Articles Tagged with SEC

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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 ›

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Following its publication of a Risk Alert in late 2017 detailing findings from examinations of municipal advisers, the SEC’s Office of Compliance Inspections and Examinations (OCIE) continues to examine municipal advisers in 2018.  In 2014, OCIE established the Municipal Advisor Examination Initiative to perform an examination on municipal advisers who recently registered for the first time.  OCIE performed over 110 examinations in the course of the Initiative and found that many municipal advisers did not have adequate knowledge of regulatory requirements for municipal advisers.  As a result, many municipal advisers were found not to be in adequate compliance with regulatory requirements pertaining to registration, recordkeeping, and supervision.  OCIE hoped that in publishing the 2017 Risk Alert, municipal advisers will be compelled to evaluate their policies and procedures to find possible areas for improvement.

Municipal advisers are obligated to register with the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The SEC established its municipal adviser registration rules in September 2013, and the rules became effective in July 2014.  The Dodd-Frank Act also established the Municipal Securities Rulemaking Board (“MSRB”), which exercises regulatory authority over municipal advisers.  OCIE’s examinations of municipal advisers covered “compliance with regulatory obligations including registration, statutory fiduciary standard of care, fair dealing, recordkeeping, and supervision, among other things.”  OCIE discovered that the most common deficiencies among municipal advisers related to registration, books and records, and supervision requirements. Continue reading ›

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On March 15, 2018, the United States Court of Appeals for the Fifth Circuit elected, in a 2-1 decision, to vacate the Department of Labor’s (DOL’s) Fiduciary Rule (Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al.).  In doing so, the Fifth Circuit overturned the Fiduciary Rule in its entirety, including its new definition of fiduciary advice under the Employee Retirement Income Security Act of 1975 (ERISA) and the Internal Revenue Code (Code), as well as the various new exemptions and revisions to existing exemptions that it features.  It is uncertain whether the DOL will request that the Fifth Circuit rehear the case, appeal the case to the United States Supreme Court, or do nothing.  The Fifth Circuit’s decision, however, has not deterred the Securities and Exchange Commission (SEC) from continuing to discuss implementing its own fiduciary rule.

According to the Fifth Circuit’s majority opinion, the DOL exceeded its authority in adopting the new fiduciary investment advice definition in the Fiduciary Rule, finding the definition inconsistent with the plain text of ERISA and the Code. The Fifth Circuit also concluded that the DOL acted “arbitrarily and capriciously” in, among other things, requiring people providing services to IRAs to sign a contract under the Best Interest Contract exemption in which they admit that they are fiduciaries and can be sued. Therefore, the Fifth Circuit concluded that “the Rule fails to pass the tests of reasonableness of the [Administrative Procedures Act].” Continue reading ›

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On February 26, 2018, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order against EquityStar Capital Management, LLC, an unregistered investment adviser, and its owner, Steven Zoernack.  According to the SEC’s Order, EquityStar and Zoernack offered and sold investment interests in two unregistered investment funds from about May 2010 to about March 2014.  The SEC’s Order alleges that in the course of making these offers and sales, EquityStar and Zoernack “made material misrepresentations and omissions and engaged in a fraudulent scheme involving this and other deceptive conduct.”

Zoernack was tasked with writing and publishing marketing materials for the funds that EquityStar managed.  In these marketing materials, Zoernack allegedly claimed that the funds’ manager, whose name was not disclosed, had “an impeccable and unblemished past record with the SEC.”  According to the SEC, however, Zoernack was in fact the manager, and he had “two criminal fraud convictions, had previously filed for bankruptcy, and had numerous money judgments and liens against him.”  The Order also claims that Zoernack made various efforts to hide his criminal record and negative financial history, including paying a search-engine manipulator to make positive information about him appear before negative information in search engine results. Continue reading ›

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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 ›

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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 ›

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Whether or not the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will formally name advertising as among its priorities in 2018, it is clear from its activity and that of the Enforcement Division in 2017 that advertising should remain a concern of every registered investment adviser and chief compliance officer.

In September 2017, OCIE published a Risk Alert identifying the most common compliance issues pertaining to Rule 206(4)-1 of the Investment Advisers Act of 1940, otherwise known as the “Advertising Rule.”  An advertisement includes “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers” advice regarding securities.  The Advertising Rule forbids an investment adviser from “directly or indirectly… publishing, circulating, or distributing any untrue statement of material fact, or that is otherwise false or misleading.” Continue reading ›

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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 ›

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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 ›

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In August of this year, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-and-Desist Proceedings (“Order”) against Capital Dynamics, Inc. (“CDI”), a New York-based investment adviser.  The SEC alleged that from March 2011 to July 2015, CDI allocated certain expenses to private funds it was advising when the funds’ governing documents did not authorize the funds to pay these expenses.  CDI submitted an Offer of Settlement in conjunction with the Order.

According to the SEC’s complaint, CDI and its affiliates formed the private funds, collectively known as the “Solar Fund,” “to introduce a new investment program focused on clean energy and infrastructure.”  The documents that governed the funds provided that CDI and the funds’ general partners were obligated to pay “normal operating expenses,” such as employee expenditures and fees for specified services.  They could not charge these expenses to the funds. Continue reading ›

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