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On May 10, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Barclays Capital Inc. (“Barclays Capital”).  The Order alleges that Barclays Capital, in its capacity as a dually-registered investment adviser and broker-dealer, overcharged advisory clients in the course of its wealth and investment management business.  In conjunction with the Order, Barclays Capital submitted an Offer of Settlement where it agreed to pay about $97 million, which includes disgorgement and a penalty.

According to the SEC’s Order, Barclays Capital was the adviser and fiduciary to its advisory clients for two wrap fee programs: the Select Advisors Program and the Accommodation Manager Program, both of which were launched in September 2010.  Starting in September 2010 and ending around the close of 2014, Barclays Capital assured Select Advisors Program clients in both client agreements and in its brochure that “Barclays Capital performed initial due diligence and ongoing monitoring of third-party managers it recommended to manage its clients’ assets using specific investment strategies.”  Likewise, beginning in May 2011 and ending in March 2013, Barclays Capital assured Accommodation Manager Program clients that it conducted limited due diligence and monitoring of Accommodation Manager Program strategies. Continue reading ›

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On January 13, 2017, the United States Supreme Court agreed to examine a case involving the Securities and Exchange Commission’s (“SEC’s”) ability to seek disgorgement of ill-gotten gains in fraud cases, including fraud cases involving investment advisers.  The case, Kokesh v. SEC, raises the issue of whether claims for disgorgement are subject to a five-year statute of limitations on civil penalties.  Oral arguments were heard by the Supreme Court in April.

The underlying case involves a New Mexico investment adviser named Charles R. Kokesh (“Kokesh”), who acted as an investment adviser to various funds organized as limited partnerships.  The SEC filed suit against Kokesh, alleging that from 1995 through 2006, Kokesh ordered the funds’ treasurer to take money from the funds to pay various expenses, including $23.8 million for salaries and bonuses to the funds’ officers, including Kokesh, $5 million for office rent, and $6.1 million characterized as “tax distributions.”  According to the Tenth Circuit, the payments violated the funds’ contracts because the contracts did not permit payments for salaries of the funds’ controlling persons, including Kokesh, until 2000.  The contracts also did not address bonus payments, and they only permitted payment of tax obligations if certain prerequisites were present.  A jury found that Kokesh violated the Investment Advisers Act of 1940, among other statutes, and the District Court ordered Kokesh to pay a $2.4 million civil penalty, plus disgorgement of $35 million based on amounts going back to 1995.

In response, Kokesh appealed to the Tenth Circuit Court of Appeals, arguing that the disgorgement was a penalty subject to a five-year statute of limitations under 28 U.S.C. § 2462.  The SEC argued that the disgorgement was remedial and not punitive, and therefore not a penalty subject to the statute of limitations.  The Tenth Circuit agreed with the SEC and held that disgorgement was not a penalty.

Continue reading ›

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The Department of Labor (DOL) recently released a final rule delaying by 60 days the implementation date of the DOL Fiduciary Rule from April 10th to June 9th. This is in response to President Trump’s February memorandum asking the DOL to review the impact of the DOL Fiduciary Rule and assess whether it negatively effects the ability of retirement investors to gain access to retirement information and financial advice. The DOL Fiduciary Rule seeks to assign fiduciary duties to all advisers to retirement investors by expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) to cover a wider array of advice relationships.

Under the DOL’s final delay rule, the revised definition of fiduciary investment advice and certain provisions of the Best Interest Contract (BIC) exemption will be implemented on June 9th. At that time, advisers acting as fiduciaries and engaging in transactions covered by the exemption must comply with the impartial conduct standards of the BIC exemption. The impartial conduct standards include providing investment advice in the best interest of the retirement investor, receiving only reasonable compensation, and not making any materially misleading statements. Continue reading ›

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On April 10, 2017, the Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (“NAC”) updated FINRA’s Sanction Guidelines.  The purpose of these updates is to “ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.”

FINRA’s Sanction Guidelines are designed to acquaint FINRA-member firms with common securities-industry rule violations that take place and the variety of disciplinary sanctions that may be imposed because of those rule violations.  The Sanction Guidelines also serve as a tool to help FINRA’s adjudicators find suitable sanctions in disciplinary proceedings.  From time to time, FINRA conducts reviews of the Sanction Guidelines to account for “changes in FINRA’s rules” and to reflect accurately “the levels of sanctions imposed in FINRA disciplinary proceedings.” Continue reading ›

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On April 10, 2017, the Securities and Exchange Commission (“SEC”) announced that it brought enforcement actions against 27 firms and individuals.  According to the SEC, these firms and individuals published articles on investment websites about various companies’ stock.  The articles did not disclose to investors, however, that they were not “independent, unbiased analyses,” and they allegedly gave investors the opinion that they were.  The articles also did not have any disclaimers stating that the authors were being paid for promoting various companies’ stock.

The SEC conducted investigations through which it found that public companies engaged promoters or communications firms to create publicity for their stocks.  The promoters and communications firms then employed writers to write articles about the companies.  These articles, however, did not inform the public that the writers were receiving compensation from the public companies.  The SEC claims that, because these articles did not disclose the compensation arrangement, they created the impression that they were impartial when in fact they were “nothing more than paid advertisements.”  Moreover, the SEC found that more than 250 articles contained untrue statements that the writers were not being paid by the companies that their articles were discussing.  As a result, the SEC is alleging that the relevant firms and individuals committed fraud. Continue reading ›

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On March 8, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Voya Financial Advisors, Inc. (“Voya”), an SEC-registered investment adviser.  The Order, to which Voya consented, obligates Voya to pay disgorgement of $2,621,324, prejudgment interest of $174,629.78, and a civil money penalty of $300,000.

The SEC’s Order claims that Voya did not inform its clients that it was receiving compensation from a third-party broker-dealer and that these receipts created a conflict of interest.  Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) states that investment advisers are forbidden from participating in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”  Section 207 provides that investment advisers are not allowed to “make any untrue statement of a material fact in any registration application or report filed with the Commission, or to omit to state in any such application or report any material fact which is required to be stated therein.”  Finally, Rule 206(4)-7 under the Adviser’s Act compels investment advisers to “[a]dopt and implement written policies and procedures, reasonably designed to prevent violation” of the Adviser’s Act and the rules thereunder. Continue reading ›

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In December 2016, then acting Chairwoman of the Securities and Exchange Commission (“SEC”) Mary Jo White drafted a proposal that, if adopted, would enable third-parties, such as private sector organizations, to perform compliance exams of investment advisers.  Chairwoman White drafted this proposal in order to “increase SEC oversight of the approximately 11,800 registered investment advisers.”  In 2016, the SEC conducted evaluations of only 11% of all registered investment advisers.

However, Michael Piwowar, the current SEC Chairman, has expressed opposition to the proposal.  Piwowar claims that allowing third parties to conduct investment adviser exams would not increase the SEC’s efficiency because the SEC would still be required to monitor the third parties that it hires to conduct the exams.  He is also of the opinion that requiring SEC employees to conduct the exams would better enable the SEC to become aware of “trends in the industry.” Continue reading ›

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On February 2, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the District of Connecticut against Sentinel Growth Fund Management, LLC (“Sentinel”), an investment adviser, and its founder, Mark J. Varrachi (“Varrachi”).  The complaint alleges that from about December 2015 to November 2016, Varacchi and Sentinel stole $3.95 million or more from investment advisory clients.  The complaint asks that the District Court impose a permanent injunction against Varacchi and Sentinel, order them to disgorge any ill-gotten gains, and order them to pay civil penalties.

Neither Sentinel nor Varrachi was registered as an investment adviser with the SEC or with any state regulatory authority.  However, the SEC charged both of them with violations of the Investment Advisers Act of 1940 (“Advisers Act”).  The SEC found that Sentinel was “in the business of providing investment advice concerning securities for compensation,” which fits the definition of an investment adviser in Section 202(a)(11) of the Advisers Act.  As for Varrachi, the SEC determined that because he owned and managed Sentinel, he too was an investment adviser.  As a result of meeting the definition of an investment adviser, Sentinel and Varrachi were subject to the Advisers Act’s antifraud provisions. Continue reading ›

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In February 2017, the Financial Industry Regulatory Authority Inc. (“FINRA”) published a Regulatory Notice asking for comment on proposed changes to FINRA Rule 2210, which governs communications with the public.  Under current Rule 2210, broker-dealers are not allowed to make communications that “predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.”  According to FINRA, the purpose of this rule is to prevent retail investors from relying on performance projections relating to individual investments, which tend to be deceptive.

However, FINRA has acknowledged that performance projections that are not based on how well an individual investment performed can be helpful to investors who are contemplating an investment strategy.  Furthermore, investment advisers are permitted to use performance projections in choosing an investment strategy for their clients, provided that the projections do not violate the Investment Advisers Act of 1940’s antifraud rules.  Therefore, FINRA proposed the amendments to Rule 2210 in order to allow broker-dealers to use projections in a way that benefits clients and to make the rules governing performance projections by broker-dealers and investment advisers more uniform. Continue reading ›

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The Securities and Exchange Commission (SEC) recently issued new guidance regarding the Custody Rule and inadvertent custody of client assets in the form of a No-Action Letter on standing letters of authorization (SLOAs) and a Guidance Update on custodial contract authority. This guidance comes in the wake of the recent SEC Risk Alert identifying most frequent compliance issues found in examinations of registered investment advisers and listing custody as one of these most frequent compliance issues.

The Custody Rule, or Rule 206(4)-2, provides that it is a fraudulent, deceptive, or manipulative act within the meaning of section 206(4) of the Investment Advisers Act of 1940 for a registered investment adviser to have custody of client assets unless certain requirements are met. One of these requirements is an annual surprise examination requirement, although this requirement does not apply if the investment adviser solely has custody as a result of its authority to make advisory fee deductions. Continue reading ›

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