SEC Tag Archives — Page 16 of 23

SEC Targets NY-Based RIA for Failure to Disclose Conflicts of Interest

January 6, 2016 | Patricia Klusmeyer

Investment advisers continue to get into regulatory trouble when it comes to failing to disclose conflicts of interest and related party transactions as required by both federal and state investment adviser law. Recently, the Securities and Exchange Commission (SEC) initiated proceedings against Fenway Partners, a New York-based registered investment adviser which served as adviser to three private equity funds. The conflicts arose around two related entities: Fenway Partners Capital Fund III, L.P., an affiliated fund, and Fenway Consulting Partners, an affiliate largely owned by the executives and owners of Fenway Partners.

Fenway Partners and Fenway Consulting Partners were both owned and managed in large part by respondents Peter Lamm, William Smart, Timothy Mayhew, and Walter Wiacek. The fund in question, Fund III, was operated by an Advisory Board consisting of independent limited partner representatives, pursuant to its organizational documents. According to the SEC allegations, the respondents failed to disclose several conflicts of interest and related party transactions to both the Advisory Board of Fund III and their fund investors.
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Investment Adviser Charged with Misleading SEC Regarding Examination

November 12, 2015 | Steve Parker

In August of this year the Securities and Exchange Commission (“SEC”) settled an administrative proceeding that related to statements an investment adviser made during the SEC’s on-site examination. The adviser at issue, Parallax Capital Partners, LLC, is a registered investment adviser that focuses primarily on mortgage-backed bonds and other similar fixed income securities. Parallax also advises a private fund in addition to providing advisory services to individuals and other entities. During an examination of Parallax that the SEC conducted in April 2011, the firm’s Chief Compliance Officer represented to the examination staff that he had performed and documented the annual compliance review required by Adviser’s Act Rule 206(4)-7 for the year 2010. The CCO further represented that the review and documentation had been conducted in February 2011, and provided the examination staff with a memorandum purportedly documenting the compliance review for 2010 that stated: “This memo documents that I have performed the review and reported significant compliance events and material compliance matters.”

The SEC examination staff was able to determine, by a review of the metadata attached to the compliance memorandum, that it had not been drafted in February 2011 as the CCO had represented, but instead that it had been created and completed in April 2011, just three days prior to the onsite examination and after Parallax received notice of the impending examination.
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SEC Announces Cybersecurity Enforcement Action Against RIA

October 27, 2015 | Alison Burns

On September 22, the Securities and Exchange Commission (“SEC”) announced an important cybersecurity enforcement action that has broad implications to registered investment advisers. In a Settlement Order, the SEC found R.T. Jones Capital Equities Management, a St. Louis-based investment adviser, “willfully violated” the Safeguards Rule. From September 2009 through July 2013, the firm stored unencrypted, sensitive personally identifiable information (“PII”) of clients and others on its unencrypted, third party-hosted, web server.

In requiring that brokers-dealers, investment companies, and registered investment advisers guard against cybersecurity breaches, the SEC has relied on its authority under Sections 501, 504, and 505 of the Gramm-Leach-Bliley Act of 1999, to create the new regulations. The “Safeguard Rule” is Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)). Enforcement actions initiated by the SEC relating to computer security are often grounded in violations of the Safeguard Rule.
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SEC Judge Rules on the Extent of Liability for Compliance Officers

October 6, 2015 | Alison Burns

On August 5th, 2015 in a decision that has implications for registered investment advisers and broker-dealers, SEC judge Cameron Elliot ruled on an enforcement action regarding the extent of liability for Compliance Officers in In the Matter of Judy K. Wolf, available here. Sanctions were not imposed against Ms. Wolf due to the violation being “decisively outweighed by the remaining public interest factors: egregiousness, degree of harm, and deterrence.” However, it was found that Wolf purposefully lied about her records violation.

In In the Matter of Judy K. Wolf, Judge Elliot stated he believed the further sanction against Wolf would be pursuit of “the low-hanging fruit” that is compliance officers.
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OCIE Announces 2015 Priorities in Second Round of Cybersecurity Examinations: New Risks for Securities Firms in Cybersecurity Compliance

October 1, 2015 | Alison Burns

The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) on Sept. 15, 2015 issued Risk Alert to announce its new focus on cybersecurity of securities firms and registered investment advisers. Cybersecurity programs of securities firms had best be strengthened, otherwise they may be subject to additional regulatory scrutiny according to the Risk Alert, which is meant to serve as helpful guidance for firms that need to create or heighten a cybersecurity program. The National Exam Program in 2014 conducted cybersecurity examinations on 106 securities firms. As a follow-up to the 2014 SEC security examinations The Risk Alert highlights certain additional measures the national registered entities need to be aware of when the SEC is conducting examinations.

A sample examination request with a list of information that the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations may review in conducting examinations of registered entities regarding cybersecurity matters may be viewed here.
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SEC Enforcement Action Underscores Importance Of Gift Policies

September 16, 2015 | Steve Parker

A recent enforcement action settled in an administrative proceeding brought by the Securities and Exchange Commission (“SEC”) underscores the importance for investment advisers to adopt and follow rules designed to prohibit inappropriate gifts to and from clients by investment adviser personnel. In a matter previously discussed on our blog, Guggenheim Partners Investment Management, LLC (“Guggenheim”) settled charges, without admitting or denying any violations that it had failed to adopt, or implement reasonable compliance procedures as required by Rule 206(4)-7 under the Investment Adviser’s Act designed to regulate gifts and entertainment provided to and from the adviser or its personnel.

More specifically, the SEC’s Order instituting administrative proceedings recited that Guggenheim’s compliance manual adopted a rule that required supervised persons to seek and obtain approval of the Chief Compliance Officer before personnel could receive any gift above an established de minimis value that was defined in the manual as being $250.00 or less. Despite this policy, between 2009 and 2012 at least seven Guggenheim employees took 44 or more flights on private planes of Guggenheim clients, none of which were reported to the Chief Compliance Officer as required by the policy. The compliance log reflected only one such flight that was only recorded because the flight had been mentioned to the Chief Compliance Officer after the flight occurred. The Commission found that Guggenheim failed to enforce its own policies with respect to gifts and entertainment and failed to implement compliance policies and procedures regarding gifts and entertainment.
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Investment Adviser Settles Charges of Failure to Disclose Conflicts of Interest

September 4, 2015 | Steve Parker

Last month, the Securities and Exchange Commission (SEC) announced that registered investment adviser Guggenheim Partners Investment Management, LLC had consented to settle charges that it breached its fiduciary duty to its clients in connection with a $50 million loan made by a client to one of Guggenheim’s senior executives. Specifically, Guggenheim failed to disclose the existence of the loan and the conflicts of interests created by the loan, to its clients. Guggenheim agreed to pay a total of $20 million dollars to settle the charges.

According to the order instituting the administrative proceeding, the senior executive borrowed the funds from an advisory client so that he could make a personal investment in another corporation that was being acquired by Guggenheim’s parent company. The client who made the loan was one of several advisory clients of Guggenheim that invested, at Guggenheim’s recommendation, in two unrelated transactions. The client who made the loan, however, was permitted to invest in the unrelated transactions on different terms than the investors who had not made a loan to Guggenheim.
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SEC Enforcement Actions Against Corporate Officers – Targeting or Responsible Monitoring?

July 31, 2015 | Shay Virtue

In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.
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SEC Issues Guidance Update on Cybersecurity

May 29, 2015 | Steve Parker

Last month, the SEC division of Investment Management released Investment Management Guidance in which it discusses a number of measures that investment advisers may wish to consider when addressing cybersecurity risks. This guidance is just the last in a long list of guidance and alerts issued by the SEC and other regulators as to the need for financial firms to improve their policies and procedures dealing with cybersecurity threats.

Among the recommendations made in the current IM are that firms:

• Conduct a periodic assessment of the nature, sensitivity and location of information, what types of cybersecurity threats and vulnerabilities exist, what security controls and processes are currently in place, the impact that would occur in the event of compromise of information, and the effectiveness of the current structure confirms current structure for managing cyber security risks

SEC Vows To Be Aggressive in 2015

April 2, 2015 | Steve Parker

Last month at the Annual Conference of the Securities and Exchange Commission (“SEC”), the Commission revealed its enforcement statistics for 2014, including a record number of enforcement actions (755) and monetary relief obtained ($4.1 Million). The Commission also announced its current initiatives including a continued emphasis in the use of data analytics in both regulation and enforcement investigations. Among the areas of emphasis highlighted at this year’s conference were insider trading, financial reporting and auditing cases, inadequate internal controls for public companies, enhanced scrutiny of auditors and other reporting gatekeepers, and Foreign Corrupt Practices Act enforcement.

In addition, 30 trials were conducted in 2014 by the Commission, the most trials in over a decade. By contrast, the Commission tried only 6 cases in 2013. Two-thirds of the trials were in federal court, while one-third were before Administrative Law Judges.
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