RIA Compliance BlogThe Securities and Exchange Commission (“SEC”) settled an administrative proceeding against Simplify Asset Management, Inc. (“Simplify”), a Delaware corporation and registered investment adviser that engages in transactions related to exchange-traded funds (“ETFs”), for multiple violations of the Investment Company Act of 1940 (the “Investment Company Act”). From July 2021 through November 2024, Simplify caused its ETF clients to violate multiple provisions of the Investment Company Act by failing to maintain and implement adequate compliance policies and procedures and by failing to adequately oversee certain regulatory requirements. The SEC has imposed a cease-and-desist order and a $400,000 civil money penalty, which Simplify must pay within 21 days of entry of the order.
Articles Tagged with SEC Order
SEC Enforces Timely SAR Filing Requirements
Highlighting the importance of timely filing of Suspicious Activity Reports (“SARs”), the Securities and Exchange Commission (“SEC”) entered a settled order against UBS Financial Services Inc. (“UBSFS”), a registered broker-dealer and investment adviser incorporated in Delaware and with its principal place of business in Weehawken, New Jersey. The SEC found that UBSFS failed to timely file certain SARs, in violation of Section 17(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 17a-8 thereunder. As part of the settlement, UBSFS agreed to cease and desist from committing or causing further violations of the relevant provisions, was censured, and agreed to pay a $20 million civil monetary penalty to the SEC within 30 days of entry of the order.
Investment Adviser Settles SEC Case on Model Security
The SEC recently charged New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP (collectively, “Two Sigma”) with breaching their fiduciary duties for failing to reasonably address known vulnerabilities in their investment models. In its Order, the SEC also found compliance and supervisory failures related to those violations, plus violation of the Commission’s whistleblower protections via Two Sigma’s employee separation agreements.
Two Sigma is a large quantitative-analytics-based hedge fund manager using computer-based algorithmic investment models when managing or advising client investments. The SEC claims that, by March 2019, multiple Two Sigma employees had informed senior management that various Two Sigma personnel could freely change variable inputs of their algorithmic models. These unchecked input modifications would alter the algorithm’s predictions and trades without notifying the firm, its representatives, or its clients. This autonomy of various personnel to rewrite the models’ data could materially impact investment decisions for Two Sigma clients. Continue reading ›
SEC Charges Adviser and its COO with Fraud for Orchestrating Sham Cross Trade between Clients
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 ›
Firm’s Failure to Act on Numerous Compliance “Red Flags” Results in $250,000 Penalty and Censure by SEC
A recent settled SEC Order with Wedbush Securities, Inc., a dually-registered investment adviser and broker-dealer, has resulted in a censure and $250,000 fine against that firm. The genesis of this rather harsh result is what the SEC alleges to be the firm’s lack of an ability to follow-up on obvious compliance “red flags” that, in this case, pointed to an extensive and long-running “pump and dump” scheme involving one of the firm’s registered representatives. Indeed, as noted by Marc P. Berger, Director of the SEC’s New York Regional Office, “Wedbush abandoned important responsibilities to its customers by looking the other way in the face of mounting evidence of manipulative conduct.”
The SEC’s regulatory requirements compel broker-dealers to adopt policies and procedures that are sufficiently tailored to determine whether their associated persons are violating the securities laws and to prevent them from violating the securities laws. Broker-dealers are also compelled to ensure that these policies and procedures are sufficiently implemented to discover and prevent securities law violations. Continue reading ›
Robo-Adviser Settles Charges with SEC for Making Misleading Statements
Demonstrating its regulatory interest in the robo adviser industry, on December 21, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Wealthfront Advisers, LLC, a registered investment adviser which uses a software-based “robo adviser” platform in servicing its clients. The action is the second case against robo advisers filed on the same day. Wealthfront submitted an offer of settlement in light of the proceeding.
According to the SEC’s Order, Wealthfront utilizes a proprietary tax loss harvesting program (“TLH”) to help its clients garner tax benefits. These tax benefits would typically come through selling assets at a loss, which could potentially be used to reduce income or gains and create a lower tax liability. From October 2012 onward, Wealthfront has featured whitepapers on its website that provide information about the TLH strategy. Continue reading ›
SEC Settles Charges with Robo Adviser for Making False Statements About Investment Performance
On December 21, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Hedgeable, Inc., a registered investment adviser. Hedgeable utilizes a “robo adviser” program, which it offers to individuals, small business owners, trusts, corporations, and partnerships through both its website and social media. The SEC’s Order alleges that from about 2016 through April 2017, Hedgeable made various misleading statements in advertising and performance data. Hedgeable submitted an offer of settlement in order to resolve the proceeding.
According to the Order, Hedgeable launched a so-called “Robo-Index” to present comparisons of its performance against that of two unaffiliated robo advisers. These comparisons were featured on both Hedgeable’s website and various social media sites. The SEC found that Hedgeable’s method of preparing the Robo-Index had significant material issues. For example, the SEC found that data from 2014 and 2015 only featured data from a small pool of Hedgeable client accounts and excluded over 1,000 other client accounts. The SEC alleged that, because of the small sample sizes, the data likely reflected “survivorship bias,” stemming from the fact that the sample size likely only contained clients who received higher than average returns compared to Hedgeable’s other clients. The SEC also determined that Hedgeable’s calculation methods did not correctly estimate expected returns for a standard client of the other two robo advisers. Hedgeable allegedly produced the data in the Robo-Index using estimations of the other robo advisers’ trading models rather than using the robo advisers’ actual models. Continue reading ›
Recent SEC Order Clarifies CCO and Other Firm Manager Liability
The SEC routinely hears appeals arising from FINRA disciplinary proceedings, and in turn issues “Adjudicatory Orders” announcing its decisions. To the extent that these Orders are issued by vote of the full Commission, they stand as highly useful guidance to industry players on the thoughts of the SEC’s ultimate leadership. In a recent Adjudicatory Order, the SEC articulated its current position on Chief Compliance Officer (“CCO”) liability for securities regulatory violations, as well as the liabilities of other members of a securities firm’s senior management for failure to supervise the CCO. See Application of Thaddeus J. North for Review of Disciplinary Action Taken by FINRA, Order of the Commission, Rel. No. 34-84500 (Oct. 29, 2018).
The facts of the case involve findings by FINRA that the CCO (Mr. North) of a multi-office 50+ representative brokerage firm violated FINRA rules by failing to establish a reasonable supervisory system for the review of electronic correspondence, failing to reasonably review electronic correspondence, and failing to report a relationship with a statutorily disqualified person. Specifically, despite being the person responsible for reviewing the firm’s electronic communications, the record showed that for a roughly two-year period North completely failed to review any Bloomberg messages/chats (such messages making up 85% of the firm’s electronic communications). North testified that he “did not understand” his firm’s Smarsh e-mail retention/retrieval system, and further attributed his failure to review electronic communications to that activity being “boring.” Separately, North failed to either independently investigate or report to FINRA his knowledge of a material relationship between one of his firm’s registered representatives and a statutorily-disqualified person. This particular failure came despite North’s knowledge that the representative had paid the disqualified person over $150,000, had executed a services agreement with that person, and that FINRA was actively investigating the matter.
On these facts, the SEC upheld FINRA’s disciplinary action as “clearly appropriate” in light of North’s “egregious” conduct in “fail[ing] to make reasonable efforts to fulfill the responsibilities of his position.” Notably, “North ignored red flags and repeatedly failed to perform compliance functions for which he was directly responsible.”
Transamerica Entities Settle Charges with SEC Over Errors in Quantitative Investment Models
The Securities and Exchange Commission recently issued three Orders Instituting Administrative and Cease-and-Desist Proceedings relating to the misuse of quantitative models in managing customers’ accounts. Four entities affiliated with Transamerica and two individuals associated with one of those entities were charged with violating the Investment Advisers Act of 1940 (“Advisers Act”) and Advisers Act Rules. The Orders allege that AEGON USA Investment Management LLC, Transamerica Asset Management, Inc., Transamerica Capital, Inc., and Transamerica Financial Advisors, Inc., marketed various products and investment strategies that used a “proprietary quant model” while failing to verify whether the models functioned as intended and without disclosing known risks connected with the models. The Transamerica entities and the individuals, Bradley Beman and Kevin Giles, submitted offers of settlement to resolve the charges. Continue reading ›
Investment Adviser Agrees to Pay $1.9 Million Penalty for Misleading Statements in Advertising
The Securities and Exchange Commission recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Massachusetts Financial Services Company (“MFS”), an SEC-registered investment adviser. According to the SEC’s Order, MFS advertised hypothetical returns pertaining to its blended research stock ratings without informing clients that a number of the hypothetical portfolios’ superior returns were based on back-tested models. Without admitting or denying the allegations in the SEC’s Order, MFS submitted an offer of settlement to resolve the matter.
According to the SEC’s Order, MFS has employed a quantitative-based research department since 2000. In 2000, the department developed what MFS calls “blended research” strategies, which involve “combining fundamental and quantitative ratings to arrive at a blended stock score, and by using a portfolio optimization process that considers the blended scores along with risk and other portfolio constraints.” As of May of this year, MFS had approximately $21 million in assets under management invested in blended research strategies.
The SEC’s Order alleges that from 2006 through 2015, MFS created research proofs based on the blended research analysis. The data and a bar chart describing the analysis were featured in MFS advertisements. MFS subsequently used the bar chart in three different kinds of marketing materials: in a standard slide deck from 2006 through 2015, in responses to formal requests from clients starting in 2012, and in a white paper that discussed MFS’s blended research strategies. These materials were marketed exclusively to institutional clients, prospective institutional clients, financial intermediaries, and investment consultants.