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Topic: Enforcement

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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Repeated Failures to File Form PF Lead to Censure and Fines from the SEC

June 8, 2018  The SEC is making no bones about it. When it requires registrants to complete and file a new form, it expects those requirements to be acted on. Form PF is a case in point. The agency on June 1 made an example of 13 private fund advisers that, it said, repeatedly "failed to provide required information" by being "delinquent" in their Form filings over multiple years.
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Hedge Fund Advisers that Inflate Asset Value Likely to Draw SEC Attention

May 31, 2018  It may sound like a way to bring in investor dollars, but in reality it is more likely to bring in SEC investigators. Hedge fund advisers tempted to lure new investors and keep existing ones by taking questionable steps to increase fund value run the risk of being taken to court by the SEC for fraud.
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Enforcement Co-Directors Take Issue with Disgorgement Time Limits

May 31, 2018  The SEC doesn’t like having to comply with the statute of limitations when it comes to disgorgement. Division of Enforcement co-directors Stephanie Avakian and Steven Peikin, in testimony before a panel of the House Committee on Financial Services, made clear that, in some cases, five years may not be long enough.
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Hedge Fund Adviser Execs May Face Personal Fines if They Ignore Red Flags

May 18, 2018  A chief financial officer at a hedge fund advisory firm on May 8 settled SEC charges that he failed to act on red flags involving asset mismarking and insider trading. The firm ended up paying more than $10 million, and the CFO agreed to separately pay a $100,000 fine. The lesson: Advisory firm executives need to be on the lookout for signs of fraud, and act on them when they find them.
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SEC Should Not Prioritize Enforcement Over Other Parts of its Mission: Peirce

May 18, 2018  SEC enforcement is important and must continue, but has gone too far. While enforcement is necessary, agency staff should use it as a last resort and rein in the kind of enforcement-by-numbers philosophy that the SEC has been using over the past few years.
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SEC Keeps Gatekeepers in Its Sights with New Accounting Firm Settlement

May 11, 2018  The SEC made it known back when Mary Jo White was the agency chair that it would go after what it terms "gatekeepers" – attorneys, accountants, consultants and others – if it believes they took part in fraud. With its May 4 settlement with an accounting firm and two of the firm’s partners, chairman Jay Clayton signaled that his SEC will do the same.
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DOL Won’t Enforce Prohibited Transactions Claims in Light of Court Action

May 11, 2018  The last rites for the Department of Labor’s Fiduciary Rule are turning out to be an extended affair.
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Machine Learning and Artificial Intelligence Increasingly Part of SEC Oversight

May 11, 2018  Artificial intelligence may or may not be here yet, depending on one’s definition of AI. There is little doubt, however, that machine learning – the analysis of data by machines without direct human direction – has already found a home at the SEC and is growing.
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ALJ Case: Supreme Court Oral Arguments Shed Little Light on Anticipated Ruling

May 4, 2018  Raymond Lucia got his day before the Supreme Court, but other than the satisfaction of getting that far, it remains unclear just how the high court will rule on his petition challenging how SEC administrative law judges are appointed.
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Private Equity Adviser Settles Purchasing Agreement Conflict of Interest Charges

April 27, 2018  Private equity advisers need to be careful before signing agreements with group purchasing organizations (GPOs). Those agreements may contain conflict-of-interest traps that amount to a breach of fiduciary duty and that should be avoided at all costs.
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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 SEC’s Share Class Selection Distribution initiative’s 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  It’s every advisory firm’s 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 SEC’s recent share class initiative – 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 – 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 – 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  What’s behind the SEC’s crackdown on cherry-picking at advisory firms, other than the agency’s desire to stamp out this violation wherever and whenever it’s 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  It’s a limited time offer. The SEC’s 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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