On June 4, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against deVere USA, Inc. (“deVere”), a registered investment adviser. The SEC’s Order alleges that deVere failed “to make full and fair disclosure to clients and prospective clients of material conflicts of interest regarding compensation obtained from third-party product and service providers.” The Order also alleges that deVere made inadequate disclosures in its Form ADV, did not conform its compliance program to its method of doing business, and did not follow compliance requirements adopted in its compliance manual. deVere submitted an offer of settlement in conjunction with the SEC’s Order. Continue reading
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
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
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
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
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
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
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
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.
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