SEC Files Enforcement Action Against an RIA for Allegedly Failing to Disclose Compensation Received from Private Investment Funds
On May 20, 2009, the U.S. Securities and Exchange Commission ("SEC") announced that it had filed an emergency civil action charging Wealth Management LLC (registered investment adviser), James Putman (founder, majority owner and Chief Executive Officer of Wealth Management), and Simone Fevola (former President and Chief Investment Officer of Wealth Management) with engaging in a kickback scheme and other fraudulent conduct involving unregistered investment pools for which Wealth Management served as a General Partner or Managing Member and as the registered investment adviser responsible for managing the pooled assets.
In the complaint, the SEC alleges breach of fiduciary duty and fraud for misrepresenting the safety and stability of the two largest private funds managed by Wealth Management while placing their clients into these investments even though they were unsuitable for some of their clients. The SEC's complaint also alleged, among other things, that Mr. Putman and Mr. Fevola each accepted at least $1.24 million in undisclosed payments derived from certain investments made within the private funds that were managed by Wealth Management, while continuing to cause clients to invest in these private funds.
The offering documents for the private investment funds disclose that Wealth Management would be compensated for managing the funds through a management fee based on a percentage of assets under management. Additionally, on four of the six funds that were managed by Wealth Management an annual "Incentive Allocation" of up to 10% (depending on the fund) of the annual profits could be paid to Wealth Management. No other forms of compensation were disclosed, and Wealth Management's Form ADV indicated that the adviser and its associated persons did not receive any economic benefits from non-clients in connection with giving investment advice to clients. No references were made regarding the payments received from the investments made within the funds.
This case should serve as a reminder to a registered investment adviser that it has a fiduciary duty to its clients. As a fiduciary, a registered investment adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts, especially when the registered investment adviser's interest may conflict with the client's interest. Not providing proper disclosure to advisory clients can result in violations to the anti-fraud provisions of the Investment Advisers Act of 1940. The receipt of any form of additional compensation received from any source other than the client when the adviser is recommending a security to a client is just one example of a conflict of interest that must be fully disclosed to the client.
In the complaint, the SEC alleges breach of fiduciary duty and fraud for misrepresenting the safety and stability of the two largest private funds managed by Wealth Management while placing their clients into these investments even though they were unsuitable for some of their clients. The SEC's complaint also alleged, among other things, that Mr. Putman and Mr. Fevola each accepted at least $1.24 million in undisclosed payments derived from certain investments made within the private funds that were managed by Wealth Management, while continuing to cause clients to invest in these private funds.
The offering documents for the private investment funds disclose that Wealth Management would be compensated for managing the funds through a management fee based on a percentage of assets under management. Additionally, on four of the six funds that were managed by Wealth Management an annual "Incentive Allocation" of up to 10% (depending on the fund) of the annual profits could be paid to Wealth Management. No other forms of compensation were disclosed, and Wealth Management's Form ADV indicated that the adviser and its associated persons did not receive any economic benefits from non-clients in connection with giving investment advice to clients. No references were made regarding the payments received from the investments made within the funds.
This case should serve as a reminder to a registered investment adviser that it has a fiduciary duty to its clients. As a fiduciary, a registered investment adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts, especially when the registered investment adviser's interest may conflict with the client's interest. Not providing proper disclosure to advisory clients can result in violations to the anti-fraud provisions of the Investment Advisers Act of 1940. The receipt of any form of additional compensation received from any source other than the client when the adviser is recommending a security to a client is just one example of a conflict of interest that must be fully disclosed to the client.
Labels: Enforcement, Fiduciary, Hedge Funds
posted by bhill at 10:20 PM
SEC Issues Cease-and-Desist Order for Failure to Disclose Conflicts of Interest and Misrepresentation of Its Research Process
Recently, the U.S. Securities and Exchange Commission ("SEC") issued a cease-and-desist order, disgorgement to clients, prejudgment interest and penalties, among other sanctions against a registered investment adviser for its failure to disclose conflicts of interest in its selection of funds for discretionary clients and for providing misrepresentations to clients by stating that funds selected for model portfolios were chosen according to the firm's approved research process.
In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.
Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).
This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.
In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.
Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).
This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.
Labels: Conflict of Interest, Enforcement
posted by bhill at 10:23 PM
First Quarter Personal Securities Transaction Reports
With the end of first quarter 2008, RIA Compliance Consultants would like to remind SEC registered investment advisors of their requirement to collect or prepare updated personal securities transaction reports from all access persons. The information on the reports must reflect transactions that took place during first quarter of 2008 and must officially be reported to the firm no later than 30 days after the end of the quarter. Therefore, all reports must have been collected by April 30. As part of the SEC Code of Ethics rule, all SEC registered investment advisor firms are required to review the activity of their access persons' securities holdings at the end of every calendar quarter. The quarterly reports and documented review/approval of each report must be retained as part of a registered investment advisor firm's official books and records.
It is important for investment advisor firms to not only collect these reports, but to also establish a system of reviewing and documenting the reviews of all reports. In particular, the review of personal securities transactions should attempt to detect instances or patterns when the interests of the firm or its access persons are placed ahead of the interests of clients. Depending on your firm's specific procedures, reviews may focus on restricted lists, black-out periods, and other conditions placed on access persons trading activities.
If your firm has questions or concerns about your firm's requirements to monitor and review personal securities transactions, please give us a call to find out how we can develop a customized suite of compliance services designed specifically for your firm.
It is important for investment advisor firms to not only collect these reports, but to also establish a system of reviewing and documenting the reviews of all reports. In particular, the review of personal securities transactions should attempt to detect instances or patterns when the interests of the firm or its access persons are placed ahead of the interests of clients. Depending on your firm's specific procedures, reviews may focus on restricted lists, black-out periods, and other conditions placed on access persons trading activities.
If your firm has questions or concerns about your firm's requirements to monitor and review personal securities transactions, please give us a call to find out how we can develop a customized suite of compliance services designed specifically for your firm.
Labels: Compliance Program, Enforcement, PST
posted by bhill at 9:58 AM
SEC Bars Investment Advisor for Inflating AUM and Performance Advertising
In January of this year, the SEC entered bar and cease and desist orders against a two member registered investment advisor firm. The firm was owned by a husband and wife with the wife serving strictly in an administrative capacity. The law judge in the case found that the registered investment advisor had willfully violated the Investment Advisers Act of 1940 because it falsely represented to the SEC that it had assets under management (AUM) exceeding $25 million in order to remain eligible for SEC registration. The inflated AUM numbers were reported on several Form ADV Part 1 amendments from 1996 through 2000. The SEC terminated the firm’s registration in 2002. However, the firm continued to hold itself out to the public as an investment advisor and reported its AUM numbers through several database services. The reporting of those numbers were also found to be intentionally inflated and therefore misleading. Further, the firm was not able to provide documentation substantiating its AUM and performance numbers. The firm claimed all paperwork and client files were lost in a fire and then claimed the paperwork was lost in flood. To read the entire order click here.
While this firm’s actions were found to be willful and were intentionally done to mislead potential clients and the public in general, the lessons learned can be applied to every registered investment advisor. This case illustrates the importance of disclosing accurate AUM on the Form ADV Part 1. If your firm does not meet an eligibility requirement for SEC registration, it must deregister with the SEC and register with the state regulators. Do not take the risk of over reporting or misreporting AUM simply to maintain SEC registration. This case also illustrates action the SEC is willing to take when a registered investment advisor presents misleading AUM and performance information to the public through advertising and other marketing channels. All performance numbers need to be substantiated, documented and maintained with the firm’s books and records. Finally, a registered investment advisor is required to maintain books and records under Rule 204-2 and other applicable regulations, even after the firm terminates its registration. Once termination is effective, a registered investment advisor must maintain all books and records for the time period required under Rule 204-2, typically not less than five years from the end of the fiscal year during which the last entry was made on such record.
While this firm’s actions were found to be willful and were intentionally done to mislead potential clients and the public in general, the lessons learned can be applied to every registered investment advisor. This case illustrates the importance of disclosing accurate AUM on the Form ADV Part 1. If your firm does not meet an eligibility requirement for SEC registration, it must deregister with the SEC and register with the state regulators. Do not take the risk of over reporting or misreporting AUM simply to maintain SEC registration. This case also illustrates action the SEC is willing to take when a registered investment advisor presents misleading AUM and performance information to the public through advertising and other marketing channels. All performance numbers need to be substantiated, documented and maintained with the firm’s books and records. Finally, a registered investment advisor is required to maintain books and records under Rule 204-2 and other applicable regulations, even after the firm terminates its registration. Once termination is effective, a registered investment advisor must maintain all books and records for the time period required under Rule 204-2, typically not less than five years from the end of the fiscal year during which the last entry was made on such record.
Labels: Advertising, Enforcement, Form ADV, SEC
posted by bhill at 12:27 PM
SEC Files Cease-and-Desist Order Against an Investment Adviser for Failure to Disclose Referral Fees
On September 25, 2007, the U.S. Securities and Exchange Commission (“SEC”) filed a cease-and-desist order against an investment adviser for its failure to disclose that the investment adviser’s president received payments from a security issuer that the investment adviser recommended to its clients.
According to the SEC, the investment adviser described itself as a “fee-only” investment adviser that is “…only compensated by clients and receive nothing for the investments we recommend….” Additionally, the SEC asserted that the investment adviser filed annually the Form ADV Part I with the Commission for over six years that falsely stated that the investment adviser and its related persons were not paid commissions and didn’t recommend securities in which it had a sales interest. However, the president of the investment adviser allegedly entered into an agreement with a security issuer whereby the issuer would pay a referral fee for each client investing in issuer’s security based upon size of the investment. The SEC found that this arrangement resulted in the investment adviser receiving $361,307 in undisclosed referral fees from the security issuer.
Based on the receipt of the referral fees by the investment adviser’s president and the investment adviser’s failure to disclose such referral fees and misstatement that no such referral agreement existed, the SEC found that the investment adviser violated Section 206(1), Section 206(2) and Section 207 of the Investment Advisers Act of 1940. Accordingly, the SEC ordered a civil penalty of $40,000 and disgorgement of $361,307 for undisclosed referral fees from the investment adviser’s president.
This enforcement action clearly demonstrates the importance of accurately disclosing all forms of direct and indirect compensation received by an investment adviser and its related persons. If your registered investment adviser needs to update the compensation disclosures on its Form ADV, RIA Compliance Consultants offers Form ADV Review and Drafting services for existing investment advisers. For more information about our investment adviser compliance services, please call us at 877-345-4034.
According to the SEC, the investment adviser described itself as a “fee-only” investment adviser that is “…only compensated by clients and receive nothing for the investments we recommend….” Additionally, the SEC asserted that the investment adviser filed annually the Form ADV Part I with the Commission for over six years that falsely stated that the investment adviser and its related persons were not paid commissions and didn’t recommend securities in which it had a sales interest. However, the president of the investment adviser allegedly entered into an agreement with a security issuer whereby the issuer would pay a referral fee for each client investing in issuer’s security based upon size of the investment. The SEC found that this arrangement resulted in the investment adviser receiving $361,307 in undisclosed referral fees from the security issuer.
Based on the receipt of the referral fees by the investment adviser’s president and the investment adviser’s failure to disclose such referral fees and misstatement that no such referral agreement existed, the SEC found that the investment adviser violated Section 206(1), Section 206(2) and Section 207 of the Investment Advisers Act of 1940. Accordingly, the SEC ordered a civil penalty of $40,000 and disgorgement of $361,307 for undisclosed referral fees from the investment adviser’s president.
This enforcement action clearly demonstrates the importance of accurately disclosing all forms of direct and indirect compensation received by an investment adviser and its related persons. If your registered investment adviser needs to update the compensation disclosures on its Form ADV, RIA Compliance Consultants offers Form ADV Review and Drafting services for existing investment advisers. For more information about our investment adviser compliance services, please call us at 877-345-4034.
Labels: Enforcement, Form ADV
posted by bhill at 11:01 PM
SEC Issues Cease and Desist Proceedings for Failing to Allow SEC Staff to Examine Business Records
On September 24, the U.S. Securities & Exchange Commission (SEC) issued an order instituting administrative and cease-and-desist proceedings against a registered investment adviser for refusing to produce or allow for the inspection of the firm's advisory business.
In the Matter of Amaroq Asset Management, LLC and Dwight Andree Sean Oneal Jones (Investment Advisers Act of 1940 Release No. 2651 / September 24, 2007; Administrative Proceeding File No. 3-12822), the SEC alleges Amaroq Asset Management (Amaroq) repeatedly failed to cooperate with the SEC during the SEC's attempt to conduct routine registered investment adviser examinations. Initially, Amaroq's owner, Dwight "Sean" Jones, initially failed to even respond to the SEC and then later claimed his books and records were, first, destroyed in a fire, and then second, inadvertently sold by a storage company. Mr. Jones then claimed the firm ceased conducting business operations in 2004.
However, the SEC order claims that Amaroq continued to hold itself out to the public, through its website, as an investment adviser subject to SEC examinations. The order states Amaroq failed to file a Form ADV - W and that as of the date of the order, the firm was still registered with the SEC. The SEC further alleges Amaroq failed to update its Form ADV Part 1A through the Investment Advisor Registration Depository. Amaroq did not file an annual amendment to Form ADV Part 1A for fiscal years 2004, 2005, and 2006, nor did it file amendments to notify the SEC of changes in address and contact information.
This SEC order is another example of the importance of filing timely Form ADV amendments and cooperating with the SEC during routine examinations. More importantly, it is a reminder that a registered investment adviser must file a Form ADV-W in order to officially notify regulators of the firm's intent to cease offering investment advisory services and to terminate its investment adviser registration. If your registered investment adviser needs help filing its Form ADV amendments or help preparing for an SEC examination, please contact RIA Compliance Consultants, Inc., for more information about our services.
In the Matter of Amaroq Asset Management, LLC and Dwight Andree Sean Oneal Jones (Investment Advisers Act of 1940 Release No. 2651 / September 24, 2007; Administrative Proceeding File No. 3-12822), the SEC alleges Amaroq Asset Management (Amaroq) repeatedly failed to cooperate with the SEC during the SEC's attempt to conduct routine registered investment adviser examinations. Initially, Amaroq's owner, Dwight "Sean" Jones, initially failed to even respond to the SEC and then later claimed his books and records were, first, destroyed in a fire, and then second, inadvertently sold by a storage company. Mr. Jones then claimed the firm ceased conducting business operations in 2004.
However, the SEC order claims that Amaroq continued to hold itself out to the public, through its website, as an investment adviser subject to SEC examinations. The order states Amaroq failed to file a Form ADV - W and that as of the date of the order, the firm was still registered with the SEC. The SEC further alleges Amaroq failed to update its Form ADV Part 1A through the Investment Advisor Registration Depository. Amaroq did not file an annual amendment to Form ADV Part 1A for fiscal years 2004, 2005, and 2006, nor did it file amendments to notify the SEC of changes in address and contact information.
This SEC order is another example of the importance of filing timely Form ADV amendments and cooperating with the SEC during routine examinations. More importantly, it is a reminder that a registered investment adviser must file a Form ADV-W in order to officially notify regulators of the firm's intent to cease offering investment advisory services and to terminate its investment adviser registration. If your registered investment adviser needs help filing its Form ADV amendments or help preparing for an SEC examination, please contact RIA Compliance Consultants, Inc., for more information about our services.
Labels: Enforcement, Form ADV
posted by bhill at 2:44 PM
SEC Issues Cease-and-Desist Order for Incomplete Disclosure of a Conflict of Interest
Once again the U.S. Securities and Exchange Commission (“SEC”) issued a cease-and-desist order against a registered investment adviser for incomplete disclosure of a conflict of interest in violation of Section 207 of the Investment Advisers Act of 1940.
In the Matter of Callen Associates (Rel. IA-2650/Sept. 19, 2007; File No. 3-12808), the SEC alleges that a pension consultant registered as an investment adviser sold its affiliated a broker-dealer, and as part of this sale, the purchaser agreed to pay an annual fee for eight years to the investment adviser for sale of the affiliated broker-dealer contingent upon the investment adviser’s clients continuing to generate a minimum amount of commissions each year with the purchaser’s broker-dealer. The SEC asserts that although the investment adviser disclosed through its Form ADV Part II that the purchaser’s broker-dealer was its preferred/exclusive broker for plan sponsor/investment manager clients, the investment adviser described the ongoing compensation from the sold broker-dealer to the investment adviser as a periodic fixed fee. The SEC found that the characterization of these payments to the investment adviser “… as ‘fixed’ was misleading in that a material portion of each annual payment was contingent upon the [purchased broker-dealer’s] receipt of a minimum threshold of [the investment adviser’s] client brokerage business.”
This enforcement action by the SEC is an excellent example of the need for an investment adviser to describe accurately and thoroughly any potential conflicts of interest to its clients and the SEC. If your investment adviser needs assistance in preparing such disclosures, please contact RIA Compliance Consultants, Inc. for more information about our services.
In the Matter of Callen Associates (Rel. IA-2650/Sept. 19, 2007; File No. 3-12808), the SEC alleges that a pension consultant registered as an investment adviser sold its affiliated a broker-dealer, and as part of this sale, the purchaser agreed to pay an annual fee for eight years to the investment adviser for sale of the affiliated broker-dealer contingent upon the investment adviser’s clients continuing to generate a minimum amount of commissions each year with the purchaser’s broker-dealer. The SEC asserts that although the investment adviser disclosed through its Form ADV Part II that the purchaser’s broker-dealer was its preferred/exclusive broker for plan sponsor/investment manager clients, the investment adviser described the ongoing compensation from the sold broker-dealer to the investment adviser as a periodic fixed fee. The SEC found that the characterization of these payments to the investment adviser “… as ‘fixed’ was misleading in that a material portion of each annual payment was contingent upon the [purchased broker-dealer’s] receipt of a minimum threshold of [the investment adviser’s] client brokerage business.”
This enforcement action by the SEC is an excellent example of the need for an investment adviser to describe accurately and thoroughly any potential conflicts of interest to its clients and the SEC. If your investment adviser needs assistance in preparing such disclosures, please contact RIA Compliance Consultants, Inc. for more information about our services.
Labels: Conflict of Interest, Enforcement, Form ADV
posted by bhill at 4:52 PM
SEC Initiates Cease-and-Desist Proceeding over Regulation S-P
The United States Securities and Exchange Commission (“SEC”) recently announced the issuance of an Order Instituting Administrative Cease-and-Desist Proceedings against Next Financial Group, Inc. (“Next”) for alleged violations of Regulation S-P (Privacy of Consumer Financial Information).
According to SEC Release No. 56316 (August 24, 2007), the SEC alleges that Next violated Regulation S-P by allowing its “registered representatives to take customer nonpublic personal information with them when leaving Next’s employment” without allowing the customer to opt out of such disclosure. Moreover, the SEC alleges that Next aided and abetted the violation of the privacy policies of other firms by encouraging registered representatives leaving other broker-dealers and joining Next to bring nonpublic, personal customer information without proper notice to the client and a reasonable opportunity to opt out of such a disclosure.
In light of this cease-and-desist proceeding, the following precautions are worthy of consideration by a registered representative planning to depart from his or her broker-dealer. (Since registered investment advisers are subject to Regulation S-P, the following suggestions may also be applicable to an investment adviser representative in similar circumstances.)
- Prior to any intentions to depart, a registered representative of an independent broker-dealer (“IBD”) or investment adviser representative (“IAR”) of an investment adviser firm should urge his or her IBD or investment adviser to amend its privacy policy so as to allow a departing registered representative or IAR to take nonpublic, personal customer information unless the client opts out.
- Similarly, a registered representative of an IBD, who also operates or serves as an IAR of an independent investment adviser firm unaffiliated with the IBD, should urge the IBD to amend its privacy policy in order to permit the sharing of nonpublic, personal customer information with the registered representative’s independent investment adviser firm unless the client exercise the right to opt out of a disclosure.
- In the event that a registered representative’s broker-dealer or IAR of an investment adviser firm has not amended its privacy policy as described above, a registered representative or IAR will need to either obtain authorization from each customer to take such nonpublic, personal customer information, or refrain from taking or utilizing any nonpublic, personal customer information when departing his or her current broker-dealer or preparing the paperwork necessary to transfer his or her accounts.
With respect to broker-dealers and investment adviser firms, the following are a few of the strategies that should be considered in the context of this cease-and-desist proceeding involving Regulation S-P:
- Include a covenant within the agreement between registered representative or IAR and the new broker-dealer or investment adviser firm whereby the registered representative or IAR represents that he or she has not and will not in the future utilize nonpublic, personal customer information in violation of the privacy policy of his or her previous firm while transferring accounts to the new broker-dealer or investment adviser firm.
- Establish a written policy prohibiting registered representatives or IARs from taking or utilizing nonpublic, personal customer information in violation of a previous firm’s privacy policy.
- Train recruiters, transition specialists and operations support staff of the broker-dealer or investment adviser firm’s policy prohibiting such use as described as above.
- Instruct incoming registered representatives or IARs of the new firm’s policy. This training should be documented by the broker-dealer or investment adviser firm in a contemporaneous note or checklist.
- Refrain from taking electronic files with customer data and populating new account paperwork on behalf of a new registered representative or IAR unless the firm has reasonable assurances that such information wasn’t obtained in violation of a previous firm’s privacy policy.
- Amend its privacy policy to allow, after an opportunity for the client to opt out, a departing registered representative to take nonpublic, personal customer information and/or disclose such information to an unaffiliated investment adviser firm operated by a registered representative of the broker-dealer.
Finally, it’s important to recognize that trade secrets, confidentiality obligations and non-solicit restrictions also should be factored in establishing a policy for the broker-dealer or investment adviser firm or determining the permissible activities for a departing registered representative or IAR.
If you or your firm needs assistance analyzing, preparing or amending your firm’s privacy policy, please call RIA Compliance Consultants at 877-345-4034.
Labels: Enforcement, Privacy
posted by bhill at 4:01 PM
SEC Files Enforcement Action Against Investment Adviser for Misappropriation, Commingling & Pledging Client Assets
Last week, the United States Securities and Exchange Commission ("SEC") filed an emergency action against a registered investment adviser alleging the following unauthorized acts:
- pledging of securities owned by clients;
- placing client funds belonging to segregated client accounts to a "house" account;
- commingling assets without ability to verify ownership of particular securities; and
- providing clients with false account statements that failed to reflect actual holding and encumbrance/pledges.
The District Court for the Northern District of Illinois ordered the investment adviser to provide a full accounting of client assets within five days.
Labels: Enforcement
posted by bhill at 9:49 PM
SEC Settles a Form 13F Filing Violation for a $100,000 Penalty
Earlier today, the United States Securities and Exchange Commission ("SEC") issued Investment Advisers Act of 1940 Release No. 2634 (August 15, 2007) announcing its settlement with Quattro Global Capital, LLC, a registered investment adviser to a group of hedge funds, for failing to properly file the Form 13F.
Under Section 13(f) of the Securities Exchange Act of 1934 and Rule 13f-1 thereunder, an institutional money manager, which exercises investment discretion over $100,000,000 of Section 13(f) securities, must report their holdings by filing the Form 13F with the SEC via the EDGAR system each quarter.
The SEC found that Quattro failed to file its quarterly 13F Form with the SEC during the period of February 2002 through May 2005 despite its obligation to do so. Without admitting or denying the SEC's findings, Quattro consented to an order by the SEC to cease and desist from violating Section 13(f) and SEC Rule 13f-1 thereunder and pay a civil penalty of $100,000.
Since an investment adviser is considered an institutional money manager for purposes of Section 13(f), this settlement is an excellent opportunity for your registered investment adviser firm to review whether it has reached the discretion threshold of $100,000,000 of Section 13(f) securities, which generally includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies, exchanged traded funds and certain convertible debt securities but excludes open-end investment company mutual funds. On the SEC's website, there's an official list of Section 13(f) securities.
If your investment adviser firm needs assistance in filing its Form 13F via EDGAR or determining if it has reached the investment discretion threshold of $100,000,000 in Section 13(f) securities, please contact RIA Compliance Consultants to learn more about our services in this area.
Under Section 13(f) of the Securities Exchange Act of 1934 and Rule 13f-1 thereunder, an institutional money manager, which exercises investment discretion over $100,000,000 of Section 13(f) securities, must report their holdings by filing the Form 13F with the SEC via the EDGAR system each quarter.
The SEC found that Quattro failed to file its quarterly 13F Form with the SEC during the period of February 2002 through May 2005 despite its obligation to do so. Without admitting or denying the SEC's findings, Quattro consented to an order by the SEC to cease and desist from violating Section 13(f) and SEC Rule 13f-1 thereunder and pay a civil penalty of $100,000.
Since an investment adviser is considered an institutional money manager for purposes of Section 13(f), this settlement is an excellent opportunity for your registered investment adviser firm to review whether it has reached the discretion threshold of $100,000,000 of Section 13(f) securities, which generally includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies, exchanged traded funds and certain convertible debt securities but excludes open-end investment company mutual funds. On the SEC's website, there's an official list of Section 13(f) securities.
If your investment adviser firm needs assistance in filing its Form 13F via EDGAR or determining if it has reached the investment discretion threshold of $100,000,000 in Section 13(f) securities, please contact RIA Compliance Consultants to learn more about our services in this area.
Labels: Enforcement, Form 13F
posted by bhill at 9:13 PM
SEC Charges 14 individuals for Insider Trading Scheme.
In a March 1 press release, the SEC announced that it is charging "14 defendants in a brazen insider trading scheme that netted more than $15 million in illegal trading profits on thousands of trades, using information stolen from UBS Securities, LLC and Morgan Stanley & Co., Inc. The SEC complaint alleges that eight Wall Street professionals, including UBS research executive and a Morgan Stanley attorney, two broker-dealers and a day-trading firm participated in the scheme. The defendants also include three hedge funds, which were the biggest beneficiaries of the fraud." To read the full text of the press release click here.
This announcement is a reminder for all investment advisors to ensure the implementation and adequacy of policies and procedures prohibiting the misuse of material, nonpublic information. Policies and procedures must be designed to prevent insider trading (Section 204A of the Investment Advisers Act). It should also be noted that Section 204A applies not only to federally registered advisors, but to all state registered firms as well.
The SEC is basing the charges under the anti-fraud rules of the federal securities laws. It should be pointed out that all investment advisors are subject to the anti-fraud provisions, particularly Section 206 of the Advisers Act. Like other federal securities laws, the Advisers Act contains several broad antifraud provisions. Section 206 states:
It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly -
1) to employ any device, scheme, or artifice to defraud any client or prospective client;
2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction.
4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Has your firm developed sufficient policies and procedures designed to comply with the anti-fraud provisions and prohibit insider trade? If not, you are subjecting the firm to significant risk and liability. Failure to properly supervise associated persons can bring severe punishment to the firm. In fact the SEC and state securities examiners have issued deficiencies to firms that have failed to establish policies and procedures, even when no violations have occurred.
This announcement is a reminder for all investment advisors to ensure the implementation and adequacy of policies and procedures prohibiting the misuse of material, nonpublic information. Policies and procedures must be designed to prevent insider trading (Section 204A of the Investment Advisers Act). It should also be noted that Section 204A applies not only to federally registered advisors, but to all state registered firms as well.
The SEC is basing the charges under the anti-fraud rules of the federal securities laws. It should be pointed out that all investment advisors are subject to the anti-fraud provisions, particularly Section 206 of the Advisers Act. Like other federal securities laws, the Advisers Act contains several broad antifraud provisions. Section 206 states:
It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly -
1) to employ any device, scheme, or artifice to defraud any client or prospective client;
2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction.
4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Has your firm developed sufficient policies and procedures designed to comply with the anti-fraud provisions and prohibit insider trade? If not, you are subjecting the firm to significant risk and liability. Failure to properly supervise associated persons can bring severe punishment to the firm. In fact the SEC and state securities examiners have issued deficiencies to firms that have failed to establish policies and procedures, even when no violations have occurred.
Labels: Enforcement, Insider Trading
posted by bhill at 11:30 AM
Spitzer Alleges Fraud in Lawsuit Against UBS for Fee Based Brokerage Accts.
New York Attorney General Elliot Spitzer announced a filing of a lawsuit against UBS Financial Services, Inc. for allegedly defrauding its customer through its fee-based brokerage program. Spitzer's action alleges that fee-based brokerage accounts are inappropriate for investors who rarely trade securities or hold significant amounts of cash.
Although this lawsuit is focused upon a brokerage account, it raises interesting questions for investment advisors. Will the SEC and state regulators start questioning individuals that are dually licensed under an investment advisor and a broker-dealer whether an asset should have been held in a wrap account versus a commission-based account? If assets within an account are managed under an investment advisory agreement subject to an asset management fee but have few transactions, will the SEC challenge whether the fee is appropriate?
There doesn't appear to be formal guidance with respect to these scenarios. However, it's clear that an investment advisor can only charge a "reasonable" fee. Many commentators have interpreted this to mean that investment advisory fees above 3% of the account value on an annual basis are typically unreasonable (and receive intense regulatory scrutiny) and advisory fees above 2% will be subject to increased regulatory scrutiny. When charging a fee of 2% or higher, it's recommended that an advisor disclose to the client that similar services can be attained for lower fees. The investment advisor must also be able to support/justify such a charge.
Although this lawsuit is focused upon a brokerage account, it raises interesting questions for investment advisors. Will the SEC and state regulators start questioning individuals that are dually licensed under an investment advisor and a broker-dealer whether an asset should have been held in a wrap account versus a commission-based account? If assets within an account are managed under an investment advisory agreement subject to an asset management fee but have few transactions, will the SEC challenge whether the fee is appropriate?
There doesn't appear to be formal guidance with respect to these scenarios. However, it's clear that an investment advisor can only charge a "reasonable" fee. Many commentators have interpreted this to mean that investment advisory fees above 3% of the account value on an annual basis are typically unreasonable (and receive intense regulatory scrutiny) and advisory fees above 2% will be subject to increased regulatory scrutiny. When charging a fee of 2% or higher, it's recommended that an advisor disclose to the client that similar services can be attained for lower fees. The investment advisor must also be able to support/justify such a charge.
Labels: Enforcement
posted by bhill at 12:25 PM
Kansas Securities Regulator Suspends IA Firm
Earlier this fall, the Office of the Kansas Securities Commissioner entered an order to summarily suspend the investment advisor registration of a state firm located in Overland Park, Kansas. According to the Commissioner’s Press Release, the “firm committed fraud by informing a client that his funds were maintained in an account at a brokerage firm when, in fact, the funds were pooled with the funds of other investors in a second account controlled” by the advisor firm’s president. The firm also apparently did not fully cooperate with the state examiners during their investigation. This enforcement action serves as example as to how Kansas securities regulator will respond when an investment advisor attempts to circumvent state securities laws.
The Kansas Securities Commissioner has also become more visible through a series of television and radio advertisements encouraging the investing public to conduct its own investigating before hiring a Kansas based financial professional. In conjunction with these efforts to educate the public, Kansas has initiated a proactive approach to regulatory examinations and has already conducted numerous audits. As a result, it’s imperative that investment advisors located in Kansas ensure that they are implementing effective compliance programs and controls.
If your firm is located in Kansas and wants to discuss how RIA Compliance Consultants can help your firm meets its regulatory requirements, please give us a call at 877-345-4034.
The Kansas Securities Commissioner has also become more visible through a series of television and radio advertisements encouraging the investing public to conduct its own investigating before hiring a Kansas based financial professional. In conjunction with these efforts to educate the public, Kansas has initiated a proactive approach to regulatory examinations and has already conducted numerous audits. As a result, it’s imperative that investment advisors located in Kansas ensure that they are implementing effective compliance programs and controls.
If your firm is located in Kansas and wants to discuss how RIA Compliance Consultants can help your firm meets its regulatory requirements, please give us a call at 877-345-4034.
Labels: Custody, Enforcement
posted by bhill at 1:29 PM
SEC Cites Firm for Failing to Implement Written Compliance Programs
Earlier this month, the SEC filed an administrative proceeding against an advisor firm for, among other things, failing to meet the requirements of Rule 206(4)-7 which requires an investment adviser registered with the SEC to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules there under. During a follow-up visit the SEC felt the firm failed to adequately correct deficiencies noted during a previous examination. In addition, the firm had not implemented any written compliance programs designed to meet the requirements of Rule 206(4)-7. The firm was censured, order to cease and desist from violating several rules under the Advisers Act, and ordered to pay a monetary fine totaling $65,000.
This case is just the latest example of the seriousness with which the SEC is taking regarding the requirements of advisor firms to implement strong internal controls and written compliance programs designed to prevent the violation of federal securities laws. It is important to note that the compliance programs rule falls under the anti-fraud provisions of the Advisers Act. While the firm in this case had other issues, the key lesson to be learned is that the SEC will cite firms for simply failing to have compliance programs. This can be the case even if actual violations are not detected.
If your firm has not implemented written compliance programs, it is urgent you do so immediately. Rule 206(4)-7 has been in effect since October 2004 and the SEC will expect compliance programs to be in place, implemented, and reviewed on an annual basis.
If you would like to read the SEC's entire administrative proceeding click on the following link here.
This case is just the latest example of the seriousness with which the SEC is taking regarding the requirements of advisor firms to implement strong internal controls and written compliance programs designed to prevent the violation of federal securities laws. It is important to note that the compliance programs rule falls under the anti-fraud provisions of the Advisers Act. While the firm in this case had other issues, the key lesson to be learned is that the SEC will cite firms for simply failing to have compliance programs. This can be the case even if actual violations are not detected.
If your firm has not implemented written compliance programs, it is urgent you do so immediately. Rule 206(4)-7 has been in effect since October 2004 and the SEC will expect compliance programs to be in place, implemented, and reviewed on an annual basis.
If you would like to read the SEC's entire administrative proceeding click on the following link here.
Labels: Compliance Program, Enforcement
posted by bhill at 10:42 AM
Is Your Firm Supervising Charges for Financial Plans?
The New Jersey Attorney General just announced a $5 million settlement to be paid by an investment advisor/broker-dealer for failing to supervise its representative.
The underlying wrongdoing apparently involved a rep forging client signatures on financial planning agreements and then mutual fund redemption forms in order to pay for fictional financial plans.
According to the consent order, the victims included an apartment manager (in her 60s earning $44,000 per year with $25,000 of assets at the advisory firm) that paid $11,000 for 6 financial plans during a two year time period. On the other end of the spectrum, there was a recent college graduate earning $24,000 annually with $35,000 of assets held at the advisory firm that was charged $8,000 for 4 financial plans in a two year period.
This unfortunate incident confirms again the need for invstment advisor firms to adopt and enforce thorough supervisory procedures related to preparation of financial plans and charging of financial planning fees.
The underlying wrongdoing apparently involved a rep forging client signatures on financial planning agreements and then mutual fund redemption forms in order to pay for fictional financial plans.
According to the consent order, the victims included an apartment manager (in her 60s earning $44,000 per year with $25,000 of assets at the advisory firm) that paid $11,000 for 6 financial plans during a two year time period. On the other end of the spectrum, there was a recent college graduate earning $24,000 annually with $35,000 of assets held at the advisory firm that was charged $8,000 for 4 financial plans in a two year period.
This unfortunate incident confirms again the need for invstment advisor firms to adopt and enforce thorough supervisory procedures related to preparation of financial plans and charging of financial planning fees.
Labels: Enforcement
posted by bhill at 3:14 PM
