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The weekly news source for investment management legal and compliance professionals

Topic: Enforcement

Advisers Must Follow Through on Promised Advisory Fee Discounts

December 14, 2018
It may sound like an obvious point to make: If an advisory firm promises clients that they will receive fee discounts at certain “breakpoints” based on the amount of assets they turn over to the adviser for management, it must follow through and provide those discounts. However, if an advisory firm fails to implement procedures to make good on these promises, it may find itself both shortchanging clients and facing SEC sanctions.

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SEC Draws a Digital Line in the Sand for Cryptocurrencies

November 30, 2018
The SEC, in a recent statement and through recent enforcement actions, made its view on cryptocurrencies clear: Any digital asset deemed to be a security must meet Commission registration requirements. That includes initial offers and sales of these securities, investment vehicles placing money in digital asset securities and those advising others to do the same, or secondary market trading of such products.

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Delays in Providing Compliance Resources to Inexperienced CCO Detailed in Two SEC Settlements

November 16, 2018
The SEC this month reached a settlement with a former advisory firm over allegations that it failed to perform adequate due diligence and monitoring of key investments. Much of the paperwork in the settlement, as well as in a separate settlement with the adviser’s former chief executive officer involving compliance issues, focused on allegations that the firm hired an inexperienced chief compliance officer and then repeatedly refused to provide him with the compliance resources he requested.

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2018 Enforcement Numbers Top Previous Year

November 9, 2018
The SEC earlier this month issued the results of its fiscal year 2018 enforcement efforts – and the results show that the number of enforcement actions and total money collected topped those from fiscal year 2017. At the same time, Division of Enforcement officials continued to state that measuring enforcement success primarily though these kinds of metrics “cannot adequately measure the effectiveness of an enforcement program.”

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Procedures Designed to Prevent Conflicts of Interest are Not Just for Show

October 26, 2018
Conflicts of interest are among the big red flags that the SEC’s Division of Enforcement looks for when investigating advisers. Firms that disclose such conflicts to clients and adopt procedures to handle the conflicts can avoid compliance problems, while at the same time build trust with both existing and prospective clients. But when advisers violate their own procedures and then fail to disclose that they did so, they will not only damage or lose that trust, they are likely to draw in investigators.

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SEC Targets Short-and-Distort Schemes to Drive Down a Company’s Share Price

October 12, 2018
It’s one thing for an adviser to express an opinion about a company that it plans to invest in. It’s another to use false statements in an attempt to drive down a company’s share price. The SEC recently filed a complaint in federal court that a hedge fund adviser did just that.

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Peikin: Monetary Sanctions are Not the Only Enforcement Tools

October 5, 2018
SEC Division of Enforcement Director Steven Peikin wants you to know that he does not think every violation is best solved with a civil money penalty. Other enforcement tools, he said in an October 3 speech, including non-monetary relief such as undertakings, conduct-based injunctions, bars and suspensions can also prove quite effective – with the mix to be decided on a case-by-case basis.

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Concealing Asset Values Won’t Solve Problems, May Bring SEC Charges

September 28, 2018
No adviser wants to see declines in the asset values of the client accounts they manage. Concealing those declines from clients and regulators, however, is not the answer. Not only will clients find out and likely be quite upset, but there is a good possibility the SEC’s Division of Enforcement will take notice. Better to come clean about the true state of affairs.

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SEC Enforcement Co-Director: Success Should Not be Measured by Statistics Alone

September 28, 2018
Most years for the past several years, the number of enforcement actions brought by the SEC’s Division of Enforcement have generally increased year after year. The implicit message inferred by at least some observers was that the agency saw “more” as an indication of success. Now, with a new team running the agency, that may now no longer be the case.

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Cybersecurity: Firm Pays $1 Million to Settle Deficient Procedure Charges

September 28, 2018
A dually-registered adviser/broker-dealer agreed on September 26 to pay the SEC $1 million in fines as part of a settlement over cybersecurity violations. The settlement with Des Moines-based Voya Financial Advisers involved violations of two agency cybersecurity-related rules, as well as a 2016 incident in which hackers gained access to personally identifiable information for at least 5,600 of the firm’s customers.

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Don’t Promise One Investment Strategy to Investors and Use Another

September 21, 2018
Investors might justifiably be somewhat upset if they find out that the fund in which they invested had to shut down. They might be even more bothered if they discover that the adviser managing the fund invested their dollars using a higher risk investment strategy than promised – and so might the SEC.

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Advertising with Blended Back-Tested and Actual Results Draws SEC Attention

September 21, 2018
The SEC for several years has made it clear that it does not like the use of hypothetical and/or back-tested performance results in advertising. A recent settlement not only shows that the agency’s Division of Enforcement has not changed its view, but that it may file enforcement actions against advisers that blend back-tested performance results with actual results.

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Failure to Disclose All Redemption Options May Lead to Enforcement Action

September 14, 2018
It may be tempting to be nice when an investor wants to cash in part of his or her investment with shorter notice window than your firm usually allows. But a shorter redemption window for some investors may lead to unfair results for other investors forced to wait – especially if all redemption options have not been disclosed.

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Product Decisions Without Promised Internal Review May Lead to SEC Sanctions

September 14, 2018
Don’t fall into the trap of adding or dropping investment products to satisfy clients or business affiliates without conducting the internal reviews promised in Form ADV and marketing materials. Such actions may at the time seem like a way to keep key stakeholders happy, but it is a recipe for an SEC investigation and possible enforcement action.

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Cryptocurrency: SEC Takes Action Against Hedge Fund Manager

September 14, 2018
It was only a matter of time before it happened. The SEC on September 11 took what it called its “first-ever enforcement action” against a hedge fund manager marketing digital assets. The firm had raised more than $3.6 million for such investments over a four-month period – but the agency charged that it did so using misrepresentations and registration failures.

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Federal Court Dismisses Challenge to SEC Disgorgement Authority

September 7, 2018
Following the June 2017 Supreme Court Kokesh settlement that subjected SEC disgorgement orders to a five-year statute of limitations, it was perhaps inevitable that there would be legal challenges to the agency’s authority to order disgorgement at all as part of an administrative settlement. Late last month a federal district court judge rejected such a challenge.

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SEC Keeps its Eye Out for Cherry-Picking as Another Adviser Settles

August 24, 2018
It’s always easier for enforcers to go after the low-hanging fruit, and in the case of the SEC, that fruit happens to be cherries. The agency on August 17 took another step in its ongoing crackdown against cherry-picking, reaching separate settlements with an advisory firm and an investment adviser representative who worked for it.

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Settlement Shows Peril of Failing to Disclose Conflicts of Interest

August 24, 2018
Advisers that receive more than fees when clients follow their recommendations and invest in entities from which the adviser receives a financial incentive need to be very careful. Conflicts of interest not only should be avoided – they must be disclosed.

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Former Private Equity Adviser Partner/CCO Settles Conflict of Interest Charges

August 16, 2018
It’s probably never wise for an adviser to condition an investment on a personal transaction – and it’s almost certain that if the arrangement is undisclosed and client approval is not obtained, whoever was behind it is courting trouble from the SEC.

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Five Settlements Show the SEC’s Determination to Enforce the Testimonial Rule

August 16, 2018
There’s talk of the SEC revising parts of the Advertising Rule, including its ban on testimonials. That day may come, perhaps sooner than later – but until it does, the agency’s Division of Enforcement is making clear that violations of the Advertising Rule, in particular its testimonial ban, will be prosecuted.

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