Enforcement

Investment advisers in New Jersey and California recently reached settlements with the SEC in regard to client investments in entities tied to former Oregon-based firm Aequitas Management. Those settlements, like a July agency settlement with a Massachusetts advisory firm, resolve allegations involving conflicts of interest and inadequate disclosure.

An investment advisory firm and its founder/chief executive officer reached a settlement with the SEC after the agency charged both with principal trading violations. The founder’s ownership interest in a fund his firm managed when the trades occurred was more than 35 percent, the agency said, well above the 25 percent limit mentioned in a recent agency Risk Alert, and apparently triggered the agency investigation.

The SEC wants to make sure that no one takes advantage of the business situation created by the coronavirus and the government and business reactions to it by misusing material non-public information and engaging in insider trading. It issued a warning to that effect.

The SEC recently filed charges in federal court against an advisory firm, its owner and a former owner, claiming that the three breached their fiduciary duty when they failed to disclose to their clients that they were accepting compensation that created a conflict of interest. Now the defendants face not only the charges, but the possibility of disgorgement and financial penalties.

The SEC, in its latest share class disclosure settlement with an advisory firm, makes a point of noting, fairly prominently in the settlement order, that the firm chose not to self-report its alleged violations to the Division of Enforcement. The result appears to be that the adviser got hit with more than $900,000 in disgorgement and civil money penalties – part of which could have been avoided by voluntarily coming forward.

An advisory firm and its owner settled charges with the SEC that they misled investors about the degree of risk they faced when placing their money in a fund that primarily invests in futures contracts. The agency said that the two misrepresented risk protections that they, and a senior portfolio manager had told investors were in place. The settlement will cost the adviser and its owner more than $10 million in disgorgement and fines.

An SEC settlement with two Florida-registered advisers leaves the two individuals agreeing to collectively pay more than $7 million in disgorgement and interest, as well as $200,000 in civil money penalties. The two got in trouble when the agency alleged that they failed to disclose conflicts of interest involving their ownership interests in an insurance holding company, an investment advisory firm, and a lender.

The SEC this month filed a brief in the U.S. Supreme Court that may make the difference between whether it can continue to request that courts impose disgorgement against defendants or whether it can no longer do so. If the Commission loses the argument before the high court, the ramifications are likely to be significant, not only for the SEC and those it regulates, but for other federal agencies, as well.

When an advisory firm employee uses material non-public information (MNPI) from a client to increase his own profits, that most likely constitutes insider trading. A former healthcare analyst at a New York City-based registered advisory firm found this out the hard way on January 10, when he settled insider trading charges with the SEC.

Every year brings new developments and challenges, but as far as investment advisers and funds go, 2020 may pack quite a wallop. Aside from adoption of a final Advertising Rule, Proxy Advisory Firm Rule and others, expect the SEC to move forward with proposing a revamped Custody Rule and possibly more self-reporting initiatives along the model of the concluded Share Class Disclosure Initiative. As if that isn’t enough, fund managers will need to ensure their funds comply with the requirements of the recently adopted ETF and Liquidity Risk Management Rules.