Articles Tagged with RIA Compliance

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

On October 31, 2018 the Financial Industry Regulatory Authority published Regulatory Notice 18-37, which announces the commencement of the 2019 Renewal Program for registered investment advisers and broker-dealers.  The 2019 Renewal Program is set to begin on November 12, 2018.  On that day, FINRA will release Preliminary Statements to all registered firms via E-Bill.  Firms are required to remit full payment of their Preliminary Statements by December 17, 2018.

The Preliminary Statements contain various fees for renewal of state registrations and notice filings.  For individuals who are renewing their broker-dealer registrations, FINRA will assess a fee of $45.  For investment adviser firms and their representatives who are renewing their registrations, any IARD system fees will be featured on their preliminary statements.  For FINRA-registered firms that have one or more branch offices, FINRA will assess a renewal fee of $20 per branch.  FINRA will, however, waive one branch renewal fee for each FINRA-registered firm.

Firms may pay their Preliminary Statement fees via E-Bill, a wire transfer, or a check.  FINRA’s preferred method of payment is E-Bill.  If a firm does not pay the Preliminary Statement fees by December 17, it will be charged a late renewal fee.  The late fee will amount to either 10 percent of a firm’s final renewal assessment or $100, whichever is greater, but the late fee can be no more than $5,000.  FINRA also warns firms that failure to pay the Preliminary Statement fees by the December 17 deadline could result in the firms becoming unable to do business in the areas where they are registered.

Oregon requires all investment advisers and broker-dealers to maintain errors and omissions insurance for at least $1 million. Under Section 59.175 “every applicant for a license or renewal of a license as a broker-dealer or state investment adviser shall file with the director proof that the applicant maintains an errors and omissions insurance policy.”  This law provides investors with recourse if they suffer losses because of an uninsured investment adviser. Presently, investment advisers in Oregon may obtain errors and omissions insurance through either the Oregon surplus lines, the Oregon risk retention markets, or both.  However, according to the Oregon Secretary of State’s Department of Consumer and Business Services, which oversees the Division of Finance and Securities Regulation, neither of those groups is “admitted” or authorized to conduct insurance business in Oregon.  As a result, the Department has decided that a temporary rule is necessary to help both Oregon investment advisers and insurance producers understand the steps they need to take to provide proof of insurance. Continue reading

As we recently highlighted, the Securities and Exchange Commission took enforcement action against three registered investment advisers for violating the pay-to-play rule applicable to advisers under the Investment Advisers Act.  Broker-dealers should be aware that in 2017 the Financial Industry Regulatory Authority announced the approval of  modifications to two rules – Rules 203 and 458, imposing similar prohibitions and limitations on capital acquisition brokers (“CABs”).  A CAB is a FINRA member firm that participates in a restricted amount of activities, such as “advising companies on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions.”  The rules will implement “’pay-to-play’ and related recordkeeping rules to the activities of member firms that have elected to be governed by the CAB Rules.”  The new rules went into effect on December 6, 2017. Continue reading

On April 12, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published a Risk Alert “providing a list of compliance issues relating to fees and expenses charged by SEC-registered investment advisers… that were the most frequently identified in deficiency letters sent to advisers.” According to OCIE, investment advisers often explain the terms of a client’s fees and expenses in their Form ADV and their advisory agreements. If an investment adviser does not follow these terms and participates in improper fee billing, that investment adviser may be violating the Investment Advisers Act of 1940. The Risk Alert is designed to compel investment advisers to evaluate their practices, as well as their policies and procedures, to help ensure compliance with the Advisers Act. Continue reading

On 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

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

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 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