Articles Tagged with Investment Advisers

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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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On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its Examination Priorities for 2018.  The Examination Priorities cover “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.”  The five priorities that OCIE specifically listed are (1) issues crucial to retail investors, such as seniors and those saving for retirement, (2) compliance and risks in critical market infrastructure, (3) FINRA and MSRB, (4) cybersecurity, and (5) anti-money laundering programs.  This is not an exclusive list, and OCIE invited comments concerning how it can adequately promote compliance.

OCIE intends to continue to make shielding retail investors from fraud a priority.  OCIE plans to focus especially on senior investors and those saving for retirement.  For example, examiners will pay particular attention to firms’ internal controls that are intended to monitor their representatives, especially in relation to products targeted at senior investors.  OCIE will also focus on disclosure of the costs of investing, examination of investment advisers and broker-dealers who primarily offer advice through digital platforms, wrap fee programs, mutual funds and exchange traded funds, municipal advisors and underwriters, and the growth of the cryptocurrency and initial coin offering markets. 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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The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading ›

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Earlier this year the Maryland General Assembly amended parts of the Maryland Securities Act and added some new sections to it.  The amendments went into effect on October 1, 2017.  Changes to the Maryland Securities Act include the creation of the Securities Act Registration Fund, adoption of the North American Securities Administrators Association’s Senior Model Act to address financial exploitation of seniors, and changes in fees for certain filing categories.

The amendments added a new section, Section 11-208, which establishes a Securities Act Registration Fund.  The Fund’s purpose is “to help fund the direct and indirect costs of administering and enforcing the Maryland Securities Act.”  The Fund will comprise registration fees, money that the State sets aside for the Fund in its budget, and any money accepted from any other source for the Fund’s benefit.  The Fund cannot be used for any purpose other than administering and enforcing the Maryland Securities Act. Continue reading ›

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The Department of Labor (DOL) recently published its proposal to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. Currently only adherence to the impartial conduct standards is required for compliance with the Best Interest Contract (BIC) exemption during the transition period, as well as for certain other prohibited transaction exemptions issued or revised in connection with the Fiduciary Rule. Compliance with the full provisions of the BIC exemption and the other related exemptions is not required until the second phase of implementation of the Fiduciary Rule, which is currently set for January 1, 2018.

If adopted, the same requirements in effect now for compliance with the BIC exemption and related exemptions would remain in effect for the duration of the extended transition period. The DOL stated that the primary purpose for seeking to extend the transition period was to allow the DOL sufficient time to review the substantial commentary it has received and consider possible changes or alternatives to the Fiduciary Rule exemptions. The DOL noted its concern that without a delay in the applicability date, financial institutions would incur expenses attempting to comply with certain conditions or requirements of the newly issued or revised exemptions that are ultimately revised or repealed.

The DOL stated that it anticipates it will propose in the near future a “new and more streamlined class exemption built in large part on recent innovations in the financial services industry.” These recent innovations include the development of “clean shares” of mutual funds by some broker-dealers, which the DOL discussed approvingly in its first set of transition period FAQ guidance. “Clean shares” would not include any form of distribution-related payment to the broker, but would instead have uniform commission levels across different mutual funds that would be set by the financial institution. In this way, the firm could mitigate conflicts of interest by substantially insulating advisers from the incentive to recommend certain mutual funds over others. However, these types of innovations will take time to develop.

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On August 14, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease and Desist Proceedings (“Order”) against Coachman Energy Partners, LLC (“Coachman”), an investment adviser, and its owner, Randall D. Kenworthy (“Kenworthy”).  According to the SEC’s Order, Coachman “failed to adequately disclose its methodology for calculating the management fees and management-related expenses it charged” to four oil and gas funds it managed.  Coachman and Kenworthy submitted offers of settlement in conjunction with the Order.

The SEC found that from 2011 to 2014, Coachman acted as investment adviser to four funds specializing in oil and gas operations.  Each fund was charged an annual management fee which made up 2 to 2.5% of the total capital contributions given to each fund as of the last day of the year.  According to the SEC, however, Coachman’s offering materials and Forms ADV did not adequately disclose that the management fees were based upon year-end contributions.  Rather, these documents implied that management fees and expenses were based upon “the average amount of capital contributions under management during the course of the year.”  Therefore, the SEC alleged that Coachman and Kenworthy overbilled investors in the amount of $1,128,916.

The SEC also alleged that between 2013 and 2014, Coachman billed two of the funds management expenses based upon 1.5% of the total capital contributions given to these funds as of the last day of the year.  However, the offering materials for these funds allegedly did not sufficiently inform investors that the funds would be obligated to pay Coachman for management expenses based on year-end capital contributions.  Rather, these materials supposedly informed investors that management expenses were calculated using the average number of capital contributions under management for the whole year.  The SEC alleges that this resulted in Coachman and Kenworthy overbilled clients in the amount of $449,294.

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The Department of Labor (DOL) recently indicated in a court filing that it has submitted a proposed rule to the Office of Management and Budget (OMB) to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. This proposal is currently under review by the OMB.

The DOL also recently released a new set of FAQ guidance regarding compliance with the Fiduciary Rule during the transition period when providing advice to IRAs, plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), and other plans covered by section 4975 of the Internal Revenue Code (Code). Most of the questions dealt specifically with the prohibited transaction exemption under ERISA section 408(b)(2) for service providers to ERISA plans. Continue reading ›

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The Securities and Exchange Commission (“SEC”) recently announced a proposal to amend Rules 203(l)-1 and 203(m)-1 of the Investment Advisers Act of 1940 (“Advisers Act”). The purpose of these proposed amendments is to “reflect changes made by… the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”).” The FAST Act amended sections 203(l) and 203(m) of the Advisers Act to provide advisers to small business investment companies (“SBICs”), venture capital funds, and certain private funds with additional avenues to registration exemption.

SBICs are commonly defined as privately-owned investment companies that are licensed and regulated by the Small Business Administration (“SBA”). They typically provide a vehicle for funding small businesses through both equity and debt. Section 203(b)(7) of the Advisers Act provides that investment advisers who only advise SBICs are exempt from registration. Moreover, investment advisers who use the SBIC exemption are not obligated to comply with the Advisers Act’s reporting and recordkeeping provisions, and they are not subject to SEC examination. Continue reading ›

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On May 17, 2017, the Securities and Exchange Commission’s (“SEC’s”) Office of Compliance Inspections and Examinations (“OCIE”) published a Risk Alert pertaining to cybersecurity.  According to the Risk Alert, an extensive ransomware attack called WannaCry, WCry, or Wanna Decryptor “rapidly affected numerous organizations across over one hundred countries.”  In light of the WannaCry attack, OCIE is urging registered investment advisers, broker-dealers, and investment companies, to address cybersecurity vulnerabilities.

According to the Risk Alert and an alert published by the Department of Homeland Security, U.S. Cert Alert TA17-132A, the hacker or hacking group who instigated the WannaCry attack obtained access to enterprise servers by way of exploiting a Windows Server Message Block vulnerability. WannaCry infects computers using software that encrypts data on a server using a .WCRY file-name extension, which prevents the rightful owner from accessing the data. Once infected, the ransomware software demands payment from the business in return for access to the business’ data. Microsoft released a patch to this vulnerability in March of 2017, but many users of Microsoft operating systems do not diligently update their software. Continue reading ›

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