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The weekly news source for investment management legal and compliance professionals

Topic: Enforcement

Individual Adviser Representatives Not Immune from SEC Prosecution

April 19, 2019  The SEC’s Division of Enforcement may choose not to take action against an advisory firm, but that doesn’t mean they won’t take action against an investment adviser representative (IAR) working for that firm – a lesson that one IAR just learned.
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Monitor Disclosures – Even When They Come from the Top

April 12, 2019  Chief compliance officers should make every effort to review disclosures from their firms to the SEC, investors and others, even if those disclosures already have the blessing of top management. Failure to do so may leave the door open to potential fraud.
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SEC’s Enforcement Powers Likely Widened by Lorenzo Ruling

April 12, 2019  The SEC, battered by Supreme Court rulings in recent months that made it change how it appoints administrative law judges and placed a time limit on disgorgement, scored a big win with the high court’s recent Opinion in the Lorenzo v. Securities and Exchange Commission case. Under the ruling, the SEC, as well as private parties, will likely be able to bring fraud charges in more cases and assess more sanctions.
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SEC Charges Former Advisory Firm COO Overbilled to Give Himself a Raise

April 5, 2019  Don’t steal from your clients and don’t steal from your employer. These seem like fairly easy rules to understand and follow – but the SEC and the U.S. Attorney’s Office for the Southern District of New York, in separate enforcement actions on March 28, charged a former advisory COO with doing both.
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Digital Assets: SEC Provides Framework for Determining When They May be Securities

April 5, 2019  The SEC’s approach to the use of cryptocurrencies to date has to a large degree focused on whether those digital assets are securities. Now, in its latest step to regulate this growing segment of the market, the agency has issued a "framework" to help those working with digital assets determine if those assets may, in fact, be securities.
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Keep Fiduciary Duty and Conflicts of Interest in Mind During Transactions

March 22, 2019  It sounds like the classic conflict of interest: An advisory firm manages both the seller and multiple prospective buyers in a real estate asset transaction. How can such an adviser possibly get the best possible deal for its clients on both sides?
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Senate Bill Would Allow SEC to Seek Restitution Going Back 10 Years

March 22, 2019  A bipartisan bill introduced in the U.S. Senate March 14 would go at least part of the way toward redressing the Supreme Court judgment that limited disgorgement to a five-year statute of limitations. The bill would provide the SEC with the authority to seek restitution for investors harmed by fraudsters – and allow the agency to go back 10 years in pursuing such actions.
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SEC Alleges Adviser Ignored Compliance Responsibilities, Falsely Identified CCOs

March 15, 2019  Compliance and chief compliance officers are not just for show. Advisers that name CCOs but then fail to give them responsibility for administering their firm’s written compliance policies and procedures may be called out by the agency for doing just that – as one advisory firm found out.
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Multiple Adviser Settlements Demonstrate Clout of SEC’s Share Class Initiative

March 15, 2019  The SEC knocked it out of the park this month, demonstrating to naysayers that its Share Class Selection Disclosure Initiative has been effective in appealing to advisory firms. The agency on March 11 announced settlements with 79 different advisory firms that chose to self-report their violations. While these firms collectively agreed to pay more than $125 million in disgorgement and interest, they also escaped having to pay civil money penalties.
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Court Decision Removes Threat to SEC Pursuit of Cryptocurrencies

February 22, 2019  A federal district court judge has reconsidered a previous ruling and granted a preliminary injunction against a digital token company. In doing so, he also removed a potential threat to a key SEC tactic in the agency’s enforcement actions against cryptocurrency operators.
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Fraud Charges Demonstrate that Actions Must Match Disclosures

February 8, 2019  Telling investors one thing and then doing another is often a recipe for trouble. This may have been particularly true for one advisory firm that the SEC charged January 26 with promising some investors that portions of their profits would be used to protect their investments but instead were used to pay the living expenses of the firm’s owner.
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Advertising: SEC’s Pursuit of Back-Tested Performance Nets another Settlement

February 1, 2019  Any adviser considering the use of back-tested performance in its advertising would be wise to think twice. The SEC, which has made no secret in recent years of its concerns about this practice, may well look further into firms that employ it, as one advisory firm recently discovered.
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Determine Auditor’s Custody Rule Savvy before Engagement

February 1, 2019  The Custody Rule can be a major headache for advisory firms and their legal counsel. It is complicated, open to interpretation, and the SEC is on the lookout for advisers – and accounting firms – that violate it. All the more reason, for both advisers and auditors to be knowledgeable and experienced about the Rule before taking steps that may violate its requirements.
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Advisers Need to Stay on Top of Client Allocations and Valuations

January 23, 2019  Advisory firms that allocate expenses to clients contrary to written agreements should be prepared to face the possibility of an SEC investigation and enforcement action. That possiblity is magnified if the same firm is found to have improperly conducted reviews of client valuation models.
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Cato Institute Challenges SEC’s Use of Settlement Gag Orders

January 18, 2019  The Cato Institute, the well-known libertarian think tank, took aim at the SEC this month. It filed a complaint against the Commission in federal court, challenging the SEC’s use of the gag order that prevents settlement respondents from denying the allegations in their settlements or telling their side of the story.
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SEC Share Class Crackdown Continues and Shows No Sign of Abating

January 11, 2019  The SEC in late December settled charges against three advisory firms involving their alleged placement of clients in mutual fund share classes that assessed certain fees when less expensive share classes of the same funds were available. These settlements, as well as the inclusion of this practice in the agency’s 2019 examination priorities list, make clear that advisers, mutual funds and their legal representatives should not expect any let-up in these enforcement actions in the near future.
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SEC Takes First Robo-Adviser Enforcement Actions

January 4, 2019  It was only a matter of time until it happened. With the SEC focusing its enforcement guns on cryptocurrencies and cybersecurity, advisory firms’ use of robo-advisers couldn’t have been far behind. The agency primed the pump with guidance on the subject in early 2017, but really showed that it meant business late last month, when it brought its first two enforcement actions against advisory firms involving the use of robo-advisers.
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The Year Ahead: New and Revised Rules, Cryptocurrency and Cybersecurity Enforcement

January 4, 2019  Advisory firms, investment companies and broker-dealers should get ready for some changes as 2019 takes off. Among other things, they will be likely to deal with new rules, revisions to existing rules, and enforcement efforts targeted at reining in cryptocurrencies and strengthening cybersecurity.
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2018 in Review: Standards of Care, Cryptocurrencies, SEC Changes and More

December 21, 2018  With the past year almost over and a new one about to begin, it’s time to take a look back and take stock of what was accomplished in 2018 and what issues remain. The past 12 months found major developments involving standards of care for advisers and broker-dealers, the emergence of an SEC strategy regarding cryptocurrencies, a full year in office for a new SEC team and philosophy, the rising challenges of cybersecurity, and more.
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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 Subscriber Access Not Required

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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Refund Unearned Advisory Fees as Contracts and Policies Stipulate

August 10, 2018  Advisory firms receiving requests from clients to refund their advisory fees need to do so on time and in accordance with their advisory contracts, policies and procedures, and other disclosures. Failure to do so, whatever the reason, may draw attention from SEC examiners and possibly the Division of Enforcement.
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Compliance Officer Latest to Settle AML Charges in Aegis Capital Case

August 3, 2018  The SEC wants anti-money laundering rules followed – and will go after both firms and individuals at firms that it believes violate those rules. A compliance officer at a dually-registered adviser and broker-dealer learned this the hard way earlier this month after he allegedly failed to file Suspicious Activity Reports on hundreds of transactions.
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Failure to Offset Fees May Result in Payments to Both Clients and the SEC

July 27, 2018  It’s great when fees come in, whether for management, consulting or something else. But check your governing documents – not all fees are meant to be kept by the advisory firm, and keeping such fees may result in a visit from the SEC’s Division of Enforcement staff.
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OIG Recommends Seven Changes in SEC Use of External Experts

July 20, 2018  The SEC has had its eye on advisory firm use of external experts and taken enforcement action when it found problems. Now the agency itself is under the spotlight. The OIG recently recommended seven steps it wants the SEC to take in its own use of external experts.
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Trump Gives SEC and Other Agencies More Leeway in Choosing ALJs

July 20, 2018  President Donald Trump on July 10 allowed the SEC and other agencies that employ administrative law judges greater leeway in just how they find and hire those ALJs. Some industry observers are welcoming the move as an important step to streamline the hiring process, while others are questioning whether politically appointed agency heads will now be able to appoint ALJs that meet their political points of view.
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Third-Party Agreements: Ensure Clients Don’t Get Burned by Conflicts of Interest

July 13, 2018  Advisers may see agreements with other advisory firms as a way to enhance revenue. While such third-party agreements may on their face bring in additional dollars, advisers should also take precautions that they don’t create conflicts of interest with clients. When that happens, the agreements may bring in more than additional revenue – they may bring in SEC examiners and investigators.
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Expect Kavanaugh to Stay in Line with Supreme Court Securities Rulings

July 13, 2018  Should federal appeals court Judge Brett Kavanaugh be confirmed as a Supreme Court justice, as many commentators think likely, don’t expect him to rock the boat when it comes to rulings involving the nation’s securities laws. The high court has a long history of deciding securities law cases fairly narrowly, and Kavanaugh is unlikely to push the court one way or the other, legal and securities experts say.
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Wells Process: Enforcement Co-Director Offers Best Practices for Defense

July 6, 2018  SEC Division of Enforcement co-director Steven Peikin may not be in the business of helping defense attorneys win their cases, but he recently offered some advice that might be worth their time: Do’s and don’ts in having a productive Wells meeting.
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SEC Strategic Plan Draft Calls for Cybersecurity, Enforcement, Revisiting Rules

July 6, 2018  The SEC’s draft five-year strategic plan for 2018 through 2022 – the first released by chairman Jay Clayton – centers around three high-concept goals: Investors, innovation and performance. Within those three goals, however, are more practical initiatives focusing on a variety of topics, including cybersecurity, enforcement and revisiting existing rules.
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Hedge Fund Manager Fined Over Inflated Assets Despite Personally Recapitalizing Fund

June 22, 2018  Sometimes personal efforts to make things right don’t entirely work. A case in point might be when a managing member of a hedge fund advisory firm personally recapitalizes a fund after it is all but wiped out – and is then fined by the SEC anyway.
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Check Out Audit Team Members before Retaining Firm

June 22, 2018  It is essential that accounting firms hired to perform audits – and their individual audit team members – have credibility, and that asset managers that hire such firms know they can rely on their work. Failure on the part of advisory firms and other financial institutions to ensure that those performing the audit are up to snuff may result in serious consequences.
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