealth case is just the latest in a string of actions by the SEC involving mutual fund share class selection by advisers and comes on the heels of the recent DC Circuit decision in the Robare case, which has likely emboldened the SEC somewhat.

The Commonwealth case involves a revenue sharing arrangement between Commonwealth and National Financial Services, LLC (“NFS”), an affiliate of mutual fund giant Fidelity Investments. Pursuant to that arrangement, NFS paid Commonwealth a percentage of the money paid to NFS by mutual fund companies in return for the right to sell their mutual funds through NFS. The money paid to Commonwealth by NFS under this arrangement, in turn, was directly related to the amount of Commonwealth client assets invested in certain share classes of specific funds offered on NFS’ platform. In other words, the more client assets placed by Commonwealth into particular funds and classes of those funds, the more revenue shared with Commonwealth. Continue reading ›