On August 7, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of U.S. Securities and Exchange Commission (“SEC”) released a Risk Alert which details its examination of the cybersecurity preparedness of 75 broker-dealers, investment advisers and investment companies in the U.S. In comparison to prior cybersecurity examinations, this exam involved more active testing and validation of the firms’ procedures and controls related to cybersecurity. Click here to read the Risk Alert.
SEC Enforcement Action: Investment Adviser Fails to Disclose Affiliate Broker-Dealer Conflicts of Interest
March 14, 2017
The U.S. Securities and Exchange Commission (“SEC”) issued an enforcement action recently against an investment adviser firm for its alleged failure to disclose fee sharing arrangements that the investment adviser firm entered with its third-party broker dealer. The investment adviser firm consented to the order without admitting or denying the SEC findings, except as specified within the SEC’s Order. Click here to read the full SEC Order Instituting Administrative and Cease-And-Desist Proceedings.
March 07, 2017
In February 2017, the Division of Investment Management of the U.S. Securities and Exchange Commission (“SEC”) issued a Guidance Update “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority.” In this Guidance Update, the SEC explained that an investment adviser may have custody of client funds or securities because of provisions in a custodial agreement entered into by the investment advisory client and a qualified custodian.
February 27, 2017
The U.S. Securities and Exchange Commission (“SEC”) recently issued new guidance for investment adviser firms and individual investors considering the use of robo-advisers. Robo-advisers are becoming increasingly popular among investment adviser firms and clients alike, due to their ability to provide targeted investment advice for a lower investment advisory fee, which increases the accessibility of professional investment advice for frugal investors or investors whose account balances may not meet an investment adviser firm’s required minimum account balance. Robo-advisers are not suitable for every client, however, leading the SEC to issue guidance for investment adviser firms seeking to utilize this new technology.
The U.S. Securities and Exchange Commission (SEC) issued a press release announcing that an investment adviser, Morgan Stanley Smith Barney, agreed to pay an $8 million penalty to settle charges under the Investment Advisers Act of 1940 relating to single inverse ETF investments it had recommended to investment advisory clients. Click here to for the entire press release and here for the SEC’s order.
A former investment adviser firm and its principal recently settled claims by the U.S. Securities and Exchange Commission (SEC), admitting that the investment adviser firm principal cherry picked profitable trades for a select number of favored friends, clients, and family members of the firm’s principal.
October 25, 2016
The U.S. Securities and Exchange Commission (“SEC”) recently instituted administrative cease-and-desist proceedings against a Washington-based registered investment adviser. The SEC alleges the investment adviser engaged in several schemes meant to defraud clients and unjustly enrich the investment adviser’s personal accounts. Among the alleged wrongdoing was the investment adviser’s scheme to “cherry pick” favorable trades for his personal accounts while allocating unfavorable trades to client accounts. During one relevant period, the SEC claims the investment adviser’s accounts showed a return of 1.39% while the affected client accounts had a -0.78% return. In total, the SEC asserts that the investment advisor profited almost $500,000 while client accounts suffered losses of more than $2 million.
September 13, 2016
The United States Securities and Exchange Commission (“SEC”) recently fined two investment adviser firms nearly $1 million for alleged failures related to wrap account fee disclosures. As the name implies, a wrap account “wraps” brokerage fees and account management fees together; a customer will generally pay a single fee to the investment adviser, as agreed upon in advance, regardless of how many (or how few) brokerage transactions are placed on the customer’s behalf so long as the trades are placed with the sponsoring broker. For customers with a pattern of active trading, a wrap account can be a cost effective choice. The benefits disappear at an increasing rate, however, each time the customer’s trades are directed to a non-sponsoring broker whose fees are billed in addition to the normal wrap fee.
September 12, 2016
The United States Securities and Exchange Commission (“SEC”) recently announced changes to the Form ADV used by investment adviser firms to register with the SEC and state securities regulators. Two changes are of particular note. First, investment adviser firms will now be required to disclose all social media platforms the firm uses for business purposes, such as pages on Facebook, Twitter, or LinkedIn. In the event of a regulatory exam, investment adviser firms should also be prepared to produce records related to the content of those sites at any given point in time. The SEC rule does not require investment adviser firms to provide information about personal social media accounts held by employees or about social media sites whose content is generated by third parties and not controlled by the investment adviser. It is important to remember, however, that client communications made by the investment adviser firm’s employees on a personal account would still be subject to other applicable record keeping requirements, such as those relating to performance claims or solicitation. Click here to read the SEC rule release detailing the new requirements.
The U.S. Securities and Exchange Commission (SEC) recently fined thirteen investment adviser firms for promoting performance information for a third party investment product that the SEC alleges the investment adviser firms knew, or should have known, was false. At the heart of the enforcement actions were claims made by a third party money manager who purported to have a time tested investment program that consistently and greatly exceeded standard market returns. The SEC alleged that in fact, the mathematical algorithm underlying the investment program had only been in existence a short period of time and the third party money manager was using selective, back-tested (“hypothetical”) data to promote its new program. Compounding the problem, the investment performance calculations contained an error that further inflated the product’s artificial performance statistics. Despite being notified of the calculation error and knowing the algorithm’s investment performance data was not from actual accounts, the SEC alleged that third party money manager claimed in marketing materials given to investment adviser firms and investment adviser firm clients that the data was genuine. Click here to read the SEC enforcement action on the third party money manager.