Articles Tagged with Compliance

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The compliance deadlines for the SEC’s amendments to Regulation S-P, adopted on May 15, 2024, are approaching. For investment advisers with $1.5 billion or more in assets under management, the compliance deadline is December 3, 2025. Advisers with fewer than $1.5 billion in AUM have six more months, with a compliance deadline of June 3, 2026.

Critically, Reg S-P now requires RIAs to notify clients in the event of certain data breaches. Under the amended rule, RIAs must notify clients of any event that could endanger their personal data, unless the RIA has determined, after reasonable investigation, that sensitive client information has not been, and is not reasonably likely to be, used for substantial harm or inconvenience. Such notice must be sent as soon as practicable, and no later than 30 days after learning of the breach, to any affected or potentially affected clients. If the RIA cannot identify which clients may be affected, the RIA must notify all of its clients. Substantively, any such notification must: Continue reading ›

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Two recent SEC enforcement cases highlight the importance of registered investment advisers presenting true and accurate records to the Commission. While the facts of each case differ, they show that the documents’ falsification is worse than their insufficiency. Continue reading ›

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Regulators continue to emphasize the importance of registered investment advisers’ conflict-of-interest disclosures. The SEC recently settled a case with Transamerica Retirement Advisors, LLC (“Transamerica”) regarding account transfers with insufficient conflict of interest disclosure. 

While Transamerica settled without admitting or denying the allegations, the Commission’s findings are as follows:  Continue reading ›

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Custody presents a compliance danger for investment advisers, including advisers to private funds. Three recent enforcement cases illustrate the importance of diligent compliance for fund advisers with custody of client assets. 

According to the Advisers Act, an investment adviser has custody of client assets if it holds, directly or indirectly, client funds or securities, or if it has the authority to obtain possession of those assets. See Advisers Act Rule 206(4)-2(d)(2).  Continue reading ›

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Two recent enforcement cases highlight the pitfalls of conversion from broker-dealer accounts to investment adviser accounts. In both cases, client accounts were converted from broker-dealer to advisory accounts, leading to a change in client fees. In both cases, the adviser was penalized for mismanaging the change in fee arrangements.

The first case relates to One Oak Capital Management, LLC (“One Oak”), a registered investment adviser, and its dually registered investment adviser representative, Michael DeRosa. DeRosa, who was simultaneously employed at a separate broker-dealer, counseled several clients to convert their accounts from broker-dealer accounts and products to advisory accounts with One Oak. Continue reading ›

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The SEC recently charged New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP (collectively, “Two Sigma”) with breaching their fiduciary duties for failing to reasonably address known vulnerabilities in their investment models. In its Order, the SEC also found compliance and supervisory failures related to those violations, plus violation of the Commission’s whistleblower protections via Two Sigma’s employee separation agreements.

Two Sigma is a large quantitative-analytics-based hedge fund manager using computer-based algorithmic investment models when managing or advising client investments. The SEC claims that, by March 2019, multiple Two Sigma employees had informed senior management that various Two Sigma personnel could freely change variable inputs of their algorithmic models. These unchecked input modifications would alter the algorithm’s predictions and trades without notifying the firm, its representatives, or its clients. This autonomy of various personnel to rewrite the models’ data could materially impact investment decisions for Two Sigma clients. Continue reading ›

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The SEC recently announced its annual Examination Priorities for the 2025 year. This annual release provides insight into the areas that the SEC plans to highlight when inspecting investment advisers, investment companies, broker-dealers, and other entities subject to examination by the SEC’s Division of Examinations. For investment advisers, the 2025 priorities largely are unchanged from the announced 2024 priorities, which we have previously discussed.

For FY25, the SEC again intends to focus on investment advisers who have never been examined, newly registered investment advisers, and investment advisers who have not been examined recently.

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Last week, the SEC announced a series of enforcement actions tied to its ongoing sweep of investment adviser compliance with the new Marketing Rule. In total, nine firms settled claims that they violated Advisers Act Rule 206(4)-1, the “new Marketing Rule,” resulting in $1,240,000 in civil penalties.

We have previously written about the implementation of the new Marketing Rule, the announcement of the corresponding examination sweep program, and the subsequent enforcement actions that have resulted. While the previous enforcement actions have largely centered around investment advisers who have failed to adopt policies and procedures designed to prevent violations of the new Marketing Rule, the recent enforcement actions give greater insight into the real-world application of the new Marketing Rule. Namely, the actions detail marketing violations due to the use of third-party ratings by the investment advisers.

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In September 2023, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against Lufkin Advisors, LLC, a now de-registered Registered Investment Adviser, and its President, Chauncey Forbush Lufkin, III (collectively, “Defendants”) in the U.S. District Court for the Southern District of Florida.

The SEC first alleged an ongoing fraudulent course of conduct for multiple years. To support this claim, they alleged that the Defendants

  • Failed to manage assets entrusted to them,
  • Lost control–due to a lost or forgotten password–of cryptocurrency assets valuing an estimated $10 million for at least a year without notification to the client(s),
  • Made investments with Mr. Lufkin’s spouse’s company without the appropriate conflict of interest disclosures,
  • Failed to account for withdrawals from private funds, and
  • Failed to monitor the value of investments in private funds.

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On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that drastically changes the employment landscape by banning most types of noncompete provisions nationwide and rendering some existing ones unenforceable. The rule was adopted following a review of the non-competition landscape by the FTC. That review of noncompetes and their impact on the employment market and US economy was extensive. The FTC estimated that 1 in 5 Americans are subject to noncompetes as part of their employment.[i] In total, the FTC received over 26,000 comments regarding the proposed ban on noncompetes, over 25,000 commentors supported the proposed ban on noncompetes.[ii] Continue reading ›

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