Articles Tagged with Enforcement

Recent developments within two of the three branches of the federal government portend significant potential changes in the SEC’s ability to obtain disgorgement of ill-gotten gains in civil actions brought by its enforcement arm. Early in November, the U.S. Supreme Court decided to hear an appeal of a Ninth Circuit case, SEC v. Liu, involving the issue of whether the SEC has statutory authority to obtain disgorgement at all. Then, not three weeks later, the U.S. House of Representatives responded by passing H.R. 4344, a bill explicitly codifying the SEC’s authority to obtain disgorgement. While the ultimate decision of the high court remains months away, and the House’s action has no legal significance until a companion bill in the Senate is acted upon and the two bills are passed by both chambers, these developments are of great significance to securities litigators and SEC-watchers alike.

Disgorgement has long been a powerful arrow in the SEC’s enforcement quiver, allowing it to obtain, on behalf of aggrieved investors, reimbursement of ill-gotten gains. However, despite it having obtained billions of dollars in disgorgement in civil actions over the last few decades, no statute explicitly confers the SEC with authority to seek this remedy. Rather, lacking any express authority, federal judges have implied it in scores of decisions dating back to the 1970s. Now, that entire foundation has come into question, prompted first by the Supreme Court’s 2017 decision in Kokesh v. SEC, and now by the high court’s acceptance of the Liu appeal. Continue reading

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. Continue reading

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.” Continue reading

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

SEC Chairman Jay Clayton recently announced, on behalf of the Commission, a significant change in policy as to how the SEC will consider requests for disqualification waivers made by respondents in SEC enforcement proceedings where a settlement offer is being negotiated. We think that Clayton is to be applauded for this move as the new policy should prove to be a fairer and more efficient alternative to the status quo that has prevailed in recent years, most notably because it will give respondents a heightened degree of certainty regarding “collateral consequences” of an enforcement settlement.

First a bit of background. While the majority of SEC enforcement proceedings are resolved with a settlement agreement between the SEC and the respondent resulting in fines, restitution to investors, or other sanctions, a secondary or “collateral” consequence of the settlement may be statutory disqualification under the securities laws of the respondent (or an affiliate) from some otherwise permissible activity. A prime example is the so-called “bad-boy” provisions of Reg D, which, among other things, prohibit persons subject to SEC cease-and-desist orders or other SEC disciplinary orders from raising capital in a Reg D private placement. Another example is the prohibition on receipt of cash fees for solicitation under Rule 206(4)-3 of the federal Advisers Act where the solicitor is subject to certain SEC disciplinary orders. As noted by Clayton, “[t]he effects of these collateral consequences can vary widely depending on the scope of the businesses and operations of the entity and, in practice, range from immaterial to extremely significant.”  Continue reading

A recent decision handed down by the DC Circuit Court of Appeals in a case involving SEC action against an adviser for failure to disclose material conflicts of interest provides potentially significant precedent for SEC enforcement proceedings going forward. See The Robare Group, Ltd., et al. v. SEC, No. 16-1453, (D.C. Cir. April 30, 2019). The Robare decision is a mixed bag for the SEC in that, while it affirmed the SEC’s findings of negligence against the adviser under one section of the Advisers Act, it threw out the SEC’s findings that the adviser “willfully” violated a second Advisers Act provision based on the same negligent conduct. Notably, the Court predicated its holding against the SEC on negligent behavior and willful behavior being “mutually exclusive.” The significance of this holding is that the SEC has traditionally applied a standard of willfulness in enforcement proceedings that falls short of the level of intent required by Robare. Accordingly, unless Robare is reversed or modified, the SEC will be forced to reconsider its prior practice of assuming that all voluntary conduct constitutes “willful” behavior going forward.

Robare involved an appeal by a Houston-based adviser, The Robare Group (“TRG”), of SEC administrative findings that TRG had violated Advisers Act Sections 206(2) and 207, and Rule 206(4)-7 under the Advisers Act, as a result of TRG’s inadequate disclosure of a “revenue sharing” arrangement with Fidelity Investments, whereby Fidelity compensated TRG in return for TRG clients investing in certain funds offered on Fidelity’s online platform. While TRG received approximately $400,000 over an eight year period from Fidelity under this arrangement, the SEC alleged that, during that same period, TRG failed (at first entirely and then inadequately) to disclose to its clients and to the SEC the compensation received from Fidelity and the conflicts of interest arising from that compensation.

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A recent pair of SEC enforcement Orders against registered investment adviser Talimco, LLC and its Chief Operating Officer Grant Rogers highlight the need for advisers to be ever-mindful of their fiduciary duties to both clients when effecting cross trades between such clients.

Cross trading occurs whenever an adviser arranges a securities transaction between two parties, both of whom being advisory clients of the firm. While “principal trading” (where the adviser buys or sells for its own proprietary account) and “agency cross trading” (where the adviser acts as a broker and receives compensation) are accorded heightened scrutiny and require additional disclosures and consents, this recent pair of Orders show that even ordinary cross trades can be highly problematic when one client is favored over another.

In this particular case, the SEC alleges that Talimco and Rogers went so far as to manipulate the auction price of a commercial loan participation in a sham transaction between two of its clients that distinctly advantaged one client over the other. Continue reading

Following several enforcement actions brought against registered investment advisers that received 12b-1 fees when institutional shares were available to be purchased in clients’ advisory accounts, in February of this year the Securities and Exchange Commission announced an initiative under which firms could self-report the receipt of “avoidable” 12b-1 fees since 2014.  Under the so-called Share Class Selection Disclosure Initiative (SCSDI), advisers who self-reported receiving 12b-1 fees under those circumstances would be subject to an SEC enforcement action but would receive favorable treatment in such a case. Such favorable treatment included no recommended civil penalties as long as the firm agreed to disgorge all avoidable 12b-1 fees received.

In order to participate in the SCSDI, however, firms were required to report to the SEC by June 12, 2018. In announcing the SCSDI, the SEC indicated that firms that did not self-report may be subjected to harsher sanctions if their practice was later discovered.

In recent weeks through information available through clearing firm data and public sources the SEC has identified RIAs that may have received 12b-1 fee but chose not to self-report. Some of these firms are receiving subpoenas or requests for information and testimony.  Whether the failure to report was justified and/or the original receipt of the 12b-1 fees were not improper are questions that the SEC Enforcement Staff will be evaluating during its investigations.  In some limited circumstance a firm might be able to justify receipt of the questioned fess, and also might be excused from or ineligible for the self-reporting initiative. Continue reading

In October 2018, the South Carolina Court of Appeals vacated a $540,000 civil penalty that the South Carolina Securities Commissioner had imposed against John M. McIntyre and his company, Silver Oak Land Management, LLC.  The Commissioner imposed the penalty upon a determination that McIntyre and Silver Oak Land Management had committed securities fraud in the offer, sale, and management of various limited liability company interests.  The Court of Appeals, however, found that in the course of a hearing the Commissioner conducted, the Commissioner did not grant McIntyre and Silver Oak Land Management adequate procedural due process. Continue reading

In our previous post regarding state-registered investment advisers, we examined the landscape and discussed common deficiencies found in state adviser examinations.  In this post, we will discuss enforcement actions typically aimed at state-registered investment advisers, as well as current enforcement trends such as fraud pertaining to emerging markets and protection of senior investors.

Earlier in 2018, the North American Securities Administrators Association (NASAA)  published its 2018 Enforcement Report.  This report contains information and statistics regarding NASAA members’ enforcement actions in 2017 and highlights current trends in enforcement actions aimed at state-registered investment advisers.

According to the Report, NASAA members received 7,998 complaints that resulted in 4,790 investigations.  Once the investigations were completed, NASAA members initiated 2,105 enforcement actions, over half of which were administrative actions.  Criminal actions made up the second largest number of enforcement actions, followed by civil and other types of enforcement actions. Continue reading