SEC Enforcement Action – ETFs and Failure to Follow Policies and Procedures

February 15, 2017

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.

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FINRA Fines Firms for Deficiencies in Cybersecurity and Recordkeeping

December 29, 2016

The Financial Industry Regulatory Authority (“FINRA”) recently announced fines against 12 broker-dealers for alleged deficiencies related to their cybersecurity and record retention practices. In each case, the firms – who have consented to the fine without admitting or denying the charges – allegedly failed to properly store electronic records in a “write once read many” format that is meant to protect records from illicit alteration. The “write once read many” format is required by FINRA rules and protects broker-dealers against malicious interference with their vital business records, whether by outside hackers or disgruntled insiders.

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SEC Enforcement Action Alleges Cherry-Picking, Double-Dipping, and Fund Mismanagement

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.

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Addition to RIA Compliance Consultants’ Sample Forms Library – Non-Access Person Acknowledgement Form

October 13, 2016

RIA Compliance Consultants added a new Sample Form to our Sample Forms Library. Our new Non-Access Person Acknowledgement Form is for investment advisers to document employees who are “non-access persons.” According the Securities and Exchange Commission (SEC), an investment adviser’s “access persons” are, “any of the investment adviser’s supervised persons who have access to non-public information regarding any investment advisory client’s purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund or any person who is involved in making securities recommendations to investment advisory clients, or who has access to such recommendations that are nonpublic.”

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SEC Focuses On Wrap Fee Disclosures and “Trade Away” Costs

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.

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SEC’s Passes New Rule Requiring Additional Information from Investment Advisers on the Form ADV

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.

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SEC Penalizes Investment Advisory Firms for Spreading False Performance Claims

September 02, 2016

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.

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