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The weekly news source for investment management legal and compliance professionals

Topic: Enforcement

Discovery of Fraudulent Registration Offers No Relief from Rule Compliance

April 20, 2018
One might think that an advisory firm charged with misstating its assets under management in order to register with the SEC could take some solace in believing that it never had to comply with agency rules. After all, such an adviser might think, the Custody Rule, the Books and Records Rule, the Advertising Rule and other rules apply only to SEC registrants. But such an assumption would be a mistake.

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New Share Class Settlements May Increase Self-Reporting Pressure on Advisers

April 13, 2018
Is it a coincidence? With just under two months before the SECís Share Class Selection Distribution initiativeís self-reporting deadline, the agency on April 6 announced new share-class settlements with three advisory firms containing civil money penalties that collectively total almost $2 million. The SEC used the occasion to issue a press release that "strongly encourage[s]" advisers to participate and avoid such fines themselves.

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Exam Referrals to Enforcement: How Much Should Advisers Worry?

April 13, 2018
Itís every advisory firmís nightmare. SEC examiners visit, find some deficiencies and suggest some corrective actions, which the adviser makes. Some months later, the advisory firm learns that it is the subject of a Division of Enforcement investigation, based on a referral from the exam team.

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F-Squared Founder Ordered to Pay More than $13 Million

March 30, 2018
The F-Squared Investments saga seems to open or close a new chapter every few months since 2014, when the SEC first brought charges against the advisory firm for allegedly making false and misleading statements about its investment strategy algorithm. The latest development occurred March 22, when a federal judge ordered that F-Squared founder and former CEO Howard Present personally pay $13 million, including a $1.58 million civil money penalty, following his loss at trial this past October.

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Self-Report or Not: Consider What’s at Stake

March 30, 2018
The SECís recent share class initiative Ė in which the agency promises not to charge civil money penalties to advisers that voluntarily report that they placed clients in certain share classes when less expensive classes were available Ė has cast a spotlight on the question of whether self-reporting is a good idea.

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Adviser and SEC Settle Custody Charges Over Dual Employee Arrangement

March 23, 2018
Advisory firms that share employees with third parties need to be certain that the practical realities of these arrangements do not create Custody Rule violations and/or conflicts of interest. One adviser recently found out the hard way what happens when the SEC raises questions.

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Failure to Place Client Interests Over Those of Affiliates May Lead to Charges

March 16, 2018
An adviser may have clients and may have affiliates, and may understandably want to do right by both. Such dual interests, however, may lead to a conflict of interest Ė and when that happens, client interests must come first.

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The SEC’s Cherry-Picking Crackdown: What’s Behind It

March 16, 2018
Whatís behind the SECís crackdown on cherry-picking at advisory firms, other than the agencyís desire to stamp out this violation wherever and whenever itís found? Certainly there are other improper actions that the Division of Enforcement has made clear it will pursue, among them share class selection or Rule 105 violations. Cherry-picking cases, however, seem to be in a case by themselves.

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SEC Charges Hedge Fund Manager with Misrepresentation, Freezes Assets

March 2, 2018
Misrepresentation is misrepresentation, but sometime misrepresentation can go so far that a federal court has to step in and put a stop to the alleged activity until the charges are resolved. That is the situation that a purported hedge fund manager found itself in earlier this month.

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SEC Will Not Fine Advisers that Self-Report Share Class Violations by June 12

February 23, 2018
Itís a limited time offer. The SECís Division of Enforcement will not impose financial penalties against advisory firms that voluntarily report placing clients in certain share classes when less expensive share classes for the same investment are available. Advisers taking advantage of this offer will still have to pay disgorgement and prejudgment interest, be censured and face the possibility of individual liability.

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SEC Files Misrepresentation Charges Against Adviser Raising Money to Flip Real Estate

February 2, 2018
Flip or flop? Advisers seeking to raise money from clients and investors for the declared purposed of flipping residential properties would be wise to ensure that the dollars raised go to that purpose. The SEC has filed charges against an adviser and others for allegedly failing to do just that.

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Fund Administrators that Fail to Act on Red Flags May Face Charges

February 2, 2018
Fund administrators should be under no illusion that if a fund runs into trouble, the administrator is somehow immune because it is not the fund, but simply provides services to it. Administrators have an obligation to watch for and act on red flags, particularly those that involve client assets.

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Full Disclosure Needed When Advisers Raise Money to Keep Themselves Afloat

February 2, 2018
Desperate times may call for desperate measures Ė but not measures so desperate that investors are kept in the dark about key elements and the SEC takes notice. This is especially true when the party seeking to raise money for itself is an investment advisory firm, and the parties from which it seeks to raise those dollars include its own advisory clients.

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Failure to Disclose Principal Trades May Lead to SEC Charges

January 26, 2018
The Advisers Act has strict requirements when it comes to self-dealing Ė and that includes principal trades. Just consider Section 206(3). It prohibits an adviser, while acting as a principal for his own account, from knowingly selling any security to or purchasing any security from any client without first disclosing to the client that he is doing so and obtaining the clientís consent.

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Undisclosed Investment Strategy Changes Unlikely to Save the Day

January 26, 2018
An adviser may start a fund with high expectations, but find that, for a number of reasons, returns do not come in as expected, and in fact go south. Advisers in such situations may be tempted to turn to a higher risk/higher reward investment strategy in the hope it will make up for the losses. Those that do should be aware that such a move may bring with it business and compliance challenges that no adviser wants to face.

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Status of Administrative Law Judges Will be Reviewed by Supreme Court

January 18, 2018
It took just eight words: "The petitions for writs of certiorari are granted." With that sentence, the U.S. Supreme Court on January 12 let it be known that it will review a lower court decision in Lucia v. SEC, potentially overturning the way that the agency has traditionally classified its administrative law judges. The high courtís ultimate decision may upend a number of established lower courtís verdicts.

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Multiple and Repeated Compliance Problems Likely to Draw SEC Action

January 12, 2018
Compliance is more than simply taking steps to satisfy regulators. If followed in spirit, with an eye toward ethics, compliance should be part of a culture where advisory firms do the right thing simply because it is right. In doing so, they will probably find that they are more likely to satisfy SEC requirements and thereby head off potential enforcement actions.

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SEC Charges Gatekeepers in Federal Court with Aiding and Abetting Fraud

January 12, 2018
Donít expect the crackdown on "gatekeepers" Ė attorneys, accountants, consultants and other third parties that work with advisory firms Ė to let up any time soon, even with a new SEC chairman at the helm. The agency recently filed charges in U.S. District Court against an attorney and an accountant for allowing, if not enabling, an adviserís alleged misappropriation of more than $9 million from a charitable foundation.

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PF Manager Settles Charges Involving Conflicts, Disclosure and Exam Findings

January 5, 2018
A private fund manager that the SEC accused of not acting in a timely fashion on multiple examination findings was taken to federal court by the agency, which charged him with, among other things, engaging in conflicted transactions and misleading investors. The manager, Louis Mohlman, Jr. and his two advisory firms reached a settlement with the SEC the same day.

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Adviser and Broker-Dealer Issues Play Out in Latest Share Class Settlement

January 5, 2018
The SEC reached a settlement with a dually-registered advisory firm / broker-dealer that involves the issue of recommending higher-cost share classes of securities to clients when lower-cost share-classes of securities are available. This latest share-class settlement has an added wrinkle in that the firm may have had a conflict of interest because, in its capacity as a broker-dealer, it allegedly received the additional service fee from the purchase of the higher-cost shares.

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