RIA Compliance BlogOn July 10, 2018, the Securities and Exchange Commission published five Orders Instituting Administrative and Cease-and-Desist Proceedings against two registered investment advisers, three investment adviser representatives, and Leonard S. Schwartz, a marketing consultant. The Orders allege that the respondents violated the Investment Advisers Act’s Testimonial Rule (275.206(4)-1(a)(1)). The SEC also alleged that another investment advisory firm, Romano Brothers & Company (“Romano Brothers”), violated the Testimonial Rule by posting two videos on YouTube featuring client testimonials. The Testimonial Rule provides that investment advisers and their representatives are forbidden from publishing, circulating, or distributing advertising materials that directly or indirectly refer to client experiences about the investment adviser and its services. The SEC considers publication of client testimonials fraudulent because testimonials typically present a biased evaluation of an investment adviser’s services. Continue reading ›
Articles Tagged with Compliance
SEC Directors Stress Importance of Budget Request to Expand and Improve Investment Adviser Examinations
On May 16, 2018, SEC Co-Directors Stephanie Avakian and Stephen Piekin appeared before the Subcommittee on Capital Markets, Securities, and Investment, a subcommittee of the House of Representatives’ Committee on Financial Services. At this meeting, Avakian and Peikin emphasized the importance of the budget increases requested by the SEC in February of this year. The Commission’s Fiscal Year 2019 Congressional Budget Justification; Annual Performance Plan and Fiscal Year 2017 Annual Performance Report includes budget requests for each SEC division, including the Office of Compliance Inspections and Examinations. As part of OCIE’s budget request, the SEC requested funding for “13 restored positions to focus on examinations of investment advisers and investment companies.”
According to the SEC, the number of registered investment advisers, as well as the amount of assets that they manage, has significantly increased in the last few years. The SEC also anticipates that the number of registered investment advisers and the complexity of these investment advisers will continue to grow throughout 2018 and 2019. Moreover, a hiring freeze, which began at the beginning of 2017, has caused the number of compliance staff to decrease. The SEC anticipates that it will need funding to restore 100 positions that were lost because of the hiring freeze. Therefore, the SEC believes that without the requested funding, SEC staff will be unable to address its growing responsibilities adequately. Continue reading ›
Lender’s $4.5 Million of Promissory Notes Were Unregistered Securities
A case involving real estate lending illustrates the perils of failing to comply with the securities laws. Last fall the Securities and Exchange Commission filed a complaint against Paul Z. Singer, a Philadelphia-based lender, and his company, Singer Financial Corp. (“SFC”), alleging that from October 2012 to July 2015, Singer, “by and through SFC, raised $4.5 million from at least 70 investors through an illegal and unregistered offering of securities in the form of promissory notes.”
This is not the first time Singer and SFC have been alleged to have sold unregistered securities. The Pennsylvania Securities Commission imposed penalties against SFC in 1997 and Singer and SFC in 2007 for violations of Pennsylvania’s securities laws pertaining to the unregistered offer and sale of securities. Also, the New Jersey Bureau of Securities imposed a $5,000 fine against SFC in 2010 for selling unregistered securities. Continue reading ›
Investment Advisers Cautioned not to Use Client Usernames and Passwords to Access Accounts
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 ›
SEC Weighs in on FINRA’s Proposed Rule Amendments Pertaining to Expungement Procedures
In response to FINRA’s Regulatory Notice 17-42, the Securities and Exchange Commission published a letter detailing its thoughts regarding some rule amendments FINRA proposed relating to its expungement procedures. According to FINRA, “expungement of customer dispute information is an extraordinary measure, but it may be appropriate in certain circumstances.” Nevertheless, critics of expungement have voiced their concern that FINRA’s current procedures for expungement may not be adequate. In response, FINRA proposed the amendments to improve procedures involving expungement requests.
The proposed amendments include changes to FINRA Rule 12805, which outlines the conditions that arbitrators must satisfy prior to granting an expungement request. Rule 12805 does not currently elaborate on how or when expungement relief may be requested during an underlying dispute with a customer. The amendments would require a FINRA associated person who is named as a party in the underlying customer case to seek expungement while the customer case is ongoing. If the associated person files an expungement request, he or she would be obligated to file either a $1,425 filing fee or the applicable filing fee provided in FINRA Rule 12900(a)(1), whichever is greater. Continue reading ›
SEC Retail Strategy Task Force Working to Combat Misconduct Involving Retail Investors
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 ›
SEC Continues to Pursue Municipal Advisor Examinations
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 ›
FINRA Seeks to Streamline and Strengthen Outside Business Activities and Private Securities Transactions Rules
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 ›
SEC Fines Adviser Who Obtained Misleading Morningstar Rating
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 ›
SEC to Host National Compliance Outreach Seminar in April
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 ›