Copyright © 2017 by Willkie Farr & Gallagher LLP. All rights reserved. These materials may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP. The information included in this Summary Chart is current as of December 31, 2016.

The author appreciates the efforts of Charles F. Gyer, an associate in Willkie Farr & Gallagher LLP’s office in the District of Columbia, in the preparation of this Chart. Mr. Gyer has yet to be admitted to the Washington D.C. Bar and is practicing under the supervision of members of Willkie Farr & Gallagher LLP who are current members of that Bar.

Investment Advisers Act of 1940

Advisers Act

Investment Company Act of 1940

1940 Act

Securities Exchange Act of 1934

Exchange Act

Securities Act of 1933

Securities Act

Employee Retirement Income Security Act of 1974

ERISA

12/14/16

Alleged Failure by Private Equity Fund Manager to Obtain Advisory Board Consent for Co-Investments Presenting Conflicts of Interest

In New Silk Route Advisors, L.P., Advisers Act Release No. 4,587 (Dec. 14, 2016), the SEC settled public administrative and cease-and-desist proceedings against New Silk Route Advisors, L.P. (“NSR”), an investment adviser registered under the Advisers Act, for allegedly failing to obtain advisory board consent for certain co-investments made by two private equity funds managed by NSR (the “NSR Funds”), as required by each NSR Fund’s limited partnership agreement.

According to the SEC, each NSR Fund’s limited partnership agreement required NSR to obtain the consent of the Fund’s advisory board before making any investments in portfolio companies in which NSR or its affiliates were also investing or had invested. The SEC alleged that NSR’s co-founder and chief executive officer was a co-founder and chief executive officer of a separate Advisers Act-registered investment adviser, which managed other private equity funds (each, an “NSR Affiliate Fund”). According to the SEC, from approximately 2008 to 2014, NSR caused the NSR Funds to invest over $250 million in four portfolio companies in which an NSR Affiliate Fund also invested. The SEC alleged that these co-investments posed a conflict of interest for NSR, as NSR’s chief executive officer also owed fiduciary duties to each NSR Affiliate Fund.

The SEC alleged that NSR willfully violated Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

NSR agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $275,000.

The SEC asserted that NSR negligently failed to obtain the required advisory board consent for each NSR Fund’s co-investments with the NSR Affiliate Fund. The SEC alleged that NSR also failed to disclose, until May 2014, that it caused the NSR Funds to fund approximately $1.3 million in capital installments that were originally committed to one of the portfolio companies by the NSR Affiliated Fund, after the NSR Affiliated Fund exhausted its capital.

According to the SEC, NSR failed to adopt policies and procedures reasonably designed to prevent violations of the Advisers Act arising from making co-investments with an affiliate without client consent as required by each NSR Fund’s limited partnership agreement.

https://www.sec.gov/litigation/admin/2016/ia-4587.pdf

12/12/16

Alleged Material Misstatements and Omissions of Material Fact by Bank Custodian in Connection with Foreign Exchange Rate Pricing

In State Street Bank and Trust Company, 1940 Act Release No. 32,390 (Dec. 12, 2016), the SEC settled public administrative and cease-and-desist proceedings against State Street Bank and Trust Company (“SSBTC”), which serves as custodian for investment companies registered under the 1940 Act, for allegedly making materially misleading statements and omissions in connection with SSBTC’s methodology of pricing certain foreign currency exchange transactions.

According to the SEC, SSBTC offered a service under which SSBTC automatically processed and executed custody client purchases and sales of foreign currencies without requiring clients to negotiate prices on a trade-

The SEC alleged that SSBTC willfully violated Section 34(b) of the 1940 Act.

The SEC alleged that SSBTC caused certain of its registered investment company clients to violate Section 31(a) of, and Rule

SSBTC agreed to cease and desist from committing or causing any violations and any future violations of the charges, to pay disgorgement of $75,000,000, prejudgment interest of $17,369,416.51, and a civil money penalty of $75,000,000.

Alleged Failure to Maintain Accurate Transaction Records

by-trade basis (“Non-Negotiated Transactions”).

The SEC alleged that SSBTC represented to its custody clients that, with respect to Non-Negotiated Transactions, it provided “best execution,” guaranteed the most competitive rates available, priced transactions at prevailing interbank or market rates, and that rates were based on, among other things, the size of the trade and SSBTC’s inventory of the currency. According to the SEC, SSBTC failed to disclose that it priced most Non-Negotiated Transactions at the applicable interbank market rate near the end of each trading day, regardless of when trade orders were received, after which SSBTC would then apply a predetermined, uniform markup (for purchases) or markdown (for sales), limited only to fall within the highest and lowest interbank rates of the day. The SEC alleged that, as a result of these practices, SSBTC often executed Non-Negotiated Transactions with custody clients at or near the highest and lowest rates in the interbank market between the time the market opened in the morning and the time that SSBTC priced the transactions.

According to the SEC, SSBTC provided certain registered investment company clients with daily records of all transactions, as well as periodic transaction reports. The SEC alleged that these records and reports routinely contained the dates of Non-Negotiated Transactions and the prices at which SSBTC executed the transactions, but were materially misleading in light of SSBTC’s misstatements about

3la-1(b) under, the 1940 Act.

how it priced Non-Negotiated Transactions, as the reports and records omitted information about the time of day at which trades were executed and how the prices were determined.

https://www.sec.gov/litigation/admin/2016/ic-32390.pdf

12/1/16

Alleged Improper Valuation of Securities by Investment Adviser to Exchange-Traded Funds

Alleged Failure to Adopt and Implement Policies and Procedures Reasonably Designed to Prevent Improper Valuation of Securities

In Pacific Investment Management Company LLC, Advisers Act Release No. 4,577 (Dec. 1, 2016), the SEC settled public administrative and cease-and-desist proceedings against Pacific Investment Management Company LLC (“PIMCO”), an investment adviser registered under the Advisers Act, for alleged improper valuation of certain positions held by an actively managed exchange-traded fund.

The SEC alleged that PIMCO, in its management of the ETF, utilized an “odd lot strategy,” which involved purchasing relatively small blocks of securities, termed “odd lot” positions, that traded at a discount to larger institutional blocks of the same securities, termed “round lot” positions. According to the SEC, PIMCO would purchase odd lot positions of certain securities at a discount, and then value these positions at the higher round lot prices.

The SEC alleged that, as a result of the odd lot strategy, PIMCO caused the ETF to overstate its net asset value. According to the SEC, the ETF regularly recorded performance increases reflected by the difference between the purchase price for an odd lot position and the higher round lot price used to value the position held

The SEC alleged that PIMCO willfully violated Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act, and willfully violated Section 34(b) of, and Rule 22c-1 under, the 1940 Act.

PIMCO agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay disgorgement of $1,331,628.74, prejudgment interest of $198,179.04, and a civil money penalty of $18,300,000.

PIMCO also agreed to certain undertakings, including retaining an independent compliance consultant and adopting that compliance consultant’s recommendations.

by the ETF. The SEC alleged that PIMCO did not have a reasonable basis to believe that the round lot price accurately reflected the exit price the ETF would receive for those positions and therefore did not accurately value certain odd lot positions it purchased for the ETF. According to the SEC, PIMCO did not perform any contemporaneous analyses to determine whether the use of round lot prices for the ETF’s odd lot positions appropriately reflected fair value.

The SEC alleged further that PIMCO’s pricing policy was not reasonably designed to ensure that odd lots purchased for the ETF were accurately priced and that the ETF’s net asset value was accurately calculated. According to the SEC, PIMCO’s pricing policies and procedures inappropriately relied on PIMCO’s traders to determine when to report position prices that did not reasonably reflect market value, without providing sufficient oversight of the traders’ determinations or any guidance regarding when to elevate significant pricing issues to PIMCO’s pricing committee or the valuation committee of the ETF’s Board of Trustees.

The SEC asserted that PIMCO made materially misleading statements to the ETF’s Board of Trustees, as well as certain investors, by failing to disclose that the odd lot strategy was a significant source of the ETF’s performance. According to the SEC, PIMCO negligently provided monthly and annual disclosures that failed to disclose the effect of the odd lot strategy on the ETF’s performance and that the performance

resulting from this strategy was not sustainable as the ETF grew in size. The SEC alleged that these disclosures implied that the ETF’s performance resulted from price appreciation in certain market sectors, while internal PIMCO reports indicated – and many of the drafters and reviewers of these disclosures understood – that a significant portion of the ETF’s favorable performance was attributable to initial gains from valuing odd lots at round lot prices. According to the SEC, PIMCO also failed to disclose the existence or effect of the odd lot strategy to the ETF’s Board of Trustees, which had specifically inquired about why the ETF outperformed PIMCO’s flagship mutual fund and its benchmark index.

https://www.sec.gov/litigation/admin/2016/ia-4577.pdf

11/21/16

Auditor’s Alleged Failure to Comply with Professional Standards

Auditor’s Alleged Cause of Advisers Act Violations

In Grassi & Co., CPAs, P.C, Advisers Act Release No. 4,572 (Nov. 21, 2016), the SEC settled public administrative and cease-and-desist proceedings against Grassi & Co., CPAs, P.C. (“Grassi”), a public accounting firm registered with the Public Company Accounting Oversight Board, for allegedly failing to comply with professional standards in connection with audits of a private fund client, and for allegedly failing to detect investment adviser fraud. This case arises from the same set of facts discussed in Apex Fund Services (US), Inc., below.

According to the SEC, Grassi served, from January 2012 until January 2013, as independent auditor for several private funds advised by ClearPath Wealth

The SEC alleged that Grassi caused ClearPath’s and ClearPath’s President’s violations of Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Grassi engaged in

Grassi agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay disgorgement of $130,000, prejudgment interest of $11,510.41, and a civil money penalty of $260,000, and to comply with certain undertakings, including engaging an independent

Management, LLC (“ClearPath”), an investment adviser registered by the State of Rhode Island. The SEC alleged that Grassi issued during this period nine audit reports, for years ended 2009 through 2011, containing unqualified opinions on the financial statements for four different funds advised by ClearPath.

According to the SEC, from 2010 forward, ClearPath and ClearPath’s president were defrauding the funds they advised, and the investors in those funds, by misappropriating fund assets and making repeated misstatements to investors about the value and existence of fund investments. The SEC alleged that Grassi failed to detect evidence of the fraud by, among other things, neglecting to note the commingling of assets among multiple fund series when a restriction in each fund’s governing documents prohibited the assets and liabilities of each series from being commingled with that of any other series. According to the SEC, Grassi failed to make adjustments to financial statements it had provided earlier after its discovery of a previously undisclosed account for one of the funds that showed a $4.1 million margin loan had been taken against the fund’s assets. The SEC alleged that this conduct constituted a failure to detect fraud, thereby allowing the advisers to materially inflate the values of their investments without contradiction and to conceal use of limited partners’ investments for their own benefit. According to the SEC, as a result of Grassi’s failure to address ClearPath’s indications of fraud, five of Grassi’s nine audit reports were materially false, and those

improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

compliance consultant to oversee compliance with all applicable securities laws.

reports enabled ClearPath and its principal to continue to report to limited partners materially inflated values of their investments without contradiction, to conceal use of limited partners’ investments for their own benefit, and continue their scheme to defraud the funds and their investors unimpeded.

https://www.sec.gov/litigation/admin/2016/34-79368.pdf

11/10/16

Alleged Affiliate Transactions by Unregistered Investment Adviser

In Derik J. Todd, Advisers Act Release No. 4,567 (Nov. 10, 2016), the SEC settled public administrative and cease-and-desist proceedings in connection with affiliate transactions allegedly conducted by Derik J. Todd, an unregistered investment adviser, and four limited liability companies, controlled, directly or indirectly, by Mr. Todd: Madison Capital Energy Income Fund II GP LLC (“Fund II GP”), Big Horn Minerals LLC (“Big Horn”), Madison Capital Investments LLC (“MCI”), and Madison Royalty Management LLC (“MRM”).

According to the SEC, in 2010 Mr. Todd formed a private fund (“Fund II”) for the purpose of acquiring oil and gas royalty interests to generate a return for its investors. The SEC alleged that Fund II’s offering materials represented to investors, among other things, that Mr. Todd and Fund II’s general partner, Fund II GP, would use the assets and funds of Fund II for the “exclusive benefit” of Fund II, conduct transactions with affiliates on an “arms-length basis,” and that Mr. Todd, through MCI, would negotiate with sellers to purchase assets for Fund II at the “best price possible.”

The SEC alleged that Mr. Todd and Fund II GP willfully violated Section 17(a) of the Securities Act.

The SEC alleged that Mr. Todd and Fund II GP willfully violated Section 10(b) of, and Rule 10b-5 under, the Exchange Act.

The SEC alleged that Mr. Todd and Fund II GP willfully violated Sections 206(1) and 206(2) of the

Mr. Todd, Fund II GP, MCI, Big Horn, and MRM agreed to cease and desist from committing any violations of and any future violations of the charges, and to pay disgorgement of $205,673, prejudgment interest of $21,581, and a civil money penalty of $50,000.

Mr. Todd agreed to be barred from association with, among others, any broker, dealer, investment adviser, or municipal adviser, and to be prohibited from serving as, among other

According to the SEC, Mr. Todd raised $11,125,500 from approximately 150 investors during Fund II’s offering period, October 2010 through January 2012.

According to the SEC, from late 2011 through 2014, Mr. Todd and Fund II GP used their affiliates as intermediaries for many of Fund II’s sales and purchases of oil and gas royalty interests. The SEC alleged that Mr. Todd sold portions of Fund II’s assets to Big Horn and MRM at cost, and then sold those same interests to an independent third party at a profit. According to the SEC, Mr. Todd and Fund II GP enabled Mr. Todd to profit in the amount of $308,638 at the expense of Fund II and its investors through these affiliate transactions. The SEC asserted that, in taking these actions, Mr. Todd and Fund II GP acted inconsistently with the representations set out in Fund II’s offering materials regarding conducting transactions on an arms-length basis for the exclusive benefit of, and at the best price possible for, Fund II.

https://www.sec.gov/litigation/admin/2016/33-10250.pdf

Advisers Act.

The SEC alleged that MCI, Big Horn, and MRM willfully aided and abetted and caused Mr. Todd’s and Fund II GP’s violations of Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1) and 206(2) of the Advisers Act.

things, an employee of any advisory board or investment adviser for five years.

Fund II GP, MCI, Big Horn, and MRM agreed to censure.

10/31/16

Auditors’ Alleged Failure to Comply with Professional Standards in Connection With an Audit of a Venture Capital

In Adrian D. Beamish, CPA, Exchange Act Release No. 79,193 (Oct. 31, 2016), the SEC instituted public administrative proceedings against Adrian D. Beamish, CPA, an audit partner at PricewaterhouseCoopers (“PwC”), for allegedly failing to comply with professional standards in connection with his audits of a private venture capital fund.

The SEC alleged that Mr. Beamish engaged in improper professional conduct within the meaning of Section 4C of the

The SEC instituted proceedings to determine what, if any, remedial action should be taken, including whether Mr. Beamish should be censured, or denied, temporarily or

Fund

According to the SEC, PwC was retained in 2006 by a venture capital fund to conduct annual audits of its financial statements. The SEC alleged that Mr. Beamish served as the audit partner and was responsible for the planning, execution, and supervision of the audits, including the PwC audit team’s compliance with appropriate professional standards. According to the SEC, Mr. Beamish authorized PwC to issue audit reports on the fund’s financial statements with unqualified opinions for the year-end 2009 through year-end 2012 audits, even though the audits failed to comply with Generally Accepted Accounting Principles (“GAAP”) and the audits failed to comply with Generally Accepted Accounting Standards (“GAAS”).

The SEC in particular alleged that the fund’s investment adviser had improperly advanced management fees from the fund and that these advances were not properly accounted for or disclosed on the fund’s financial statements. According to the SEC, Mr. Beamish failed to meet GAAS standards by failing to seek the business rationale for why the advanced management fees balance increased each year between 2009 and 2011. The SEC alleged that, if the PwC audit team had investigated this increase, it would have discovered that the adviser had used these fees for the business operations of the fund’s affiliates and for the personal expenses of the adviser’s principal.

According to the SEC, the fund’s financial statements violated GAAP by inconsistently and inaccurately

Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

permanently, the privilege of appearing or practicing before the Commission as an accountant.

disclosing the nature of the advanced management fees. The SEC alleged, for example, that the PwC audit team proposed a footnote that would have disclosed in the fund’s 2012 year-end financial statements that the amount advanced to the adviser exceeded all future expected management fees contractually owed to the adviser. According to the SEC, the fund’s adviser rejected this disclosure, and Mr. Beamish subsequently signed the fund’s unqualified opinion.

https://www.sec.gov/litigation/admin/2016/34-79193.pdf

This action is related to a settlement discussed in greater detail below, Burrill Capital Management, LLC, Advisers Act Release No. 4,360 (Mar. 30, 2016), in which the SEC settled public administrative and cease-and-desist proceedings against Burrill Capital Management, LLC, a now-defunct investment adviser, and certain of its principals, for allegedly misappropriating funds from a venture capital fund advisory client.

https://www.sec.gov/litigation/admin/2016/34-77473.pdf

10/18/16

Alleged Cross-Border Brokerage and Investment Advisory Services

In Bank Leumi le-Israel B.M., Advisers Act Release No. 4,555 (Oct. 18, 2016), the SEC settled public administrative and cease-and-desist proceedings against Bank Leumi le-Israel B.M. (“Leumi Israel”), an Israeli corporation, and two of its wholly-owned subsidiaries, Leumi Private Bank and Bank Leumi (Luxembourg)

The SEC alleged that Leumi violated Section 15(a) of the Exchange Act.

Leumi agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to

S.A. (“Leumi Luxembourg” and, collectively with Bank Leumi and Leumi Private Bank, “Leumi”), for allegedly providing brokerage and investment advisory services to U.S. customers without registering as a broker-dealer under the Exchange Act and an investment adviser under the Advisers Act.

According to the SEC, between at least 2002 through 2009, Leumi provided brokerage services to U.S. customers without registering as a broker-dealer with the Commission, and Leumi Private Bank provided investment advisory services to U.S. customers for compensation without registering as an Investment Adviser with the Commission. The SEC alleged that, during this period, at least 11 different representatives from Leumi traveled to the U.S. on 65 occasions to provide investment advice or solicit securities transactions at some 245 individual meetings.

According to the SEC, Leumi became aware in at least 2008 that it faced the risk of violating federal securities laws by providing these services to U.S. customers without being registered as a broker-dealer and investment adviser. The SEC alleged that Leumi began to adopt policies and procedures designed to bring Leumi in compliance with federal securities laws, such as discontinuing travel by Leumi representatives to the U.S. in April 2009. Despite these policies, according to the SEC, from 2009 to 2013, Leumi continued to provide brokerage services to at least 711 separate customer accounts with securities holdings beneficially

The SEC alleged that Leumi Private Bank violated Section 203(a) of the Advisers Act.

pay disgorgement of $3,372,700, and a civil money penalty of $1,526,228.

owned by U.S. customers.

The SEC alleged that, between 2002 and 2013, Leumi held securities in brokerage accounts for U.S. customers with an aggregate peak value of $537 million and generated a pre-tax income of $3.37 million from U.S. cross-border securities business.

https://www.sec.gov/litigation/admin/2016/34-79113.pdf

10/18/16

Alleged Improper Valuation of Illiquid Securities by Adviser to Open-End Fund

In Calvert Investment Management, Inc., Advisers Act Release No. 4,554 (Oct. 18, 2016), the SEC settled public administrative and cease-and-desist proceedings against Calvert Investment Management, Inc. (“Calvert”), an investment adviser registered under the Advisers Act, in connection with alleged improper fair valuation of certain illiquid securities held by mutual funds advised by Calvert.

Calvert is a well-known investment adviser of, among other clients, investment companies registered under the 1940 Act. The SEC alleged that, between March 2008 and October 2011, certain of these investment companies held securities issued by Toll Road Investors Partnership II, L.P. (the “Toll Road Bonds”), which were illiquid securities and with respect to which only limited information was publicly available from which to value the securities.

According to the SEC, during this time, Calvert’s calculation of the Toll Road Bonds’ fair value was

The SEC alleged that Calvert willfully violated Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Calvert caused certain mutual funds advised by Calvert to violate Section 34(b) of, and Rules 22c-1 and 38 a-1 under, the 1940 Act.

The SEC alleged that Calvert caused

Calvert agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $3.9 million.

Calvert also agreed to recalculate its valuation of the Toll Road Bonds for the relevant period, using a methodology approved by the SEC.

improper as Calvert failed to include certain data in making its calculations, including, among other things, the prices at which the investment companies traded the Toll Road Bonds, values assigned by other holders of the Toll Road Bonds, and other market data. The SEC alleged that Calvert instead relied primarily on a third-party analytical tool that did not properly account for the Toll Road Bonds’ future cash flows and, as a result, inflated Calvert’s fair value prices for the securities. According to the SEC, the inaccurate valuations of the Toll Road Bonds caused the investment companies to execute shareholder transactions at an incorrect net asset value and for Calvert to collect inflated asset-based fees. The SEC alleged that, during the relevant time period, certain shareholders redeemed fund shares at an overstated net asset value at the expense of the remaining shareholders.

The SEC alleged that, in October 2011, Calvert discovered that its valuation of the Toll Road Bonds was inaccurate and made adjustments to its valuations that caused a markdown of each investment company’s net asset value. According to the SEC, in December 2011, Calvert sought to compensate the affected shareholders and investment companies for any losses resulting from its markdown of net asset value. The SEC alleged that the methodology used by Calvert to compensate affected shareholders was based on an insufficient process that was not based on full transactional data and was not consistent with Calvert’s own policies and procedures relating to net asset value correction. Over

a mutual fund advised by Calvert to violate Section 17(a) of the 1940 Act.

half of the SEC’s settlement order was an effective critique of the process used by Calvert to compensate shareholders.

According to the SEC, Calvert’s compensation calculations were based on a netting out of subscription and redemption activity at the intermediary account level and did not include data concerning underlying shareholder activity in subaccounts held through certain intermediaries. The SEC alleged that this compensation methodology likely understated the effects of the improper valuation.

The SEC separately alleged that, in July 2011, Calvert separately caused one of its investment company clients to engage in a prohibited transaction in violation of Section 17(a) of the 1940 Act. The SEC alleged that Calvert caused an investment company to purchase certain Toll Road Bonds from another investment company that Calvert sub-advised, and did not timely report this transaction to the first investment company’s board of trustees.

https://www.sec.gov/litigation/admin/2016/ia-4554.pdf

10/13/16

Alleged Failure by a Registered Investment Adviser to Supervise a Research Analyst

In Artis Capital Management, L.P., Advisers Act Release No. 4,550 (Oct. 13, 2016), the SEC settled public administrative and cease-and-desist proceedings against Artis Capital Management, L.P. (“Artis”), an investment adviser registered under the Advisers Act until it withdrew its registration in April 2016, and a former senior analyst at Artis, for allegedly failing to

The SEC alleged that Artis and Artis’s former senior analyst failed reasonably to supervise Mr. Teeple within the

Artis agreed to censure, and to pay disgorgement of $6,295,084 and a civil money penalty of $2,582,991.

Alleged Failure by a Registered Investment Adviser to Adopt and Implement Policies and Procedures to Detect and Prevent Insider Trading

detect insider trading by an Artis analyst.

According to the SEC, in 2007 Artis hired Matthew Teeple as a research analyst to evaluate potential investments in certain types of technology companies. The SEC alleged that, unlike other research analysts at Artis, Mr. Teeple did not work out of Artis’s San Francisco office, did not construct analytical models regarding the companies he covered, did not provide written research reports, and did not maintain research files available for review by anyone at Artis. According to the SEC, Mr. Teeple instead worked exclusively out of his Southern California home and provided his recommendations, which were based exclusively on industry sources, to Artis by telephone.

The SEC alleged that Artis’s policies and procedures relating to insider trading required any employee that believed he or she was in possession of material nonpublic information to immediately cease recommending any transaction in the security and to consult with Artis’s chief compliance officer. According to the SEC, even though Artis was aware that Mr. Teeple based his recommendations on industry sources, Artis did not take additional steps to ensure its insider trading policies and procedures were complied with, such as by requiring Mr. Teeple to log his interactions with employees of public companies.

The SEC alleged further that, on at least two separate occasions in 2008, Mr. Teeple obtained material non-

meaning of Section 203(e)(6) of the Advisers Act.

The SEC alleged that Artis willfully violated Section 204A of the Advisers Act.

Artis’s former senior analyst agreed to pay a civil money penalty of $130,000, and to be suspended from association with, among others, any broker, dealer, or investment adviser for a period of one year.

public information in connection with the impending acquisition of a technology company whose securities were publicly traded by another company. According to the SEC, Mr. Teeple made recommendations to a senior analyst at Artis based on this information, which resulted in profitable trades for Artis.

The SEC alleged that Artis and its senior analyst should have been aware that these timely recommendations, which preceded a major public announcement by the company, may have been based on material non-public information in light of Mr. Teeple’s industry connections. A reasonable supervisor, according to the SEC, would have investigated whether Mr. Teeple had access to inside information to support these recommendations. The SEC alleged that Artis and its senior analyst failed to ask questions about the sources of the information and failed to inform Artis’s chief compliance officer of the possibility that the recommendations were made on inside information.

This action is related to the civil proceeding SEC v. Teeple, et al, 13-cv-2010 (S.D.N.Y.), in which the SEC successfully sued Mr. Teeple for insider trading, and the criminal case U.S. v. Teeple, 13-cr-339 (S.D.N.Y.), in which Mr. Teeple pled guilty to one count of criminal conspiracy to commit securities fraud.

https://www.sec.gov/litigation/admin/2016/ia-4550.pdf

10/4/16

Alleged Materially False and Misleading Statements by a Registered Investment Adviser in Connection with Allocation of Trades

In Oracle Investment Research, Advisers Act Release No. 4,545 (Oct. 4, 2016), the SEC instituted public administrative and cease-and-desist proceedings against Laurence Isaac Baiter, doing business as Oracle Investment Research (“Oracle”), an investment adviser registered under the Advisers Act until it withdrew its registration in August 2013, for alleged breaches of its fiduciary duties in connection with the allocation of trades and false disclosures provided to advisory clients.

According to the SEC, Oracle provided investment advisory services to separate accounts and to a registered investment company under the 1940 Act (the “Oracle Mutual Fund”). The SEC alleged that Oracle began, in May 2012, to execute a day-trading strategy in which it executed trades on behalf of itself in the same omnibus account as other separately managed account clients. According to the SEC, this strategy violated Oracle’s written policies and procedures, which required Oracle to provide clients with priority on all purchases and sales prior to the execution of proprietary accounts, and was also contrary to Oracle’s disclosures in its Form ADV Part 2A. The SEC alleged that Oracle’s practice of allocating trades after execution resulted in profitable trades being allocated to Oracle’s proprietary account while unprofitable trades were disproportionately allocated to client accounts. According to the SEC, Oracle’s misrepresentations and omissions constituted a breach of its fiduciary duty.

The SEC alleged further that Oracle falsely represented

The SEC alleged that Oracle willfully violated Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), 206(4), and 207 of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Oracle willfully aided and abetted and caused the Oracle Mutual Fund’s violations of Section 13(a) of the 1940 Act.

The SEC alleged that Oracle willfully violated, aided and abetted and caused the Oracle Mutual

The SEC instituted cease-and-desist proceedings to determine what, if any, remedial action, including, but not limited to, disgorgement, interest and civil penalties, is appropriate against Oracle.

to clients invested through separately managed accounts that they would not be charged additional management fees if their assets were invested in the Oracle Mutual Fund. According to the SEC, Oracle then manually deducted the Fund’s management fees from these accounts.

The SEC alleged that the Oracle Mutual Fund’s statement of additional information disclosed to investors that the Fund was diversified, as defined in Section 5(b)(1) of the 1940 Act, and that the Fund would not invest 25% or more of the Fund’s net assets in securities of issuers in a single industry. According to the SEC, however, in numerous fiscal quarters Oracle caused the Oracle Mutual Fund to become non-diversified and/or to invest 25% or more of the Fund’s net assets in securities of issuers in a single industry.

https://www.sec.gov/litigation/admin/2016/33-10228.pdf

Fund’s violations of Section 34(b) of the 1940 Act.

9/29/16

Alleged Use of Fund Assets by Advisers Act-Registered Investment Adviser to Pay Bribes to Foreign Government Officials in Violation of Foreign Corrupt

In Och-Ziff Capital Management Group LLC, Advisers Act Release No. 4,540 (Sept. 29, 2016), the SEC settled public administrative and cease-and-desist proceedings against Och-Ziff Capital Management Group LLC (“Och-Ziff”), an institutional alternative asset manager, OZ Management LP (“OZ”), a subsidiary of Och-Ziff and an investment adviser registered under the Advisers Act, Och-Ziff’s chief executive officer, and Och-Ziff’s chief financial officer, in connection with numerous transactions in which Och-Ziff allegedly paid bribes to high-ranking government officials in Africa.

The SEC alleged that Och-Ziff willfully violated Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act.

The SEC alleged that OZ violated Section 206(4) of,

Och-Ziff, OZ, Och-Ziff’s chief executive officer, and Och-Ziff’s chief financial officer agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Practices Act

The SEC alleged that, from 2007 through 2011, Och-Ziff entered into a series of transactions and investments in which Och-Ziff paid bribes through intermediaries, agents and business partners to high-ranking government officials in several African countries, including Libya, Chad, Niger, and the Democratic Republic of the Congo (“DRC”). According to the SEC, a majority of these bribes involved the use of Och-Ziff client assets managed by OZ, rather than Och-Ziff’s own capital, and were paid to foreign government officials to obtain or retain business for Och-Ziff and its business partners.

The SEC alleged that, in 2007, the head of Och-Ziff’s European office secured an investment mandate from a Libyan sovereign wealth fund by funneling Och-Ziff client assets through a shell company established by a third-party intermediary, which then used the assets to pay bribes to Libyan government officials. According to the SEC, Och-Ziff authorized these transactions even though it was aware that doing business with the intermediary presented risks of violating anti-corruption laws, as the intermediary had connections to high-ranking government officials in Libya and business interests that were difficult to accurately discern.

The SEC further alleged that, beginning in 2008, Och-Ziff entered into a partnership with an Israeli businessman (“DRC Partner”) with close ties to high-ranking government officials within the DRC.

and Rule 206(4)-8 under, the Advisers Act, and willfully violated Sections 206(1) and 206(2) of the Advisers Act.

The SEC alleged that Och-Ziff’s chief executive officer and Och-Ziff’s chief financial officer each caused Och-Ziff’s violations of Section 13(b)(2)(A) of the Exchange Act.

The SEC alleged that Och-Ziff’s chief financial officer caused Och-Ziff’s violations of Section 13(b)(2)(B) of the Exchange Act.

Och-Ziff and OZ agreed to censure and to pay disgorgement of $199,045,167.

Och-Ziff’s chief executive officer agreed to pay disgorgement of $2,173,718.

According to the SEC, the purpose of this partnership was ostensibly for Och-Ziff to fund the DRC Partner’s mining-related interests while he used his government contacts to acquire assets and navigate the DRC business environment for his and Och-Ziff’s benefit. The SEC alleged, however, that the head of Och-Ziff’s European office and at least one other Och-Ziff employee were aware that the DRC Partner would use the funds Och-Ziff provided to him to pay bribes to government officials, acquire assets with the help of government benefactors at a significant discount to the value of the asset, and gain favor for his mining interests in the DRC.

According to the SEC, Och-Ziff entered into several transactions, between 2008 and 2011, with certain entities controlled by the DRC Partner, including more than $250 million in loans, through which Och-Ziff client assets were used for payments to DRC government officials. The SEC alleged that Och-Ziff’s senior executives, including its chief executive officer and chief financial officer, reviewed due diligence regarding the DRC Partner, which revealed a history of suspicious transactions, allegations of illegal conduct, and close connections with high-ranking government officials in the DRC. According to the SEC, Och-Ziff’s chief executive officer, after reviewing this diligence, directed subordinates to continue moving forward with potential transactions with the DRC Partner.

The SEC alleged separately that Och-Ziff caused client assets invested in an Africa-focused fund controlled by Och-Ziff to be used in self-dealing transactions to benefit an Och-Ziff employee, Och-Ziff’s business partners, and Och-Ziff itself. According to the SEC, an Och-Ziff employee caused the fund to make investments in a London-based mining holding company controlled by the third-party intermediary in Libya so that the intermediary could pay back an $18 million personal loan owed to the Och-Ziff employee. The SEC alleged that the Africa-focused fund’s assets were also used in 2011 to purchase shares of a London-based oil and gas company, and that this transaction was designed to provide $50 million to a business partner of Och-Ziff to further the partner’s and Och-Ziff’s interests in the Republic of Guinea. According to the SEC, OZ failed to disclose all material facts and conflicts of interest arising from these transactions in its communications with the fund’s investors.

The SEC alleged that Och-Ziff failed to impose procedures or measures sufficient to prevent corruption or provide reasonable assurance that transaction documents appropriately reflected third-party use of funds. According to the SEC, Och-Ziff adopted in 2008 an anti-corruption policy and procedures, which applied to OZ and all of OZ’s affiliates, and required rigorous due diligence and anti-corruption measures designed to provide reasonable assurances that transactions would be executed in accordance with management’s authorization and accurately recorded. The SEC alleged that Och-Ziff failed to follow these procedures in connection with the

transactions described above despite indications of substantial corruption risks.

https://www.sec.gov/litigation/admin/2016/34-78989.pdf

9/23/16

Alleged Prohibited Cross Trading by a Registered Investment Adviser

Alleged Failure to Implement Compliance Policies and Procedures to Identify Impermissible Cross Trading

In Aviva Investors Americas, LLC, Advisers Act Release No. 4,534 (Sept. 23, 2016), the SEC settled public administrative and cease-and-desist proceedings against Aviva Investors Americas, LLC (“Aviva”), an investment adviser registered under the Advisers Act, in connection with allegedly inappropriate cross trades arranged by Aviva Investors North America, Inc. (“AINA”), an investment adviser that withdrew its registration under the Advisers Act in 2014 and was succeeded by Aviva, which assumed certain of AINA’s asset management functions.

According to the SEC, between March 2010 and December 2011, three AINA traders arranged to sell fixed income securities from certain AINA advisory clients to counterparty broker-dealers and then repurchased the same securities the following day on behalf of different AINA advisory clients. The SEC alleged that AINA conducted these trades without obtaining an exemptive order as required by Sections 17(a)(1) and 17(a)(2) of the 1940 Act. According to the SEC, 161 of these trades were between registered investment company clients of AINA and their affiliates, which required an exemptive order from the Commission.

The SEC alleged that AINA caused certain of its advisory clients to violate Sections 17(a)(1) and 17(a)(2) of the 1940 Act.

The SEC alleged that AINA violated Sections 206(3) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

Aviva agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $250,000.

The SEC further alleged that AINA’s compliance department failed to detect these trades even though the department had identified cross trading as a risk and took steps to identify and prevent impermissible cross trading. According to the SEC, the individuals working on cross trading within AINA’s compliance department were underqualified and lacked resources to effectively detect impermissible cross trading, even though senior members of the compliance department had made requests for additional resources to AINA senior management.

https://www.sec.gov/litigation/admin/2016/ia-4534.pdf

9/14/16

Alleged Failure by a Private Equity Firm to Disclose Conflicts of Interest Related to Fees and Expenses

In First Reserve Management, L.P., Advisers Act Release No. 4,529 (Sept. 14, 2016), the SEC settled public administrative and cease-and-desist proceedings against First Reserve Management, L.P. (“First Reserve”), an investment adviser registered under the Advisers Act, for allegedly failing to appropriately disclose conflicts of interest to its private equity fund clients.

According to the SEC, in late 2013, First Reserve caused two of its private equity fund clients to collectively become 75% owners of First Reserve Momentum L.P. (“FRM”), an entity that was itself a pooled investment vehicle formed by First Reserve to invest in small oil field equipment and services companies. The SEC alleged that FRM had two subsidiaries that were formed by First Reserve to provide investment management services to FRM.

The SEC alleged that First Reserve violated Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

First Reserve agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $3.5 million.

First Reserve also voluntarily reimbursed its private fund clients that were affected by these violations, including: $7,435,737 to two private funds in connection with the subsidiaries of FRM;

According to the SEC, First Reserve caused the private equity funds invested in FRM to pay a proportionate share of the subsidiary’s organizational and startup expenses. The SEC alleged that, between 2013 and 2015, over $7 million (approximately 15%) of the private equity funds’ capital contribution to FRM were used to pay the expenses of the subsidiaries, including the cost of each entity’s formation, and general operating costs such as rent, utilities, and salaries.

According to the SEC, this structure allowed First Reserve to avoid incurring certain expenses in connection with providing investment advisory services to the funds, which created a conflict of interest that was not disclosed to the funds’ investors or advisory boards. The SEC alleged that First Reserve did not disclose to the funds prior to commitment of capital or prior to the expenses being incurred, that the funds’ capital commitment would be used to pay these expenses.

The SEC asserted that First Reserve also inappropriately allocated insurance premium expenses to several of its private fund clients. The SEC alleged that the governing documents for these funds allowed insurance premium expenses to be borne by the funds for insurance that related to the affairs of the funds. According to the SEC, beginning in at least 2008, First Reserve allocated all of the premiums for an insurance policy that covered First Reserve for certain risks that did not pertain to its management of these funds.

$733,012 to various funds in connection with the allocation of insurance premiums; and $179,466 to various funds in connection with legal fee discounts.

The SEC further alleged that, between 2010 and 2014, First Reserve retained a law firm to provide services to First Reserve and its various funds. According to the SEC, First Reserve requested and obtained from the law firm a discount for legal services provided to First Reserve, even though the majority of work performed by the law firm was related to the funds. The SEC alleged that the funds did not receive a discount on the same kind of services that had been discounted for First Reserve, which created a conflict of interest that was not disclosed. According to the SEC, in 2013 First Reserve disclosed in its Form ADV the possibility that it could receive service provider discounts that could be more favorable than those of the funds, but at no time disclosed to the funds or its investors that it was receiving a discount for legal services.

https://www.sec.gov/litigation/admin/2016/ia-4529.pdf

9/8/16

Alleged Failure to Track Additional Commission Costs Charged by Subadvisers Trading Outside of Wrap-Fee Program

In Raymond James & Associates, Inc., Advisers Act Release No. 4,525 (September 8, 2016), the SEC settled public administrative and cease-and-desist proceedings against Raymond James & Associates, Inc. (“Raymond James”), an investment adviser registered under the Advisers Act, for allegedly failing to appropriately disclose commission costs charged to clients invested in a wrap-fee program.

According to the SEC, Raymond James offered advisory clients access to third-party managers through a wrap-fee program in which each client invested in the

The SEC alleged that Raymond James violated Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

Raymond James agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $600,000.

program would select a participating third-party manager to act as Raymond James’ subadviser. The SEC alleged that clients in the wrap-fee program were not charged for commissions on trades executed by Raymond James, but were charged for commissions on trades executed by all other broker-dealers.

According to the SEC, Raymond James disclosed to clients that certain subadvisers participating in the program executed nearly all client trades with a broker-dealer other than Raymond James, but failed to disclose the amount of additional commission costs incurred by clients invested in the program. According to the SEC, the additional commission costs were instead embedded in the security price reported for each purchase or sale on periodic account statements that Raymond James provided to clients in the program. The SEC alleged that this practice meant that clients in the program were unable to take these costs into consideration when negotiating a wrap-fee with Raymond James.

The SEC alleged further that Raymond James did not collect any information from the subadvisers regarding the amount of the embedded commission costs and failed to adopt and implement written policies and procedures to make this cost information available to clients invested in the wrap-fee program.

In determining to accept Raymond James’ offer, the SEC considered remedial acts undertaken by Raymond James and cooperation afforded the SEC staff. In

particular, Raymond James indicated that it would disclose on its periodic statements to clients whenever additional commissions may have been charged and also maintain a website that discloses the trading practices of subadvisers participating in the program.

https://www.sec.gov/litigation/admin/2016/ia-4525.pdf

9/8/16

Alleged Failure to Track Additional Commission Costs Charged by Subadvisers Trading Outside of Wrap-Fee Program

In Robert W. Baird & Co. Incorporated, Advisers Act Release No. 4,526 (September 8, 2016), the SEC settled public administrative and cease-and-desist proceedings against Robert W. Baird & Co. Incorporated (“Robert Baird”), an investment adviser registered under the Advisers Act, for allegedly failing to appropriately disclose commission costs charged to clients invested in a wrap-fee program.

The facts of this case are similar to the facts of the above case, Raymond James & Associates, Inc., Advisers Act Release No. 4,525 (September 8, 2016). The SEC alleged that Robert Baird, like Raymond James, failed to adopt and implement policies and procedures reasonably designed to track and disclose the trading practices of certain of the subadvisers participating in Robert Baird’s wrap-fee programs.

https://www.sec.gov/litigation/admin/2016/ia-4526.pdf

The SEC alleged that Robert Baird violated Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

Robert Baird agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $250,000.

8/25/16

Alleged Omissions of Material Fact in Application for Exemptive Relief

In Orinda Asset Management, LLC, Advisers Act Release No. 4,513 (August 25, 2016), the SEC settled public administrative and cease-and-desist proceedings against Orinda Asset Management, LLC (“Orinda”), an investment adviser registered under the Advisers Act,

The SEC alleged that Orinda willfully violated, and caused the funds’ sponsoring

Orinda agreed to cease and desist from committing or causing any violations and any future violations of the

Under the 1940 Act

Alleged Failure to Disclose Side Agreement that Waived Adviser’s Ability to Terminate Subadviser

for allegedly omitting material facts in an application for exemptive relief and other disclosures filed with the Commission.

According to the SEC, Orinda advised two 1940 Act-registered investment companies through a manager-of-managers structure, allocating assets of the investment companies among unaffiliated investment managers that served as subadvisers to the funds. The SEC alleged that Orinda engaged a lead subadviser to assist in managing the investment companies and select and monitor other subadvisers to the investment companies. According to the SEC, Orinda and the subadviser negotiated an agreement under which Orinda would pay the subadviser “termination payments” if Orinda were to terminate the subadviser for any reason other than “for cause.”

Section 15(a) of, and Rule 18f-2 under, the 1940 Act require the approval of a registered investment company’s shareholders before retaining a subadviser or making any material changes to an existing subadvisory agreement. The SEC alleged that Orinda sought an order from the Commission exempting it from compliance with these shareholder approval obligations. Such an order is not unusual, and many such orders have been granted by the SEC. According to the SEC, after reviewing the application, the SEC’s Division of Investment Management communicated to Orinda and the investment companies’ board of directors that it would not support the application for an exemptive

administrators’ violations of, Section 34(b) of the 1940 Act.

charges, to censure, and to pay a civil money penalty of $75,000.

order if the agreement providing for termination payments to the subadviser were included. The SEC alleged that Orinda then terminated this aspect of its agreement with the subadviser and informed the SEC of its action. According to the SEC, Orinda then reached a new agreement with the subadviser under which Orinda waived its right to terminate the subadviser for any reason. The SEC alleged further that Orinda then filed a new application for exemptive relief that did not disclose the new agreement.

According to the SEC, the prospectus and statement of additional information filed with the Commission for each investment company failed to disclose the second agreement and falsely indicated that all of the subadvisory agreements could be terminated at any time by Orinda without penalty. The Orinda settlement is noteworthy as it reflects one of only a few instances over time in which the SEC commenced an enforcement case relating to non-compliance with a Commission exemptive order under the 1940 Act.

https://www.sec.gov/litigation/admin/2016/ia-4513.pdf

8/24/16

Alleged Failure by a Private Equity Advisory Firm to Disclose Transaction Fee Allocation Methodology

In WL Ross & Co. LLC, Advisers Act Release No. 4,494 (August 24, 2016), the SEC settled public administrative and cease-and-desist proceedings against WL Ross & Co. LLC (“WL Ross”), an investment adviser registered under the Advisers Act, for allegedly failing to appropriately disclose its method of allocating transaction fees received from portfolio companies owned by WL Ross’s private equity fund clients.

The SEC alleged that WL Ross violated Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

WL Ross agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $2.3 million.

According to the SEC, WL Ross advised private equity funds under the terms of governing documents that permitted WL Ross to receive certain transaction fees from the portfolio companies owned by the funds including break-up, broken deal, and monitoring fees. The SEC alleged that the funds’ governing documents required that the transaction fees received by WL Ross would be offset with a corresponding reduction in the management fee charged to a fund by 50% or 80% of the amount of the transaction fee, depending on the fund. According to the SEC, WL Ross allocated a percentage of the transaction fees it received directly to the funds to offset the quarterly management fees it received.

The SEC alleged that the governing documents of each fund were unclear as to how the transaction fees would be allocated when co-investors, which are not advised by WL Ross and therefore not subject to any offsetting provisions, invested in the same portfolio company. According to the SEC, WL Ross interpreted the ambiguity in the governing documents to allow it to allocate the transaction fees based on each WL Ross-advised fund’s proportionate ownership of a portfolio company, with WL Ross retaining the portion of the transaction fees allocable to any co-investor’s relative ownership share.

The SEC alleged further that each WL Ross-advised fund would have received a greater allocation of

WL Ross also voluntarily reimbursed the private equity funds, with interest, $11,873,571 in management fee credits resulting from its retroactive application of the revised allocation methodology to the inception of the funds.

transaction fees had WL Ross excluded the co-investor’s ownership percentage when allocating the transaction fees. According to the SEC, under the allocation method used, WL Ross received approximately $10.4 million in additional management fees from the WL Ross-advised funds between 2001 and 2011.

In determining to accept WL Ross’ offer, the SEC considered remedial acts undertaken by WL Ross and cooperation afforded the SEC staff. In particular, WL Ross voluntarily revised its fee allocation methodology to exclude the ownership interest of co-investors, and self-reported the transaction fee allocation issue to the SEC.

This case is noteworthy as another example of the SEC’s continuing focus on the fees charged by private equity advisers to portfolio companies.

https://www.sec.gov/litigation/admin/2016/ia-4494.pdf

8/23/16

Alleged Failure by a Private Equity Firm to Disclose Conflicts of Interest Related to Fees and Expenses

Alleged Failure

In Apollo Management V, L.P., Advisers Act Release No. 4,493 (August 23, 2016), the SEC settled public administrative and cease-and-desist proceedings against four private equity fund advisers: Apollo Management V, L.P., Apollo Management VI, L.P., Apollo Management VII, L.P., and Apollo Commodities Management, L.P. (collectively, “Apollo”), each an investment adviser registered under the Advisers Act, for allegedly failing to disclose certain conflicts of interest relating to monitoring fees paid by

The SEC alleged that Apollo violated Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

Apollo agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay disgorgement of $40,254,552 and a civil money penalty of $12,500,000.

to Supervise Expense Reimbursement Practices

fund clients to Apollo, and to supervise a senior partner who improperly charged personal items to Apollo-advised funds.

According to the SEC, each fund advised by Apollo owned multiple portfolio companies, each of which agreed to pay monitoring fees to Apollo for providing management, consulting, and other services. The SEC alleged that Apollo’s monitoring agreements with the portfolio companies commonly covered a ten year period and provided for acceleration of monitoring fees when triggered by certain events such as the private sale or initial public offering of a portfolio company, in which case Apollo would receive a present value lump-sum payment of the remaining years under the agreement.

According to the SEC, Apollo disclosed to the funds and investors in the funds before investors committed capital that it had the ability to collect monitoring fees, but Apollo did not fully disclose to the funds or the funds’ investors its practice of accelerating monitoring fees until after Apollo had received the fees. The SEC alleged that Apollo’s receipt of accelerated monitoring fees created a conflict of interest that was not fully disclosed, and that prevented Apollo from effectively consenting on behalf of the funds to its receipt of accelerated monitoring fees.

The SEC alleged separately from the facts relating to Apollo’s charging of monitoring fees that a general partner of an Apollo-advised fund entered into an agreement in 2008 with a fund and four parallel funds under which the funds loaned the general partner approximately $19

million, which was equal to the carried interest owed to the general partner. The SEC alleged that the loan was designed to defer the taxes owed on the carried interest by the investors in the general partner. According to the SEC, the funds’ financial statements noted the loan, but failed, until March 2014, to disclose that the loan’s accrued interest would be allocated solely to the capital account of the general partner.

The SEC alleged further, and separate from the facts noted above, that, between 2010 and 2013, a former senior partner at Apollo improperly charged personal items and services to Apollo-advised funds and the funds’ portfolio companies. According to the SEC, Apollo first discovered the partner’s improper charges in 2010 and then again in 2012 but failed to take any remedial steps or disciplinary action beyond a verbal warning to the partner after the partner had reimbursed Apollo. The SEC alleged that Apollo’s response to the partner’s conduct demonstrated a failure to appropriately supervise the partner.

According to the SEC, Apollo failed to reasonably implement policies and procedures to prevent the above alleged conduct. In determining to accept Apollo’s offer, the Commission considered remedial acts taken by Apollo and cooperation afforded the Commission staff. In particular, Apollo initiated several reviews of the former partner’s expenses and voluntarily reported the improperly charged personal expenses to the Commission staff.

https://www.sec.gov/litigation/admin/2016/ia-4493.pdf

8/15/16

Alleged Failure by a Registered Investment Adviser to Disclose Conflicts of Interest

Alleged Misappropriation of Client Assets by Investment Adviser Representative

Alleged Failure to Supervise Investment Adviser Representative

In Fortius Financial Advisors, LLC, Advisers Act Release No. 4,483 (Aug. 15, 2016), the SEC settled public administrative and cease-and-desist proceedings against Fortius Financial Advisors, LLC (“Fortius”), an investment adviser registered under the Advisers Act, Fortius’ managing member, and a former investment adviser representative of Fortius, for allegedly failing to disclose conflicts of interest and misappropriating client assets.

According to the SEC, Fortius was the investment adviser to two trust entities established to manage the assets of an elderly client who was in poor health and suffering from dementia, with the understanding that the assets would be distributed to a charitable foundation upon the client’s death. The SEC alleged that the Fortius investment adviser representative acted as trustee to the trusts pursuant to a separate service agreement between the client and the representative.

According to the SEC, during the period from 2006 until 2008, Fortius invested the trusts’ assets in traditional securities such as publicly traded stocks, bonds, and mutual funds, for which it charged an asset-based fee of between 1.0% and 1.5%. The SEC alleged that, during the period from 2008 until 2009, Fortius began to invest the trusts’ assets in unsuitable, illiquid investments in which Fortius had an undisclosed financial interest.

According to the SEC, Fortius invested $500,000 of the trusts’ funds into one of Fortius’ private fund entities,

The SEC alleged that Fortius, Fortius’ managing member, and Fortius’ investment adviser representative willfully violated Section 206(2) of the Advisers Act.

The SEC alleged that Fortius willfully violated, and its managing member caused its violation of, Section 206(4) of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Fortius willfully violated, and its investment adviser representative caused its violation of, Section 207 of the Advisers Act.

Fortius, Fortius’ managing member, and Fortius’ investment adviser representative agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Fortius and Fortius’ managing member agreed to censure.

Fortius agreed to pay disgorgement of $24,070, and a civil money penalty of $70,000.

Fortius’ managing member agreed to pay disgorgement of $1,969, and a civil money penalty of $25,000.

Fortius’ investment adviser representative agreed to be barred from association with,

which charged a higher asset-based fee of 2% to 2.5%. The SEC alleged further that Fortius caused the trusts to loan approximately $245,000 to two private companies in which Fortius had a large financial stake.

According to the SEC, Fortius, its managing member, and its representative, had a financial incentive in each of these transactions creating several conflicts of interest. The SEC alleged that the Fortius representative’s conflicts of interest prevented him from effectively consenting to these transactions on behalf of the trusts as trustee.

According to the SEC, Fortius’ investment adviser representative misappropriated approximately $137,000 from the trust accounts over a four-year period. The SEC alleged that this misappropriation indicated that Fortius failed to appropriately supervise the representative and to adopt policies and procedures reasonably designed to prevent this conduct.

https://www.sec.gov/litigation/admin/2016/ia-4483.pdf

The SEC alleged that Fortius’ investment adviser representative willfully violated Section 206(1) of the Advisers Act.

The SEC alleged that Fortius and Fortius’ managing member failed reasonably to supervise Fortius’ investment adviser representative within the meaning of Section 203(e)(6) of the Advisers Act.

among others, any broker, dealer, investment adviser, or municipal adviser.

8/12/16

Federal Court Decision Relating to Advisers Act’s Definition of Compensation

In United States v. Everett C. Miller, No. 15-2577 (3d Cir. 2016), Everett C. Miller, a formerly registered investment adviser representative under New Jersey securities law, appealed his sentence after being convicted in a criminal proceeding of securities fraud and tax evasion in connection with a Ponzi scheme he allegedly orchestrated by selling “promissory notes” through unregistered offerings. Mr. Miller entered into a plea agreement and cooperation agreement in which

Mr. Miller pled guilty to one count of securities fraud, 15 U.S.C. § 78j(b), and one count of tax evasion, 26 U.S.C. § 7201.

Mr. Miller was sentenced to 120 months in prison.

the government agreed to recommend a reduction in the length of Mr. Miller’s prison sentence under the applicable sentencing guidelines in exchange for Mr. Miller’s acceptance of responsibility. A Federal District Court granted the penalty reduction, but also imposed on Mr. Miller a penalty enhancement applicable to an “investment adviser.” The issue before the Court was in effect whether Mr. Miller met the definition of an “investment adviser.”

Mr. Miller argued on appeal before the U.S. Court of Appeals for the Third Circuit (the “Third Circuit”) that the District Court’s application of the investment adviser enhancement was in error, because he was not an investment adviser as that term is defined in Section 202(a)(ll) of the Advisers Act. In particular, Mr. Miller argued that he did not provide securities advice “for compensation.” The Advisers Act does not define compensation, but the SEC has interpreted the term broadly to include any direct or indirect benefit, including the reimbursement for services performed or costs incurred. Mr. Miller argued that he did not receive any compensation because he was not reimbursed for services performed or costs incurred, and he did not collect a management or incentive fee from purchasers of the promissory notes.

The Third Circuit rejected Mr. Miller’s argument and held that the “for compensation” requirement in Section 202(a)(ll)’s definition of investment adviser was satisfied “when he commingled investors’ accounts and

spent the money for his own purposes.”

This case is particularly noteworthy as the Third Circuit’s holding that compensation for the purposes of the definition of an investment adviser included the economic benefit Mr. Miller received from misappropriating assets appears in effect to expand the reach of the definition.

http://www2.ca3.uscourts.gov/opinarch/152577p.pdf

7/21/16

Alleged Materially False and Misleading Statements made by a Registered Investment Adviser to Clients in Connection with Common Stock Offering of Adviser’s Parent Company

Alleged Failure by Adviser to Implement Policies and Procedures to Ensure Parent Company Stock

In Concert Global Group Limited, Advisers Act Release No. 4,459 (July 21, 2016), the SEC settled public administrative and cease-and-desist proceedings against Concert Global Group Limited (“Concert Global”), the parent company of Concert Wealth Management, Inc. (“Concert Wealth”), an investment adviser registered under the Advisers Act, and Concert Global’s chief executive officer, arising from alleged materially false and misleading statements made in connection with offerings of Concert Global’s common stock.

According to the SEC, Concert Global raised $2.2 million between 2010 and 2013 through sales of its common stock to approximately 21 investors in multiple states, including 12 of Concert Wealth’s advisory clients. The SEC alleged that Concert Global and its chief executive officer provided these investors with private placement memoranda that contained material misstatements and omissions, such as overstating Concert Global’s revenues by as much as 50% and its subsidiaries’ total assets by approximately $1 billion.

The SEC alleged that Concert Global and its chief executive officer violated Sections 5(a), 5(c), 17(a)(2), and 17(a)(3) of the Securities Act.

The SEC alleged that Concert Wealth and Concert Global’s chief executive officer willfully violated Section 206(2) of the Advisers Act.

The SEC alleged

Concert Global, Concert Global’s chief executive officer, and Concert Wealth agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Concert Global’s chief executive officer and Concert Wealth agreed to censure.

Concert Global and Concert Wealth agreed to pay, jointly and severally, a civil money

Offering Documents Provided to Advisory Clients were Accurate

According to the SEC, the private placement memoranda also failed to disclose conflicts of interest arising from Concert Global’s use of the offering proceeds to repay its debt to related entities that Concert Global’s chief executive officer controlled and to pay quarterly dividends to the chief executive officer on his preferred stock.

The SEC alleged further that Concert Global and its chief executive officer made these offerings without filing a registration statement under the Securities Act with the Commission or relying on an applicable exemption from registration.

According to the SEC, Concert Wealth failed to implement policies and procedures reasonably designed to prevent the above conduct. The SEC alleged that Concert Wealth’s policies failed to address the selling of its parent entity’s common stock to advisory clients or to ensure the accuracy of statements made in connection with such offerings.

https://www.sec.gov/litigation/admin/2016/33-10113.pdf

In a related case, in Dennis Navarra, Advisers Act Release No. 4,460 (July 21, 2016), the SEC settled public administrative and cease-and-desist proceedings against Concert Global’s former chief financial officer for allegedly making materially misleading statements and omissions in connection with the offerings

that Concert Wealth willfully violated, and Concert Global’s chief executive officer caused the violations of, Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

The SEC alleged that Concert Wealth’s former chief financial officer violated Sections 5(a), 5(c), 17(a)(2), and 17(a)(3) of the Securities Act, and willfully aided and

penalty of $120,000.

Concert Global’s chief executive officer agreed to pay a civil money penalty of $60,000.

Concert Wealth’s former chief financial officer agreed to cease and desist from committing or causing any violations and any future violations of the

described in the above case.

https://www.sec.gov/litigation/admin/2016/33-10114.pdf

abetted and caused Concert Wealth’s violation of Section 206(2) of the Advisers Act.

charges, and to censure.

7/18/16

Alleged Failure by Investment Adviser to Disclose Loans from Broker-Dealer

In Washington Wealth Management, LLC, Advisers Act Release No. 4,456 (July 18, 2016), the SEC settled public administrative and cease-and-desist proceedings against Washington Wealth Management, LLC (“WWM”), an investment adviser registered under the Advisers Act, for allegedly failing to disclose conflicts of interest relating to loans it received from a broker-dealer.

According to the SEC, in 2012, WWM entered into an agreement with a broker-dealer to provide clearing, custody, and other services for WWM’s clients. The SEC alleged that WWM also received more than $1.8 million in loans from the broker-dealer to cover costs associated with transitioning its business from another broker-dealer. According to the SEC, $1.1 million of these loans were forgivable over a five-year period if the relationship continued during this period.

The SEC alleged that for nearly a year after the loans were received, WWM failed to appropriately disclose these loans to investors. During this time, according to the SEC, WWM’s Form ADV, Part 2A brochure under the Advisers Act disclosed its relationship with the broker-dealer and other loans WWM had received, but did not disclose the loans from the broker-dealer. The

The SEC alleged that WWM willfully violated Sections 206(2) and 207 of the Advisers Act.

WWM agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $50,000.

SEC alleged that the loans created a conflict of interest that should have been disclosed to investors. According to the SEC, the disclosure failure was discovered after the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) conducted an examination and informed WWM in July 2013 of its failure to disclose the loans.

https://www.sec.gov/litigation/admin/2016/ia-4456.pdf

7/14/16

Alleged Failure to Promptly Update Form ADV to Disclose Changes in Wrap-Fee Trading

In RiverFront Investment Group, LLC, Advisers Act Release No. 4,453 (July 14, 2016), the SEC settled public administrative and cease-and-desist proceedings against RiverFront Investment Group, LLC (“RiverFront”), an investment adviser registered under the Advisers Act, for allegedly failing to accurately disclose its trading practices under a wrap-fee program.

According to the SEC, in 2008 RiverFront began serving as a subadviser to advisory clients participating in a wrap-fee program, in which the clients paid a fee covering the cost of several services wrapped together, such as trade execution, portfolio management, and back office services. The SEC alleged that RiverFront had sole responsibility for selecting the broker-dealers that would execute the clients’ transactions and could select broker-dealers not included under the wrap-fee program, whose commission costs would be charged to clients in addition to the wrap-fee, so long as RiverFront determined the transaction to be in the best interests of the clients.

The SEC alleged that RiverFront willfully violated Sections 204(a) and 207 of, and Rule 204-1(a) under, the Advisers Act.

RiverFront agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $300,000.

According to the SEC, RiverFront’s investor disclosures through its Form ADV, Part 2A brochure stated that some trading with broker-dealers not covered by the wrap-fee program could occur, but that RiverFront would “generally” execute trades through the wrap-fee program’s designated broker-dealers. The SEC alleged that RiverFront executed the majority of trades through designated broker-dealers during 2008 and most of 2009, but subsequently began decreasing the proportion of trades executed through designated broker-dealers such that, by early 2010, the majority of wrap-fee program trades were executed by broker-dealers not covered by the program. According to the SEC, RiverFront’s use of the designated broker-dealers for the majority of its wrap-fee program trading made RiverFront’s disclosures materially inaccurate.

The SEC alleged that RiverFront failed to promptly amend its Form ADV as is required when information is materially inaccurate. According to the SEC, RiverFront’s subsequent amendments to its Form ADV, Part 2A brochure continued to be materially inaccurate until August 2011.

In determining to accept RiverFront’s offer, the SEC considered remedial acts undertaken by RiverFront and cooperation afforded the SEC staff. In particular, RiverFront agreed to disclose on its public website relevant cost information for trading executed through broker-dealers outside the wrap-fee program.

https://www.sec.gov/litigation/admin/2016/ia-4453.pdf

7/12/16

Alleged Failure to Provide Accurate Trading Data to the Commission

In Citigroup Global Markets, Inc., Exchange Act Release No. 78,291 (July 12, 2016), the SEC settled public administrative and cease-and-desist proceedings against Citigroup Global Markets, Inc. (“CGMI”), an Exchange Act-registered broker-dealer and an investment adviser registered under the Advisers Act, for allegedly providing inaccurate trading data to the Commission for over 15 years.

Exchange Act Rules 17a-4(j), 17a-3(a)(1), and 17a-3(a)(6) provide that firms registered under the Exchange Act are required, in response to routine requests from Commission staff, to submit promptly information concerning transactions by all proprietary and customer accounts that bought or sold a particular security during a specified period, including information regarding the time of the trade, the type of trade, the number of securities traded, the price, and other customer identifying information. The SEC alleged that, from 1999 until 2014, CGMI had a coding error in its reporting systems that excluded 34,412 trades reported from certain of its offices. According to the SEC, CGMI discovered and corrected the coding error in April 2014. The SEC alleged further that CGMI did not disclose the error to the Commission until January 2015, nine months after it was first discovered.

According to the SEC, the error affected a total of 3,528 submissions made by CGMI to the Commission and

The SEC alleged that CGMI willfully violated Section 17(a) of, and Rules 17a-4(j) and 17a-25 under, the Exchange Act.

CGMI agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $7 million.

FINRA. The SEC alleged that CGMI failed to report the incident to the SEC because it did not have in place a reasonable process to check the accuracy and completeness of these submissions.

https://www.sec.gov/litigation/admin/2016/34-78291.pdf

6/16/16

Alleged Failure by Fund Administrator to Detect or Act Upon Evidence of Fraud and Misconduct by Adviser

In Apex Fund Services (US), Inc., Advisers Act Release No. 4,428 (June 16, 2016), the SEC settled public administrative and cease-and-desist proceedings against Apex Fund Services (US), Inc. (“Apex”), a fund administration company providing services to private funds, for allegedly failing to detect or act upon indications of fraud and misconduct committed by the Advisers Act-registered investment adviser to four of Apex’s fund clients. The SEC instituted the proceedings against Apex under Section 203(k) of the Advisers Act, which gives authority to the Commission to, among other things, enter an order requiring any person that is, was, or would be a cause of a violation of any Advisers Act provision, rule, or regulation, to cease and desist from causing any violations or any future violations of the same provision, rule, or regulation.

According to the SEC, Apex was retained by four private funds advised by ClearPath Wealth Management, LLC (“ClearPath”), to provide various accounting and administrative services on behalf of the funds including record keeping, creating periodic financial reports, and providing financial information to the funds’ independent auditor.

The SEC alleged that Apex was a cause of ClearPath’s and its employee’s violations of Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

Apex agreed to cease and desist from committing or causing any violations and any future violations of the charges, to pay disgorgement of $105,613, and to comply with certain undertakings, including engaging an independent compliance consultant to oversee compliance with all applicable securities laws.

The SEC alleged that Apex’s accounting systems failed to reflect a restriction in each fund’s governing documents that prohibited the assets and liabilities of each series from being commingled with any other series. According to the SEC, this failure caused the capital account statements that Apex generated to reflect inaccurately ClearPath’s use of each series’ assets and made possible the misappropriation and use of these assets for unauthorized investments by ClearPath and a ClearPath employee.

The SEC alleged that the funds’ auditor contacted Apex in July 2012 after discovering a previously undisclosed account for one of the funds that showed a $4.1 million margin loan had been taken against the fund’s assets. According to the SEC, Apex responded a week later that it was not aware of the margin account and contacted ClearPath’s managing director of fund operations, who responded that she was also unaware of the account. The SEC alleged that no evidence indicated that Apex followed up beyond this communication and that Apex failed to make adjustments to its previously provided financial statements, which still showed a balance of $4.8 million in the series instead of less than $650,000 reflecting the margin loan.

According to the SEC, ClearPath provided Apex, in January 2012, with an account statement that indicated for the first time that a certain investment, which represented the largest investment for two of the funds,

was pledged by ClearPath. The SEC alleged that Apex failed to update its records to reflect that the asset was pledged and did not discuss the pledge agreement with ClearPath. According to the SEC, had Apex followed up with ClearPath, Apex would have discovered that one of these funds had entered into a line of credit with a bank collateralized by the investment, and that ClearPath had borrowed $3.75 million against the line of credit and used the proceeds for investments that were not recorded in the books and records of any of the funds.

The SEC alleged further that Apex failed to detect misconduct by ClearPath and a ClearPath employee arising from transfers of capital between series and between funds in violation of the funds’ offering documents, including misappropriations by the ClearPath employee for a private equity investment and to cover ClearPath’s administrative expenses in violation of a fund’s governing documents. According to the SEC, even though all of the cash flows from the prohibited transactions were reflected on ClearPath’s bank statements and schedules provided to Apex, Apex failed to account properly for the transactions and correct investors’ capital account statements to reflect the economic condition of their investments.

https://www.sec.gov/litigation/admin/2016/ia-4428.pdf

In a separate settlement entered into on the same day, Apex Fund Services (US), Inc., Advisers Act Release

The SEC alleged that Apex was a

Apex agreed to cease and desist from

No. 4,429 (June 16, 2016), the SEC settled similar charges against Apex for alleged failures in connection with another investment adviser, EquityStar Capital Management, LLC.

https://www.sec.gov/litigation/admin/2016/ia-4429.pdf

cause of EquityStar and its employee’s violations of Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

committing or causing any violations and any future violations of the charges, and to pay disgorgement of $96,836.

6/13/16

Alleged Improper Receipt of Confidential Information by a Municipal Adviser Relating to a Prospective Client

In Keygent LLC, Exchange Act Release No. 78,053 (June 13, 2016), the SEC settled public administrative and cease-and-desist proceedings against Keygent LLC (“Keygent”), a municipal adviser registered under the Exchange Act, and two of its managing directors, for allegedly engaging in a scheme to obtain confidential information about prospective school district clients.

According to the SEC, Keygent retained a consulting firm, School Business Consulting, Inc. (“SBCI”), to advise Keygent’s management and facilitate introductions to school districts that Keygent identified as potential clients. The SEC alleged that SBCI previously provided separate services to five of these potential clients including drafting interview questions for, and reviewing proposals from, prospective municipal advisers.

According to the SEC, each school district chose to select municipal advisers through a competitive bidding process and, in seeking to ensure that all competitors were on an equal footing, expressly directed Keygent

The SEC alleged that Keygent and one of the managing directors willfully violated Section 15B(c)(1) of, and Municipal Securities Rulemaking Board (“MSRB”) Rule G-17 under, the Exchange Act.

The SEC alleged that two managing directors were a cause of Keygent’s violation of Section 15B(c)(1) of, and MSRB Rule G-17 under, the Exchange Act.

Keygent and two of its managing directors agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to each pay a civil money penalty: Keygent will pay $100,000, and the managing directors will pay $30,000 and $20,000, respectively.

Keygent and one of its managing directors agreed to censure.

not to make contact with anyone at the district other than a single official designated to provide and solicit information on the bidding process. The SEC alleged further that, without each school district’s consent or awareness, Keygent received confidential information from SBCI including information on specific questions Keygent would be asked in interviews as well as the proposed fees of competitor municipal advisers bidding to provide the same services. According to the SEC, this confidential information was not provided to any of the other competitors and all five of the school districts eventually hired Keygent.

https://www.sec.gov/litigation/admin/2016/34-78053.pdf

In a related case, School Business Consulting, Inc., Exchange Act Release No. 78,054 (June 13, 2016), the SEC settled public administrative and cease-and-desist proceedings against SBCI for providing confidential information to Keygent as discussed above, and failing to register with the Commission as a municipal adviser.

https://www.sec.gov/litigation/admin/2016/34-78054.pdf

These actions are notable as the SEC’s first enforcement actions brought under the municipal adviser antifraud provisions of the Dodd-Frank Act.

The SEC alleged that Keygent and two of its managing directors were a cause of SBCI and its president’s violations of Sections 15B (c)(1) and 15B(a)(5) of, and MSRB Rule G-17 under, the Exchange Act.

The SEC alleged that SBCI and its president willfully violated Sections 15B(a)(5) and 15B(c)(1) of, and MSRB Rule G-17 under, the Exchange Act.

The SEC alleged that SBCI willfully violated, and SBCI’s president caused SBCI’s

SBCI and its president agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to each pay a civil money penalty: SBCI will pay $30,000, and SBCI’s president will pay $20,000.

SBCI agreed to censure.

violation of, Section 15B(a)(1)(B) of the Exchange Act.

SBCI’s president agreed to be barred from association with, among others, any broker, dealer, investment adviser, or municipal adviser.

6/8/16

Alleged Failure to Adopt and Implement Written Policies and Procedures Reasonably Designed to Protect Customer Records and Information

In Morgan Stanley Smith Barney LLC, Advisers Act Release No. 4,415, the SEC settled public administrative and cease-and-desist proceedings against Morgan Stanley Smith Barney LLC (“MSSB”), an investment adviser registered under the Advisers Act, for allegedly failing to adopt and implement written policies and procedures reasonably designed to protect customer records and information in compliance with Rule 30 of the SEC’s Regulation S-P (the so-called Safeguard Rule).

The SEC alleged that, between 2011 and 2014, a former MSSB employee inappropriately accessed and misappropriated confidential data for 730,000 MSSB client accounts associated with 330,000 different households. According to the SEC, this data included client names, addresses, account numbers and balances, and securities holdings. The SEC alleged that MSSB had adopted policies and procedures that enabled employees to access only customer data necessary to enable an employee to fulfill his or her responsibilities. According to the SEC, an MSSB employee discovered and exploited certain programming flaws in two of

The SEC alleged that MSSB willfully violated Rule 30(a) of Regulation S-P.

MSSB agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $1,000,000.

MSSB’s internal systems that allowed him unauthorized access to confidential customer data. The SEC alleged that MSSB failed, for at least 10 years after the systems were created, to appropriately audit or test the systems; such an audit may have enabled MSSB to have discovered the systems’ vulnerabilities.

The SEC alleged further that, even though MSSB restricted its employees’ ability to download data onto removable storage devices, the employee was able to circumvent MSSB’s internet filtering systems and download confidential data to his personal server through his personal website. According to the SEC, portions of this data were subsequently posted to at least three internet sites, purportedly for sale to third parties.

In settling the case, the SEC specifically considered the remedial efforts promptly undertaken by MSSB and cooperation afforded the SEC Staff.

In a related case, Galen J. Marsh, Advisers Act Release No. 4,414 (June 8, 2016), the SEC settled public administrative and cease-and-desist proceedings against the employee who had misappropriated the client data. The SEC’s order followed a criminal conviction in United States v. Galen Marsh, No. 15 Cr. 641 (KTD) (S.D.N.Y.), in which the employee pled guilty to violating 18 U.S.C. § 1030(a)(2)(A) by exceeding his authorized access to a computer and thereby obtaining confidential customer information with a value exceeding $5,000.

The employee pled guilty to one count of violating 18 U.S.C. § 1030(a)(2)(A).

The employee agreed to be to be barred from association with, among others, any broker, dealer or investment adviser, and to be barred from participating in any offering of a penny stock, for five years.

https://www.sec.gov/litigation/admin/2016/34-78021.pdf

6/1/16

Alleged Operation by a Private Equity Firm as an Unregistered Broker-Dealer

Alleged Failure to Disclose Conflict of Interest Arising from Operating Partner Oversight Fee

Alleged Failure to Disclose Specific Use of Fund Assets

Alleged Failure to Adopt Proper Written Compliance Policies and Procedures

In Blackstreet Capital Management, LLC, Advisers Act Release No. 4,411 (June 1, 2016), the SEC settled public administrative and cease-and-desist proceedings against Blackstreet Capital Management, LLC (“Blackstreet”), an investment adviser registered under the Advisers Act, and Murry N. Gunty, the managing member and principal owner of Blackstreet, for allegedly undertaking brokerage services for private equity fund clients while not being registered as a broker with the Commission and failing to appropriately disclose certain fees.

According to the SEC, Blackstreet provided brokerage services to its clients in connection with the acquisition and disposition of portfolio companies even though it has never been registered with the Commission as, nor affiliated with, a registered broker. The SEC alleged that Blackstreet’s brokerage services included soliciting deals, identifying counterparties, arranging financing, and executing transactions some of which involved the purchase or sale of securities. According to the SEC, Blackstreet received $1,877,000 in compensation for providing brokerage services to its clients.

The SEC alleged further that Blackstreet used client funds to purchase interests in two portfolio companies that paid Blackstreet operating partner oversight fees of $450,000. According to the SEC, the use of client

The SEC alleged that Blackstreet willfully violated, and Mr. Gunty caused Blackstreet’s violations of, Section 15(a) of the Exchange Act.

The SEC alleged that Blackstreet willfully violated, and Mr. Gunty caused Blackstreet’s violations of, Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

Blackstreet and Mr. Gunty agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay disgorgement of $2,622,737, and to pay a civil money penalty of $500,000.

assets to compensate itself created a conflict of interest for Blackstreet, which was not disclosed to the investors in the funds until after the oversight fees were collected.

The SEC alleged that between 2005 and 2012, Blackstreet used fund assets to make political and charitable contributions, and to pay for entertainment expenses, including the cost of maintaining a luxury box at a sports arena which was not expressly authorized by investors.

Mr. Gunty, the SEC also alleged, personally acquired limited partner interests from eight limited partners in a Blackstreet fund; each limited partner was either in default or seeking to sell his, her, or its interest. According to the SEC, Mr. Gunty should have caused the defaulting limited partners to forfeit their shares to the fund instead of purchasing them personally. The SEC alleged that Mr. Gunty subsequently caused the fund’s general partner to waive his obligation to satisfy future capital calls with respect to these limited partner interests, and failed to disclose this waiver to the funds.

This settlement is significant as it raises the issue of the need for private equity firms to register as broker-dealers under the Exchange Act. The settlement, however, does not shed light on the specific transactions that could result in such a firm’s needing to be a registered broker-dealer.

https://www.sec.gov/litigation/admin/2016/34-

77959.pdf

5/27/16

Alleged Failure to Adopt and Implement Policies and Procedures that Cover Outside Consultants

In Federated Global Investment Management Corp., Advisers Act Release No. 4,401 (May 27, 2016), the SEC settled public administrative and cease-and-desist proceedings against Federated Global Investment Management Corp. (“FGIMC”), an investment adviser registered under the Advisers Act, for allegedly failing to adopt and maintain written policies and procedures reasonably designed to prevent the misuse of non-public information by outside consultants in connection with FGIMC’s securities research and analysis activities.

According to the SEC, FGIMC engaged, from 2001 until 2010 outside consultants who provided securities analysis for FGIMC investment personnel managing certain FGIMC-advised mutual funds. The SEC alleged that at least one of the consultants also provided those investment management personnel with recommendations as to specific securities to buy, sell, and hold.

The SEC alleged that FGIMC’s Code of Ethics failed to specifically define consultants as “access persons” for purposes of Rule 204A-1 under the Advisers Act, which would have, among other things, required the consultants to disclose conflicts of interest and prohibited them from serving on outside boards without written authorization from FGIMC’s chief compliance officer. According to the SEC, this failure resulted in the consultants not being appropriately covered under

The SEC alleged that FGIMC willfully violated Section 204A of the Advisers Act.

FGIMC agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $1,500,000.

FGIMC’s policies and procedures regarding individual use of material non-public information and personal trading activities of individuals with access to confidential information relating to the FGIMC funds.

The SEC further alleged that, between 2005 and 2010, a consultant served as a board member of four companies in which the FGIMC funds were shareholders. The consultant, according to the SEC, was not required to pre-clear his personal securities trades with FGIMC and on more than one occasion traded in certain stocks that the funds also traded.

This settlement is noteworthy as it shows the SEC’s continued willingness to bring enforcement cases for alleged violations of the Advisers Act’s compliance provisions even in the absence of any alleged further wrongdoing by registered investment advisers or alleged harm to the clients of the advisers.

https://www.sec.gov/litigation/admin/2016/ia-4401.pdf

5/19/16

Alleged Materially False and Misleading Statements in Connection with Offerings of Interests in Advisory Business

In Blue Ocean Portfolios, LLC, Advisers Act Release No. 4,389 (May 19, 2016), the SEC instituted public administrative and cease-and-desist proceedings against Blue Ocean Portfolios, LLC. (“Blue Ocean”), an investment adviser registered under the Advisers Act, and James A. Winkelmann, Blue Ocean’s chief executive officer, chief compliance officer, and manager, for allegedly making materially false and misleading statements in connection with offerings of interests in Blue Ocean’s advisory business.

The SEC alleged that Blue Ocean and Mr. Winkelmann willfully violated Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, Section 10(b) of,

The SEC instituted cease-and-desist proceedings to determine what, if any, remedial action including, but not limited to, disgorgement, interest and civil penalties is appropriate against

According to the SEC, in April 2011, Blue Ocean and Mr. Winkelmann began offering and selling interests in Blue Ocean that provided investors with a percentage of the revenue arising out of Blue Ocean’s investment advisory business. The SEC alleged that Winkelman raised $1.4 million, primarily from Blue Ocean’s advisory clients, by creating and distributing offering memoranda.

According to the SEC, Blue Ocean and Mr. Winkelmann made materially false and misleading statements in four offering memoranda and failed to disclose material information to investors. The SEC alleged that the memoranda materially overstated Blue Ocean’s success in converting advertising spending into new revenue, made materially misleading statements claiming an alignment of Mr. Winkelmann’s and the investors’ interests, and failed to disclose and explain Blue Ocean’s inherent conflicts of interests in the offerings. According to the SEC, Blue Ocean and Mr. Winkelmann failed to appropriately disclose their financial incentive to pay investors the minimum amount of Blue Ocean’s advisory income allowed under the terms of the offering memoranda.

The SEC further alleged violations of the Advisers Act’s custody, compliance and reporting provisions in connection with the commingling of client and firm assets, and the failure of Blue Ocean to adopt and implement written policies and procedures reasonably

and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), and 207 of the Advisers Act.

The SEC alleged that Blue Ocean willfully violated Section 206(4) of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. Winkelmann caused and willfully aided and abetted Blue Ocean’s violations of Section 17(a)(1) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Section 206(1) of the Advisers Act.

Blue Ocean and Mr. Winkelmann.

designed to prevent those violations.

What is significant about this proceeding is that it appears to be one of the few instances in recent memory in which the SEC brought an action against a registered investment adviser in connection with its own corporate transaction.

https://www.sec.gov/litigation/admin/2016/33-10080.pdf

The SEC alleged that Winkelmann caused Blue Ocean’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 206(2) and 206(4) of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

5/13/16

Alleged Fraudulent Concealment of Transition Management Fees

In SEC v. Ross McLellan (D. Mass. filed May 13, 2016), the SEC filed civil fraud charges against Ross McLellan, a former executive of State Street Corporation (“SSC”), for allegedly engaging in a scheme to defraud investors who or that were customers of SSC’s transition management line of business.

According to the SEC, SSC provides, among other things, transition management services to pension funds, endowments, and other large clients needing to buy and sell large quantities of securities when undergoing a transition such as changing fund managers or investment strategies. The SEC alleged that, from February 2010 to September 2011, Mr. McLellan undertook a strategy to charge and conceal hidden markups for transition management services provided to certain clients.

The SEC alleged that Mr. McLellan violated Sections 17(a)(1) and 17(a)(3) of the Securities Act, and Section 10(b) of, and Rules 10b-5(a) and (c) under, the Exchange Act, and aided and abetted violations of Section 10(b) of, and Rule 10b-5(b) under, the Exchange Act.

The SEC is seeking to obtain a permanent injunction against Mr. McLellan from future violations of the charges, disgorgement of all ill-gotten gains in connection with the alleged scheme, payment of a civil money penalty, and any other award as the court deems just and proper.

According to the SEC, Mr. McLellan personally directed traders to increase fees on trades executed for certain larger clients who or that were less likely to focus on the fees. Mr. McLellan, the SEC alleged, also directed SSC traders to add mark-ups to certain fixed income trades that contradicted written instructions to the traders not to charge commissions for those trades. According to the SEC, Mr. McLellan also directed certain subordinates to alter documentation provided to clients to conceal these mark-ups.

The SEC alleged further that, in June 2011, a transition management client discovered that SSC had charged it additional undisclosed mark-ups. According to the SEC, McLellan directed his subordinates to mislead the client by claiming the mark-ups were inadvertent. The SEC alleged that Mr. McLellan then attempted to conceal a reimbursement to the client by circumventing the usual processes and procedures that would have recorded the payment in SSC’s loss event tracking system.

https://www.sec.gov/litigation/complaints/2016/comp23540.pdf

5/4/16

Federal Court Decision Relating to Criminal Liability for Advisers Act Violation

In United States v. James Tagliaferri, No. 15-536 (2d Cir. 2016), James Tagliaferri, a formerly registered investment adviser under the Advisers Act, appealed a 2014 criminal conviction for investment adviser fraud under Section 206 of the Advisers Act. At Mr. Tagliaferri’s trial, the judge instructed the jurors that

Mr. Tagliaferri was convicted of, among other things, a criminal violation of investment adviser

Mr. Tagliaferri was sentenced to 72 months in prison, to pay restitution of approximately $21,000,000, to forfeit

“intent to defraud” under Section 206 is established if the jury finds Mr. Tagliaferri acted “knowingly with intent to deceive.”

Mr. Tagliaferri argued on appeal before the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) that the judge’s instruction was in error, because a criminal conviction for investment adviser fraud requires a showing of an intent to harm investors. Mr. Tagliaferri argued that, although his actions were unlawful and dishonest, they did not constitute investment adviser fraud, because the government failed to prove that he intended to harm his investors.

The Second Circuit rejected Mr. Tagliaferri’s argument and held that intent to harm is not an element of a criminal conviction under Section 206 of the Advisers Act. In doing so, the Second Circuit cited the U.S. Supreme Court’s landmark decision in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (“Capital Gains”) in which the Court found that a violation of Section 206 does not require a showing of an intent to harm clients. Mr. Tagliaferri argued that Capital Gains was not applicable, because that case dealt with an SEC request for an injunction and not a criminal prosecution. The Second Circuit acknowledged this difference but disagreed that it requires that the statute, which provides for criminal enforcement of a civil liability, must add an additional essential element.

fraud under Section 206 of the Advisers Act.

$2,500,000 and certain real property, and to be permanently barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser.

4/29/16

Alleged Deficient Surprise

Central to the court’s holding were the express terms of Section 217 of the Advisers Act, which provides that “[a]ny person who willfully violates any provisions of [the Advisers Act] or any rule, regulation, or order promulgated by the Commission under authority [provided by the Advisers Act] shall, upon conviction, be fined not more than $10,000, imprisoned for not more than five years, or both.” The Second Circuit noted that the criminal enforcement of Section 206 through the means of Section 217 differs from the civil enforcement mechanism with the inclusion in Section 217 of the word “willfully.” The court explained that the word willfully must be considered in the context of the overall statute and found that the addition of the term does not require an intent to harm one’s clients. The court held instead that the term “willfully” as used in Section 217 requires only that a defendant acted with “knowledge that his conduct was unlawful.”

This decision arises from conduct that was originally alleged in an SEC enforcement action brought in February 2013. It is particularly noteworthy as it demonstrates the relatively low burden of proof that the SEC and criminal prosecutors must meet to support a claim of investment adviser fraud under the Advisers Act.

http://law.justia.com/cases/federal/appellate-courts/ca2/15-536/15-536-2016-05-04.html

In Santos, Postal & Company, P. C., Advisers Act

Release No. 4,380 (Apr. 29, 2016), the SEC settled

The SEC alleged that SPC and one

SPC and the partner agreed to cease and

Examinations by Auditing Firm

public administrative and cease-and-desist proceedings against Santos, Postal & Company, P.C. (“SPC”), an accounting firm, and one of SPC’s partners, for allegedly performing deficient examinations of an investment adviser registered under the Advisers Act.

According to the SEC, in 2010 and 2011, SFX Financial Advisory Management Enterprises, Inc. (“SFX”) engaged SPC to provide examinations of SFX’s client funds and securities to satisfy Rule 206(4)-2 under the Advisers Act (the Advisers Act’s so-called Custody Rule), which requires investment advisers to follow certain procedures when they control or have access to client money or securities. The SEC alleged that examinations undertaken by SPC and its partner were deficient, as SPC failed: to identify significant risk factors arising from SFX’s management structure; to obtain sufficient evidence to reasonably support SPC’s conclusions; and to appropriately document the examinations so as to enable a reviewer to understand the nature, time and extent of the testing performed.

The SEC alleged further that two reports filed with the Commission on behalf of SFX in connection with SPC’s examinations contained untrue statements. According to the SEC, SFX’s report to the Commission relating to SPC’s 2010 examination contained the false statement that SPC had confirmed with SFX’s clients contributions to and withdrawals from client accounts. According to the SEC, this report also falsely claimed that all testing procedures were performed for a period

of its partners willfully violated Section 207 of the Advisers Act, and engaged in improper professional conduct within the meaning of Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice.

desist from committing or causing any violations and any future violations of the charges.

The partner agreed to pay a civil money penalty of $15,000 and to be barred from appearing or practicing before the Commission as an accountant for five years.

SPC agreed to pay a civil money penalty of $15,000, disgorgement of $29,076.76, and to be barred from appearing or practicing before the Commission as an accountant for one year.

three months longer than was tested.

The SEC alleged further that SPC and its partner were informed that SFX’s vice president had misappropriated client assets prior to filing a report with the Commission relating to SPC’s 2011 examination. According to the SEC, this report included SPC’s unqualified opinion that SFX’s assertion that it complied with all requirements of the Custody Rule was fairly stated in all material respects, even though SPC and the SPC partner knew this to be false.

This enforcement action arises from the conduct described in a previous case, SFX Financial Advisory Management Enterprises, Inc., Advisers Act Release No. 4,116 (June 15, 2015) described below, and demonstrates a willingness by the SEC to bring actions against independent auditors in connection with violations of investment advisers engaging the auditors.

https://www.sec.gov/litigation/admin/2016/34-77745.pdf

4/14/16

Alleged Violation of the Advisers Act’s Custody Rule

In Reid S. Johnson, Advisers Act Release No. 4,368 (Apr. 14, 2016) the SEC settled cease-and-desist proceedings against the former sole owner and president (the “Executive”) of The Planning Group of Scottsdale, LLC (“TPGS”), an investment adviser formerly registered under the Advisers Act, for alleged violations of the Advisers Act’s Custody Rule.

According to the SEC, from at least 2010 until March

The SEC alleged that the Executive willfully violated Section 207 of the Advisers Act.

The SEC alleged that the Executive willfully aided and

The Executive agreed to cease and desist from committing or causing any violations and any future violations of the charges, to be barred from association with, among others, any

2013, TPGS had custody of certain client funds and securities, including funds and securities of pooled investment vehicles whose managing members were entities owned and controlled by the Executive. The SEC alleged that TPGS failed to accurately determine that it had custody of certain client’s assets under the Custody Rule. According to the SEC, TPGS also failed to ensure that its client’s securities were maintained by a qualified custodian. The SEC alleged that the Executive stored certain client assets, including paper stock certificates, in a file cabinet within his home and in a local storage facility.

According to the SEC, TPGS failed to obtain appropriate surprise examinations, as required under the Custody Rule. The SEC alleged that, even though the Executive engaged an accounting firm to comply with the Custody Rule, TPGS violated the Custody Rule’s independent verification requirement for 2010, 2011, and 2012. According to the SEC, each year’s engagement letter failed to meet certain requirements under the Custody Rule, including language regarding the accountant’s filing of Form ADV-E under the Advisers Act or concerning the tasks that the accountant was required to perform.

This action, along with Santos, Postal & Company, P. C. immediately above, demonstrates the SEC’s continuing willingness to bring enforcement cases for violations of the Custody Rule notwithstanding the lack of a showing that the client assets were misappropriated.

abetted and caused TPGS’s violation of Section 206(4) of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser for one year, and to pay a civil money penalty of $45,000.

https://www.sec.gov/litigation/admin/2016/34-77625.pdf

4/5/16

Alleged Failure to Supervise an Investment Advisory Representative

Alleged Failure to Adopt and Implement Internal Controls to Prevent and Detect Violations of the Advisers Act

In Cambridge Investment Research Advisors, Inc., Advisers Act Release No. 4,361 (Apr. 5, 2016), the SEC settled public administrative and cease-and-desist proceedings against Cambridge Investment Research Advisors, Inc. (“CIRA”), an investment adviser registered under the Advisers Act, for allegedly failing to appropriately supervise an employee who defrauded advisory clients and engaged in unsuitable trading in clients’ accounts.

The SEC alleged that, between 2009 and 2011, an investment adviser representative at CIRA misappropriated client funds through a consistent practice of fraudulently overbilling clients for financial planning services that were never agreed to, nor provided. According to the SEC, the representative also engaged in options trading during this period that was unsuitable for certain advisory accounts.

The SEC alleged further that, in 2009, CIRA’s compliance department determined that the representative should be placed on heightened supervision given his poor credit, a home in foreclosure, and an investigation instituted by the Financial Industry Regulatory Authority into his termination by his prior employer. According to the SEC, even though CIRA’s compliance department sent a heightened supervision plan to the representative’s supervisor, the supervisor failed to implement any part of the plan or discuss the

The SEC alleged that CIRA violated Section 203(e)(6) of the Advisers Act, which provides for the imposition of sanctions against supervisors for failing to reasonably supervise a person who violates the federal securities laws.

The SEC alleged that CIRA willfully violated Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

CIRA agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $225,000.

plan with the representative’s subsequent supervisor. The SEC alleged that CIRA’s compliance department lacked systems to ensure that the representative’s supervisor fully implemented the heightened supervision plan.

According to the SEC, CIRA failed to adopt policies and procedures that would reasonably be expected to prevent the representative’s fraud including surveillances, reports, or reviews designed to detect suspicious activity in the representative’s financial planning activities.

https://www.sec.gov/litigation/admin/2016/ia-4361.pdf

In a related case, Alexander R. Bastron, Investment Advisers Act Release No. 4,362 (Apr. 5, 2016), the SEC settled public administrative and cease-and-desist proceedings against Alexander R. Bastron, a former Regional Director at CIRA for allegedly failing to reasonably supervise a subordinate with a view to prevent the employee’s violations of the Advisers Act.

The CIRA and Bastron settlements are noteworthy for their focus on supervisory liability under the Advisers Act.

https://www.sec.gov/litigation/admin/2016/34-77528.pdf

The SEC alleged that Mr. Bastron violated Section 203(e)(6) of the Advisers Act.

Mr. Bastron agreed to be barred from association with, among others, any broker, dealer or investment adviser in any supervisory capacity, for at least one year, and to pay a civil money penalty of $20,000.

3/30/16

Alleged Misappropriation

In Burrill Capital Management, LLC, Advisers Act Release No. 4,360 (Mar. 30, 2016), the SEC settled

The SEC alleged that BCM and Mr.

BCM, Mr. Burrill, Mr. Hebert, and Ms. Sen

of Client Assets by Adviser to Venture Capital Funds Exempt from Registration under the Advisers Act

public administrative and cease-and-desist proceedings against: Burrill Capital Management, LLC (“BCM”), a now-defunct investment adviser that was exempt from registration under the Advisers Act in reliance on Advisers Act Rule 203(l)-1, G. Steven Burrill, BCM’s sole owner; Victor A. Hebert, BCM’s Chief Legal Counsel; and Helena C. Sen, BCM’s Controller. BCM and its employees were alleged by the SEC to have misappropriated funds from a venture capital fund advised by BCM.

According to the SEC, BCM advised a venture capital fund that paid quarterly management fees to BCM. The SEC alleged that, in late 2007, BCM began experiencing cash flow shortages, and that Mr. Burrill directed Ms. Sen to transfer money from the venture capital fund before it was due under the fund’s limited partnership agreement as an “advance on management fees.” According to the SEC, Ms. Sen transferred the funds and recorded the transfer as “prepaid expense.”

The SEC alleged that Mr. Burrill and Ms. Sen continued to take money from the venture capital fund before it was owed, in seeking to cover BCM and Mr. Burrill’s cash shortages. In 2009, according to the SEC, Mr. Hebert became aware of Mr. Burrill and Ms. Sen’s actions, but did not tell Ms. Sen to stop the transfers.

The SEC alleged further that, by 2012, the fund had paid the entire amount of management fees contemplated by its limited partnership agreement, but that Mr. Burrill,

Burrill willfully violated, and Mr. Hebert willfully aided and abetted and caused violations of, Section 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Ms. Sen willfully aided and abetted and caused violations of Section 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Mr. Burrill, Mr. Hebert, and Ms. Sen agreed to be barred from association with, among others, any broker, dealer, or investment adviser.

BCM and Mr. Burrill agreed to pay disgorgement of $4,785,000 and a civil money penalty of $1,000,000.

Mr. Hebert agreed to pay a civil money penalty of $185,000. Ms. Sen agreed to pay a civil money penalty of $90,000.

BCM agreed to censure.

Mr. Hebert, and Ms. Sen continued to take money from the fund as advance management fees. By May 2013, according to the SEC, the venture capital fund had paid BCM and Mr . Burrill at least $13 million more than was owed over the entire life of the fund. The SEC alleged that approximately $4.6 million of this money was used by Mr. Burrill to pay for, among other things, family vacations, jewelry, charitable contributions, private jets, and gifts.

The action taken by the SEC against BCM and its employees is significant as it shows a willingness on the part of the Commission to bring an enforcement proceeding against an Advisers Act exempt reporting adviser.

https://www.sec.gov/litigation/admin/2016/34-77473.pdf

3/15/16

Alleged Failure by Municipal Adviser to Disclose Conflict of Interest to Municipal Client

In Central States Capital Markets, LLC, Advisers Act Release No. 4,352 (Mar. 15, 2016), the SEC settled public administrative and cease-and-desist proceedings against Central States Capital Markets, LLC (“Central States”), an investment adviser registered under the Advisers Act and a municipal adviser registered under the Exchange Act, Mark R. Detter, a former vice president at Central States, David K. Malone, a vice president at Central States, and John D. Stepp, the chief executive officer of Central States, for allegedly failing to disclose a conflict of interest to a municipal client relating to municipal bond offerings.

The SEC alleged that Central States, Mr. Stepp, Mr. Detter and Mr. Malone willfully violated Section 15B(c)(1) of, and Municipal Securities Rulemaking Board (“MSRB”) Rule G-17 under, the Exchange Act.

Central States, Mr. Stepp, Mr. Detter and Mr. Malone agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Central States agreed to censure, to pay disgorgement of $289,827.80, and to

Under Section 15B(c)(1) of the Exchange Act, as amended by Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), municipal advisers and their associated persons have a fiduciary duty to municipal entity clients, and are prohibited from engaging in any act, practice or course of business that is not consistent with this fiduciary duty. According to the SEC, in April 2011 a municipal entity hired Central States to serve as its municipal adviser in connection with three separate municipal debt offerings.

The SEC alleged that Mr. Stepp, Mr. Detter and Mr. Malone, on behalf of Central States, arranged to have these offerings underwritten by a broker-dealer in which each also worked as a registered representative. According to the SEC, Mr. Stepp, Mr. Detter and Mr. Malone’s relationship with the underwriting broker-dealer created a conflict of interest, as they had a financial incentive to choose the underwriting broker-dealer over all other broker-dealers. The SEC alleged that Central States, Mr. Stepp, Mr. Detter and Mr. Malone failed to disclose their relationship with the broker-dealer and the conflict of interest created by this relationship. According to the SEC, 90 percent of the underwriting fees paid to the broker-dealer in connection with the three offerings was remitted to Central States.

The action against Central States and its employees is noteworthy as it is the first instance of the SEC

The SEC alleged that Mr. Stepp, Mr. Detter and Mr. Malone willfully violated MSRB Rule G-23 under the Exchange Act.

pay a civil money penalty of $85,000.

Mr. Stepp agreed to not act in a supervisory capacity with, among others, any broker, dealer, investment adviser, or municipal adviser for six months. Mr. Stepp also agreed to pay a civil money penalty of $17,500.

Mr. Detter agreed to be barred from association with, among others, any broker, dealer, investment adviser, or municipal adviser for two years. Mr. Detter also agreed to pay a civil money penalty of $25,000.

Mr. Malone agreed to be barred from association with, among others, any broker, dealer, investment adviser, or

enforcing the fiduciary duty created for municipal advisers by the Dodd-Frank Act.

https://www.sec.gov/litigation/admin/2016/34-77369.pdf

municipal adviser for one year. Mr. Malone also agreed to pay a civil money penalty of $20,000.

3/14/16

Alleged Failure to Disclose Conflict of Interest Arising From Receipt of 12b-1 Fees

Alleged Failure to Implement Policies and Procedures to Prevent Reverse Churning

In Royal Alliance Associates, Inc., Sagepoint Financial, Inc. and Fsc Securities Corporation, Advisers Act Release No. 4,351 (Mar. 14, 2016), the SEC settled public administrative and cease-and-desist proceedings against Royal Alliance Associates, Inc., Sagepoint Financial, Inc. and Fsc Securities Corporation (together, the “AIG Advisers”), each an investment adviser under the Advisers Act and indirectly owned by American International Group, Inc., for allegedly failing to disclose conflicts of interest relating to 12b-1 fees and failing to implement policies and procedures to prevent “reverse churning.”

The SEC alleged that the AIG Advisers invested on behalf of clients in certain mutual funds registered under the 1940 Act that offered two share classes, one that charged 12b-1 fees and one that did not. These 12b-1 fees created a conflict of interest, according to the SEC, as the AIG Advisers had an economic incentive to invest client assets in the share class that charged clients higher fees. The SEC alleged that between 2012 and 2014, the AIG Advisers failed to adequately disclose in their Forms ADV that these fees created a conflict of interest. According to the SEC, the AIG Advisers received approximately $2 million from 12b-1 fees than would have been received from investing client assets in

The SEC alleged that the AIG Advisers willfully violated Sections 206(2), 206(4), and 207 of, and Rule 206(4)-7 under, the Advisers Act.

The AIG Advisers agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay disgorgement of $2,049,859, and to pay a civil money penalty of $7,500,000.

the share classes without 12b-1 fees.

The SEC also alleged that the AIG Advisers failed to implement policies and procedures that required a quarterly review of advisory accounts that traded securities infrequently. According to the SEC, these procedures were meant to prevent “reverse churning,” a practice of charging a client a wrap fee that covers advisory services and trading costs even though the client trades infrequently.

The actions against the AIG Advisers appears to be a part of a broader Commission effort designed to review selling practices relating to mutual funds offering multiple share classes. See Melanie Waddell, SEC to Launch 12b-1 Fee Share Class Initiative, ThinkAdVISOR (Apr. 19, 2016), https://www.thinkadvisor.com/2016/04/19/sec-to-launch-12b-1-fee-share-class-initiative

https://www.sec.gov/litigation/admin/2016/34-77362.pdf

1/19/16

Alleged Material Misstatements and Omissions in Exchange Act Forms 10-K and 10-Q

In Equinox Fund Management, LLC, Advisers Act Release No. 4,315 (Jan. 19, 2016), the SEC settled public administrative and cease-and-desist proceedings against Equinox Fund Management, LLC (“Equinox”), an investment adviser registered under the Advisers Act, for alleged material misstatements and omissions made in the offer and sale of units in The Frontier Fund (“TFF”), a Delaware statutory trust and publicly

The SEC alleged that Equinox willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, and caused TFF to violate Section 13(a) of, and Rules

Equinox agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay a civil money penalty in the amount of $400,000, and to

registered managed futures fund.

The SEC alleged that, from 2004 through March 2011, TFF’s registration statements indicated that Equinox charged management fees based upon the net asset value (“NAV”) of each series. Equinox, however, charged TFF management fees based upon the notional trading value of the assets—the invested amount plus leverage used in the underlying investments. According to the SEC, Equinox’s use of the notational methodology, caused TFF to be charged $5.4 million more than what would have been charged based upon NAV.

The SEC also alleged that TFF’s disclosures in its Exchange Act Form 10-K for 2010 and its Forms 10-Q for the first and second quarters of 2011 that it valued certain derivatives at fair value were misleading. According to the SEC, TFF’s reported quarterly valuation for these options was materially higher than the option counterparty’s valuation of each of the same options. The SEC alleged that Equinox failed to consider pricing information that conflicted with its own valuations, including a report provided by the option counterparty each business day, audit confirmations from the option counterparty showing materially lower valuations, and additional transactions with the option counterparty in which the parties used the option counterparty’s bid or ask prices to increase or decrease the amounts invested in the options.

The SEC alleged further that TFF’s Form 10-Q for the

12b-20, 13a-1, and 13a-13 under, the Exchange Act.

administer a disgorgement fund into which it will pay a total of $6,000,067, consisting of disgorgement and prejudgment interest to compensate TFF investors for losses arising from the alleged conduct.

third quarter of 2011 was misleading, as it disclosed that a certain option had been transferred between two of TFF’s series in accordance with TFF’s valuation policies, when the option had been transferred using a different valuation methodology. According to the SEC, TFF’s valuation procedures required TFF when effecting transfers between series to take into account whether the same or similar securities were held by other funds managed by Equinox and the method used to price those securities. The SEC alleged that, contrary to this policy, Equinox transferred the option using the midpoint price of the valuation agent’s range, and that on the following business day the transferee series wrote down the valuation of the option to the lower bound price of the valuation agent’s range.

The SEC also alleged that TFF’s Form 10-Q for the second quarter of 2011 failed to disclose a material subsequent event: the early termination of an option, the series’ largest investment, at a valuation that was materially different from what had been recorded for that option.

https://www.sec.gov/litigation/admin/2016/33-10004.pdf

12/22/15

Alleged Aiding and Abetting of Prohibited Cross Trades

Alleged Failure

In Morgan Stanley Investment Management Inc., Advisers Act Release No. 4,299 (Dec. 22, 2015), the SEC settled public administrative and cease-and-desist proceedings against Morgan Stanley Investment Management, Inc. (“MSIM”), an investment adviser registered under the Advisers Act, and Sheila Huang, a

The SEC alleged that MSIM willfully violated Section 17(a)(3) of the Securities Act and Sections

MSIM and Ms. Huang agreed to cease and desist from committing or causing any violations and any future violations of the

to Implement Compliance Policies and Procedures to Identify Impermissible Cross Trading

MSIM portfolio manager for allegedly arranging trades favoring certain advisory accounts over others.

According to the SEC, from late 2011 through early 2012, Ms. Huang engaged in a series of unlawful prearranged sales and buybacks, commonly known as “parking,” of fixed-income securities, with SG Americas Securities, LLC (“SGAS”), a broker-dealer registered under the Exchange Act. The SEC alleged that Ms. Huang placed five sets of these transactions while effecting sales for MSIM client accounts that needed to liquidate certain securities. The SEC alleged that Ms. Huang did not sell these securities in the open market, but instead sold to and prearranged a repurchase from SGAS at prices that were based on the initial sale price plus a minimal markup in attempting to “buyback” the positions into other MSIM-advised accounts. According to the SEC, this arrangement with SGAS favored the purchasing clients over the selling clients and deprived the selling clients of their share of the market savings, an amount totaling approximately $387,186. The SEC alleged that the arrangement with SGAS was not disclosed to any of the MSIM clients involved in the transactions.

The SEC alleged further that in a sixth set of transactions, Ms. Huang arranged to sell securities from certain accounts subject to ERISA with SGAS at prearranged prices approximately $600,000 above the market prices for the securities. According to the SEC, Ms. Huang then caused a client fund not registered

206(2) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

The SEC alleged that MSIM violated Section 203(e)(6) of the Advisers Act.

The SEC alleged that MSIM willfully aided and abetted and caused a violation of Section 17(a)(2) of the Investment Company Act.

The SEC alleged that Ms. Huang willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act, and Section 10(b) of, and Rules 10b-5(a) and (c) under, the Exchange Act, and willfully aided and

charges.

MSIM agreed to disgorgement of $857,534 to administer a distribution fund, to censure, and to pay a civil money penalty of $8 million.

Ms. Huang agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to pay a civil money penalty of $125,000.

under the 1940 Act to purchase the securities from SGAS. The SEC alleged that these transactions kept the ERISA accounts from realizing a loss on the securities, but the unregistered fund purchased securities at prices that were over $600,000 above the pricing vendor’s mid-market price. This arrangement, according to the SEC, was not disclosed to any of the MSIM clients involved in the transactions. According to the SEC, Ms. Huang and her team in using the buyback arrangements effectively crossed bonds outside of MSIM’s cross trade procedures, avoiding MSIM’s and regulatory requirements governing cross trades.

In determining to accept MSIM’s offer, the SEC considered remedial acts promptly undertaken by MSIM and cooperation afforded the SEC staff. In particular, MSIM enhanced its policies, procedures, controls and training; voluntarily retained a compliance consultant; and assisted the SEC’s staff in its investigation.

https://www.sec.gov/litigation/admin/2015/33-9998.pdf

In a related case, SG Americas Securities LLC, Investment Company Act Release No. 31,948 (December 22, 2015), the SEC instituted cease-and-desist proceedings against SGAS, a registered broker-dealer, and Yimin Ge, a former senior trader at SGAS, for allegedly participating in Ms. Huang’s scheme by failing to keep accurate books and records and for aiding and abetting Ms. Huang’s violations.

abetted and caused violations of Sections 206(1) and 206(2) of the Advisers Act.

The SEC alleged that SGAS violated Section 15(b)(4)(E) of the Exchange Act, and willfully violated Section 17(a) of, and Rule 17 a-3(a)(2) under, the Exchange Act.

SGAS and Ms. Ge agreed to cease and desist from committing or causing any violations and any future violations of the charges.

SGAS agreed to

https://www.sec.gov/litigation/admin/2015/33-9999.pdf

The SEC alleged that Ms. Ge willfully aided and abetted and caused SGAS’s violations of Section 17(a) of, and Rule 17a-3(a)(2) under, the Exchange Act.

The SEC also alleged that Ms. Ge willfully aided and abetted and caused Ms. Huang’s violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act, and Section 10(b) of, and Rules 10b-5(a) and (c) under, the Exchange Act.

censure.

Ms. Ge agreed to be barred from association with, among others, any broker, dealer or investment adviser, for at least three years.

12/18/15

Alleged Failure to Disclose Conflicts of Interest

Alleged Breach of Fiduciary Duty

In JPMorgan Chase Bank, N.A., Advisers Act Release No. 4,295 (Dec. 18, 2015), the SEC settled public administrative and cease-and-desist proceedings against J.P. Morgan Securities LLC (“JPMS”), an investment adviser registered under the Advisers Act, and JPMorgan Chase Bank, N.A. (“JPMCB”), a nationally chartered bank, for allegedly failing to disclose conflicts

The SEC alleged that JPMS willfully violated Sections 206(2), 206(4), and 207 of, and Rule 206(4)-7 under, the

JPMS and JPMCB agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay

of interest relating to investments in proprietary investment products.

The SEC alleged that both JPMS and JPMCB failed, in connection with a program contemplating investing client assets in shares of mutual funds registered under the 1940 Act, to disclose conflicts of interest arising from preferences for JPMorgan-managed mutual funds. The Commission further alleged that JPMCB failed to disclose a preference for JPMorgan-managed private hedge funds, and third-party-managed private hedge funds that shared client fees with a JPMCB affiliate. According to the SEC, from 2008 to 2013, JPMS failed to adequately disclose to clients invested in its Chase Strategic Portfolio (“CSP”), a retail unified managed account program designed and operated by JPMS, conflicts of interest JPMS faced with respect to CSP. The SEC alleged that JPMS failed to disclose its preference and economic incentive to invest CSP assets in JPMorgan mutual funds. According to the SEC, a JPMS affiliate that provided services to CSP offered discounts on its services based on the amount of CSP assets that JPMS invested in JPMorgan mutual funds. These discounts, the SEC alleged, created a conflict of interest as they incentivized JPMS to favor JPMorgan mutual funds over other investments. The SEC alleged further that JPMS failed to disclose the availability of certain less expensive JPMorgan mutual fund share classes. The SEC alleged that this resulted in a breach of its fiduciary duty to CSP clients.

Advisers Act.

The SEC alleged that JPMCB willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.

disgorgement of $127,500,000, prejudgment interest of $11,815,000, and a civil money penalty of $127,500,000.

JPMS also agreed to censure.

From 2008 to 2012, according to the SEC, JPMS’s written policies and procedures required that JPMS avoid any actual or potential conflict of interest and that any such conflict be disclosed to clients with discretionary managed accounts. The SEC alleged that, on certain occasions, the disclosure concerning the use of JPMorgan mutual funds in CSP was raised, and discussed among JPMS personnel, but was not adequately addressed, resulting in a failure to implement JPMS’s written policies and procedures in seeking to ensure appropriate disclosure of its conflicts of interest. According to the SEC, JPMS’s Forms ADV did not appropriately disclose these conflicts of interest.

The SEC alleged further that JPMCB did not satisfy its disclosure duty by failing to disclose its preference for investing clients’ discretionary portfolio assets in JPMorgan mutual funds in its fund disclosure statements, account opening documents, and marketing materials.

The SEC alleged that, from 2008 until 2014, JPMCB failed to disclose to certain clients with discretionary managed accounts its preference for JPMorgan-managed hedge funds and, from 2008 until August 2015, failed to disclose its preference for third-party-managed hedge funds that shared their management and/or performance fees with a JPMCB affiliate.

In determining to accept JPMS and JPMCB’s offers, the SEC considered remedial acts undertaken by both JPMS

and JPMCB, including the retention of an independent compliance consultant to renew policies and procedures, and cooperation afforded the SEC staff.

https://www.sec.gov/litigation/admin/2015/33-9992.pdf

12/14/15

Alleged Non-Disclosure of Revenue Sharing Fees

Alleged Breach of Fiduciary Duty for Failing to Disclose Conflicts of Interest

Advisers Act Violation of the Custody Rule

Alleged False and Misleading Statements

In Total Wealth Management, Inc., Advisers Act Release No. 4,291 (Dec. 14, 2015), the SEC settled public administrative and cease-and-desist proceedings against Total Wealth Management, Inc. (“TWM”), an investment adviser registered under the Advisers Act, in connection with an alleged fraudulent scheme to collect revenue sharing fees derived from investments recommended to clients.

The SEC alleged that TWM entered into revenue sharing agreements with certain funds under which the funds paid TWM fees when TWM placed its clients’ investments in the funds. According to the SEC, TWM paid certain other employees a portion of the revenue sharing fees earned for every TWM client they placed into the underlying funds. The SEC alleged that these revenue fee sharing arrangements created a conflict of interest as they created an incentive for TWM to invest its clients into certain funds regardless their performance or the appropriateness of the investment. According to the SEC, TWM had a persistent and pervasive practice of recommending and making investments in the underlying funds that paid revenue sharing fees.

The SEC alleged that TWM structured a series of

The SEC alleged that TWM willfully violated Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), 206(4), and 207 of, and Rules 206(4)-8 and 206(4)-2 under, the Advisers Act.

TWM agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to have its registration as an investment adviser revoked.

unregistered funds known as the “Altus Funds,” and their disclosures so that investors would not know that the Altus Funds held investments paying revenue sharing fees back to TWM. According to the SEC, disclosures in all of the Altus Funds’ offering memoranda and in TWM’s Forms ADV informed clients that TWM “may” receive revenue sharing fees, but failed to inform TWM clients that TWM was receiving revenue sharing fees. The SEC alleged further that the documents failed to inform investors about the sources, recipients, amounts and duration of the fees. TWM, the SEC alleged, funneled the revenue sharing fees through entities created by the principals of TWM to mask these fees. These entities, according to the SEC, sent invoices to give the appearance that the fees were payments for consulting work, even though virtually no consulting work was ever done. According to the SEC, none of TWM’s Forms ADV filings contained any reference to these entities or their affiliations with TWM.

The SEC alleged further that TWM materially misrepresented to investors and clients the extent of the due diligence conducted on the investments recommended by TWM. According to the SEC, TWM received promotional materials, subscription agreements, and the self-reported and unverified performance history of funds, but failed to review or analyze the documents or obtain any third-party due diligence of the funds.

The SEC also alleged that, beginning in 2011, TWM falsely claimed in its Form ADV filings that it had complied with Rule 206(4)-2, the Advisers Act’s custody rule.

https://www.sec.gov/litigation/admin/2015/33-9989.pdf

In a related case, Total Wealth Management, Investment Company Act Release No. 4,292 (Dec. 14, 2015), the SEC settled public administrative and cease-and-desist proceedings against Nathan McNamee, TWM’s former president, and Douglas David Shoemaker, a co-founder and former chief compliance officer at TWM for, among other things, allegedly causing and aiding and abetting TWM’s violations.

https://www.sec.gov/litigation/admin/2015/33-9990.pdf

The SEC alleged that Mr. McNamee and Mr. Shoemaker willfully violated Section 207 of the Advisers Act, and willfully aided and abetted and caused TWM’s violations of Sections 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Mr. McNamee willfully aided and abetted and caused TWM’s violations of Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act.

Mr. McNamee and Mr. Shoemaker agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to be barred from association with, among others, any broker, dealer or investment adviser, for at least five years. Mr. McNamee agreed to pay disgorgement of $107,393 and a civil money penalty of $307,500.

Mr. Shoemaker agreed to pay disgorgement of $132,405 and a civil money penalty of $300,000.

11/24/15

Alleged Deficiencies in Compliance Policies and Procedures

In Marwood Group Research, LLC, Advisers Act Release No. 4,279 (Nov. 24, 2015), the SEC settled public cease-and-desist proceedings against Marwood Group Research, LLC (“Marwood”), a regulatory and legislative policy firm and Exchange Act-registered broker-dealer and investment adviser registered with the State of New York, for allegedly failing to inform compliance officers of instances in which analysts obtained potential material non-public information from U.S. Government employees.

Section 15(g) of the Exchange Act requires broker-dealers registered under the Act to establish, maintain, and enforce written policies and procedures, to prevent the misuse of material non-public information (“MNPI”). Section 204A of the Advisers Act provides a similar requirement for both SEC-registered and state-registered investment advisers. According to the SEC, Marwood provided as part of its business regulatory and policy updates (“research notes”) to hedge funds and other securities market participants concerning likely outcomes of future U.S. Government actions. The SEC alleged that Marwood’s analysts would meet with, call or otherwise communicate with representatives of the Government who were often in possession of potential MNPI and that these interactions created a substantial risk for MNPI to be obtained and misused by Marwood’s clients.

According to the SEC, Marwood had written policies and procedures that prohibited the dissemination of

The SEC alleged that Marwood violated Section 15(g) of the Exchange Act and Section 204A of the Advisers Act.

Marwood agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay a civil money penalty of $375,000.

Marwood also agreed to comply with certain undertakings, including engaging an independent compliance consultant to oversee compliance with all applicable securities laws.

MNPI and required any potential MNPI to be brought to the attention of Marwood’s chief compliance officer. The SEC alleged that, in 2010, Marwood employees received potential MNPI relating to pending regulatory approvals at the U.S. Centers for Medicare and Medicaid Services and the U.S. Food and Drug Administration. According to the SEC, this information was not brought to the attention of the chief compliance officer despite a substantial risk that the information was MNPI.

The SEC alleged further that Marwood’s procedures failed to reasonably ensure that the chief compliance officer was provided with sufficient information to assess whether a research note may have been influenced by improperly obtained MNPI or to evaluate independently other employees’ assessments that any information they had received from a Government employee was not MNPI, as Marwood’s policy principally relied on employees and managers to make this assessment with limited review by the chief compliance officer.

In determining to accept Marwood’s offer, the SEC considered the remedial acts promptly undertaken by Marwood, including enhancement of its policies and procedures made in 2013 and 2014 covering the potential misuse of MNPI.

https://www.sec.gov/litigation/admin/2015/34-76512.pdf

11/19/15

Alleged Repeated Violations of the Advisers Act’s Custody Rule

Action Against Senior Officials of Investment Adviser, including Chief Compliance Officer

Alleged Failure to Implement Procedures and Safeguards in Seeking to Ensure Compliance with a Cease-and-Desist Order

In Sands Brothers Asset Management, LLC, Advisers Act Release Nos. 4,273 and 4,274 (Nov. 19, 2015), the SEC settled public administrative and cease-and-desist proceedings brought in October 2014 against Sands Brothers Asset Management, LLC (“SBAM”), an investment adviser registered under the Advisers Act, and its controlling persons and chief compliance officer (the “Principals”), for alleged violations of Rule 206(4)-2 under the Advisers Act (the “Custody Rule”), which requires firms to follow certain procedures when they control or have access to client money or securities. The SEC alleged that SBAM violated the Custody Rule by being repeatedly late in providing investors with audited financial statements of the private funds managed by SBAM, and that the Principals were responsible for SBAM’s failures to comply with the Custody Rule. The Commission originally instituted public administrative and cease-and-desist proceedings against these parties on October 29, 2014.

The Custody Rule effectively requires, among other things, that investors in a private fund managed by a registered investment adviser receive an audited financial statement of the fund within a specific time period. According to the SEC, SBAM was at least 40 days late in distributing audited financial statements to investors in ten private funds for fiscal year 2010. In 2011, audited financial statements for those same funds were delivered from six months to eight months late. In 2012, the same materials were distributed to investors approximately three months late. The SEC alleged that

The SEC alleged that SBAM willfully violated Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act.

The SEC alleged that the Principals willfully aided and abetted and caused SBAM’s violations of Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act.

SBAM and the Principals agreed to cease and desist from committing or causing any violations and any future violations of the charges.

SBAM and its controlling persons agreed to be suspended from acting as an investment adviser for a period of 12 months, to pay a civil money penalty of $1 million, and to comply with certain undertakings, including engaging an independent monitor to oversee compliance with all applicable securities laws and providing the Commission with evidence of SBAM’s compliance with the Custody Rule.

The chief compliance officer agreed to be

the Principals aided, abetted and caused SBAM’s Custody Rule violations, and did not comply with a 2010 cease-and-desist order issued by the Commission (which specifically found that SBAM’s controlling persons had aided and abetted and caused SBAM’s Custody Rule violations) when they failed to implement any procedures or safeguards to ensure compliance. According to the SEC, none of the Principals made adequate efforts to ensure that SBAM satisfied its Custody Rule obligations, either by disseminating the audited financial statements that investors in certain of SBAM’s-managed funds were entitled to receive or by submitting to a surprise examination to verify client assets. The Commission noted particularly that the chief compliance officer who was responsible for compliance and for all of SBAM’s non-investment operations implemented no policies or procedures to ensure compliance with the Custody Rule — even after the 2010 Order and after SBAM continued to miss its Custody Rule deadline year after year. At most, he simply reminded people of the Custody Rule deadline without taking any more substantial action. He did not make any attempt to notify the staff of the Commission of any difficulties SBAM was encountering in meeting the Custody Rule deadline.

http://www.sec.gov/litigation/admin/2015/ia-4273.pdfhttp://www.sec.gov/litigation/admin/2015/ia-4274.pdf

suspended from serving as a chief compliance officer of any broker, dealer or investment adviser for 12 months, and to pay a civil money penalty of $60,000.

11/16/15

Alleged False and Misleading Statements and

In Virtus Investment Advisers, Inc., Advisers Act Release No. 4,266 (Nov. 16, 2015), the SEC instituted cease-and-desist proceedings against Virtus Investment

The SEC alleged that Virtus willfully violated

Virtus agreed to cease and desist from committing or causing

Advertisements Regarding Subadviser Performance

Advisers, Inc. (“Virtus”), an Advisers Act-registered investment adviser, for making material misstatements to its clients on the basis of a materially overstated performance track record provided by Virtus’s subadviser, F-Squared Investments, Inc. (“F-Squared”). The SEC brought an administrative proceeding against F-Squared for making materially misleading statements on December 22, 2014.

In 2009, according to the SEC, Virtus and F-Squared began to discuss having F-Squared subadvise two Virtus-advised mutual funds registered under the 1940 Act using F-Squared’s “AlphaSector” strategy, a major exchange-traded fund sector rotation strategy. The SEC alleged that F-Squared and its president and chief executive officer falsely described AlphaSector to Virtus, indicating that the strategy had been used to manage client assets from April 2001 to September 2008, and that it had significantly outperformed the S&P 500 Index during that time period. The SEC said that no assets, however, tracked the strategy until 2008, and its back-tested performance record had been substantially overstated. According to the SEC, Virtus recommended that the boards of trustees and shareholders of certain Virtus mutual funds approve a change in management and strategy to F-Squared and AlphaSector based on F-Squared’s misrepresentations. The SEC alleged that Virtus was negligent (1) in not knowing that F-Squared’s track record and performance numbers were false, (2) in failing to investigate adequately concerns about the legitimacy of F-

Sections 204, 206(2), and 206(4) of, and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8 under, the Advisers Act.

The SEC alleged that Virtus caused certain registered investment companies to violate Section 34(b) of the 1940 Act.

any violations and any future violations of the charges, to censure, and to pay disgorgement of $13.4 million, prejudgment interest of $1.1 million, and a civil money penalty of $2 million.

Squared’s statements, and (3) in accepting F-Squared’s misrepresentations at face value. The SEC also alleged that, from May 2009 to September 2013, Virtus presented F-Squared’s false performance information in client presentations, marketing materials, filings with the Commission, and other communications. In doing so, according to the SEC, Virtus advertised the AlphaSector strategy by using hypothetical and substantially inflated back-tested historical performance records.

The SEC alleged further that Virtus failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act, as Virtus’s policies regarding performance advertising and the retention of books and records failed to address performance obtained by other advisers or subadvisers.

In determining to accept Virtus’s offer, the SEC considered Virtus’s retention of an independent compliance consultant in April 2015 to conduct a comprehensive review of Virtus’s written compliance policies and procedures.

http://www.sec.gov/litigation/admin/2015/ia-4266.pdf

11/5/15

Alleged Failure by Private Fund Advisers to Properly Disclose Allocation of

In Cherokee Investment Partners, LLC, Advisers Act Release No. 4,258 (Nov. 5, 2015), the SEC instituted cease-and-desist proceedings against Cherokee Investment Partners, LLC (“CIP”), an Advisers Act-registered investment adviser, and Cherokee Advisers,

The SEC alleged that CIP and CA violated Sections 206(2) and 206(4) of, and Rules

CIP and CA agreed to cease and desist from committing or causing any violations and any future violations of the

Expenses to Clients

LLC (“CA”), a “relying adviser” (within the meaning of an Advisers Act interpretation) of CIP, for allegedly improperly allocating consulting, legal and compliance-related expenses to private funds managed by CIP and CA.

The SEC alleged that, between July 2011 and March 2015, CIP and CA caused funds they managed to pay for $455,698 of expenses related to CIP’s registration as an investment adviser under the Advisers Act, expenses related to a third-party compliance consultant, and expenses incurred in preparing responses to comments provided by the SEC staff in connection with an examination of CIP. According to the SEC, while the private funds’ organizational documents disclosed that the funds would bear expenses arising out of their operations and activities, the documents did not indicate that the funds would be charged for the advisers’ legal and compliance expenses. The SEC alleged further that CIP and CA failed to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act arising from the allocation of expenses, and that they failed to conduct an annual review of the adequacy of these policies and procedures.

http://www.sec.gov/litigation/admin/2015/ia-4258.pdf

206(4)-7 and 206(4)-8 under, the Advisers Act.

charges, and to jointly and severally pay a civil money penalty of $100,000.

11/3/15

Alleged Failure by a Private Equity Firm to Disclose Conflicts of

In Fenway Partners, LLC, Advisers Act Release No. 4,253 (Nov. 3, 2015), the SEC instituted cease-and-desist proceedings against Fenway Partners, LLC (“Fenway Partners”), an Advisers Act-registered investment adviser, Peter Lamm, a managing director

The SEC alleged that Fenway Partners, Mr. Lamm, Mr. Smart, and Mr. Mayhew

Fenway Partners, Mr. Lamm, Mr. Smart, Mr. Mayhew, and Mr. Wiacek agreed to cease and desist from

Interest Related to Fees and Expenses

and member of Fenway Partners, William Gregory Smart, a managing director and member of Fenway Partners, Timothy Mayhew, Jr., a managing director and member of Fenway Partners, and Walter Wiacek, vice president, chief financial officer and chief compliance officer of Fenway Partners, for allegedly failing to disclose to a private equity fund managed by Fenway Partners and its investors certain conflicts of interest relating to monitoring fees paid by the fund to a Fenway Partners-affiliated entity and incentive compensation paid upon a portfolio company exit with respect to Fenway Partners employees.

At the center of the Fenway Partners action were certain management services agreements into which, according to the SEC, Fenway Partners had entered with portfolio companies held by the private equity fund. The SEC alleged that the portfolio companies paid monitoring fees to Fenway Partners for rendering management and other services; the fund’s organizational documents provided for an offset of 80 percent of those fees against the management fee paid to Fenway Partners by the private equity fund. According to the SEC, beginning in December 2011, Fenway Partners and its executives caused portfolio companies to end their payment obligations to Fenway Partners and enter into new agreements with Fenway Consulting Partners, LLC (“Fenway Consulting”), an entity affiliated with Fenway Partners and principally owned and operated by three of its executives. Under these new agreements, according to the SEC, Fenway Consulting provided services that

willfully violated, and Mr. Wiacek caused the violations of, Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

committing or causing any violations and any future violations of the charges, and to pay a total of $1,525,000 of civil money penalties, with $1,000,000 by Fenway Partners, $150,000 each by Messrs. Lamm, Smart, and Mayhew, and $75,000 by Mr. Wiacek.

Fenway Partners, Mr. Lamm, Mr. Smart and Mr. Mayhew agreed to censure and to pay $7,892,000 of disgorgement penalties and $824,471 of prejudgment interest.

Fenway Partners, Mr. Lamm and Mr. Smart agreed to be responsible for administering a distribution fund containing the full amount of the

were similar to those provided under the original agreements and often used the same employees; however, the fees paid to Fenway Consulting (totaling $5.74 million) were not offset against the management fee that the fund paid to Fenway Partners. The SEC alleged that Fenway Partners did not disclose the conflicts of interest caused by rerouting these fees to an affiliate and adopting payment agreements without the benefit of a management fee offset. Press accounts appearing at the time at which the Fenway Partners settlement was announced, but not the SEC order, suggest that the performance of Fenway Partners was challenged throughout this timeframe.

The SEC highlighted two other instances in which Fenway Partners and its executives failed to disclose conflicts of interest related to fees and expenses. One related to the conflict of interest caused when, according to the SEC, Fenway Partners asked investors in a private equity fund advised by Fenway Partners to provide $4 million in connection with an investment in a portfolio company without disclosing that $1 million of the investment would be used to pay Fenway Consulting. Another related to incentive compensation that the SEC alleged that one of the executives and two former Fenway Partners employees received when the private equity fund exited a portfolio company. The SEC noted that this compensation was provided for services that were almost entirely performed while the individuals were Fenway Partners employees. According to the SEC, the individuals receiving these payments, which

disgorgement, prejudgment interest and civil money penalties.

totaled $15 million, were employees of Fenway Consulting at the time the payments were made. The SEC alleged that Fenway Partners and its executives did not disclose the conflict of interest triggered by these payments to the private equity fund’s advisory board or its limited partners, and that they also failed to disclose these payments as related party transactions in their financial statements provided to investors.

It is notable that certain conduct forming the basis for the violations detailed in the settled order occurred before Fenway Partners became registered as an investment adviser with the SEC in March 2012, underscoring an SEC position that the relevant violations of the Advisers Act apply to all investment advisers, not just those registered with the SEC.

http://www.sec.gov/litigation/admin/2015/ia-4253.pdf

10/26/15

Alleged Failure to Disclose Principal Trades Made Through Affiliated Broker-Dealers

Alleged Deficiencies in Compliance Policies and Procedures

In National Asset Management, Inc., Advisers Act Release No. 4,243 (Oct. 26, 2015), the SEC instituted cease-and-desist proceedings against National Asset Management, Inc. (“NAM”), an Advisers Act-registered investment adviser, for failing to disclose to its advisory clients trades undertaken in a principal capacity through its affiliated broker-dealers and failing to enforce and implement proper compliance procedures.

According to the SEC, NAM engaged in over 21,000 principal trades through broker-dealers that were wholly owned subsidiaries of NAM’s parent company without disclosing the potential conflicts of interest to NAM’s

The SEC alleged that NAM willfully violated Sections 204, 204A, 206(3), 206(4), and 207 of, and Rules 204-1, 204-3, 204A-1, 206(4)-7(a), and 206(4)-7(b) under, the Advisers Act.

NAM agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to pay a civil money penalty of $200,000, and to comply with certain undertakings, including retaining an independent compliance consultant,

10/19/15

Alleged Failure by Adviser to Disclose a Change in an Investment

advisory clients and without obtaining their written consent as required under Section 206(3) of the Advisers Act. The SEC alleged that NAM’s compliance policies and procedures were not reasonably designed to prevent NAM’s affiliated broker-dealers from selling or purchasing securities to or from NAM clients, that NAM failed to conduct an annual review of these policies and procedures, and that NAM’s compliance manual did not include any policies or procedures addressing principal transactions.

The SEC also alleged that NAM failed to report in filings with the Commission the disciplinary history of several of its investment adviser representatives, and that NAM failed to timely disclose this information to its clients. In addition, according to the SEC, NAM failed to enforce part of its code of ethics when its chief executive officer and other employees failed to submit over 500 required reports relating to their personal securities trading.

In determining to accept NAM’s offer, the Commission considered remedial acts undertaken by NAM and cooperation afforded the SEC staff.

http://www.sec.gov/litigation/admin/2015/34-76264.pdf In UBS Willow Management L.L.C., Advisers Act Release No. 4,233 (Oct.16, 2015), the SEC instituted cease-and-desist proceedings against UBS Willow Management L.L.C. (“UBS Willow Management”), a formerly Advisers Act-registered investment adviser,

The SEC alleged that UBS Willow Management willfully violated Sections 17(a)(2)

submitting a report to the Commission for the next three years assessing the effectiveness of NAM’s policies and procedures, and posting a summary of and link to this order on the homepage of its website.

UBS Willow Management and UBS Fund Advisor agreed to cease and desist from committing or causing

Company’s Investment Strategy

and UBS Fund Advisor L.L.C. (“UBS Fund Advisor”), an Advisers Act-registered investment adviser, for failing to disclose a material change in a 1940 Act-registered investment company’s investment strategy.

According to the SEC, UBS Willow Management advised a 1940 Act-registered investment company that was marketed as primarily investing in distressed debt and utilized a long-credit investment strategy based on the premise that the debt would increase in value. The SEC alleged that UBS Willow Management invested the investment company’s assets in a manner consistent with this strategy until 2008 when it began to make large purchases of credit default swaps, switching to an investment strategy based on the premise that the debt would decrease in value. According to the SEC, this change led to a dramatically different portfolio profile; instead of primarily investing in distressed debt as advertised, the investment company was primarily shorting distressed debt. According to the SEC, the investment company’s considerable exposure to credit default swaps resulted in significant losses, and the investment company was liquidated in 2012.

The SEC alleged that, when the investment company’s investment strategy changed, UBS Willow Management failed to provide adequate disclosure of the change or of the risks inherent in large exposure to credit default swaps to investors in the investment company or to the investment company’s board of directors. The SEC alleged that, from Fall 2008 to May 2009, UBS Willow

and 17(a)(3) of the Securities Act, Sections 206(2) and 206(4) of, and Rules 206(4)-8(a)(1) and 206(4)-8(a)(2) under, the Advisers Act, and Section 34(b) of the 1940 Act, and caused violations of Section 34(b) of, and Rule 8b-16 under, the 1940 Act.

The SEC alleged that UBS Fund Advisor violated Section 203(e)(6) of the Advisers Act.

any violations and any future violations of the charges, to censure, and to pay disgorgement of $8,223,110,

prejudgment interest of $1,373,436, and a civil money penalty of $3,000,000.

UBS Willow Management and UBS Fund Advisor also agreed to comply with certain undertakings, including administering a total distribution of $13,126,730 to compensate investment company investors for their losses.

Management provided a marketing brochure to potential investors that misstated the investment company’s strategy, and letters sent to investors from Fall 2008 to August 2011 contained false or misleading information about the investment company’s exposure to credit default swaps. The SEC alleged further that UBS Willow Management caused the investment company to misrepresent its investment strategy in investment reports filed with the SEC from Fall 2008 until the investment company’s liquidation.

The SEC alleged that UBS Fund Advisor was aware of the change in strategy and failed to supervise UBS Willow Management, allowing the change to occur without adequate disclosure. According to the SEC, UBS Fund Advisor had contractual control and supervisory authority over UBS Willow Management and was obligated to ensure that UBS Willow Management adhered to the stated investment strategy and made adequate disclosures to the investment company’s board of directors and to its investors.

http://www.sec.gov/litigation/admin/2015/33-9964.pdf

10/7/15

Alleged Failure by Private Equity Fund Manager to Disclose Accelerated Monitoring Fees

Alleged Failure

In Blackstone Management Partners L.L.C., Advisers Act Release No. 4,219 (Oct. 7, 2015), the SEC instituted cease-and-desist proceedings against Blackstone Management Partners L.L.C., an Advisers Act-registered investment adviser, Blackstone Management Partners III L.L.C, an Advisers Act-registered investment adviser, and Blackstone Management Partners IV L.L.C, an Advisers Act-registered

The SEC alleged that Blackstone violated Sections 206(2) and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under,

Blackstone agreed to cease and desist from committing or causing any violations and any future violations of the charges, and to pay disgorgement of $26,225,203,

to Disclose Disparate Discounted Legal Fees

investment adviser (collectively, “Blackstone”), for failing to adequately disclose to private funds managed by Blackstone, and to investors in those private funds prior to their commitment of capital, that (1) Blackstone had the authority to accelerate future monitoring fees and exercised that authority upon termination of monitoring agreements and (2) Blackstone had negotiated with its primary outside law firm a discount for external legal fees paid to the firm that was substantially greater than the discount received by the Blackstone funds.

According to the SEC, Blackstone had a practice of entering into monitoring agreements with the private funds’ portfolio companies under which Blackstone charged monitoring fees (i.e., fees in exchange for rendering certain consulting and advisory services to those portfolio companies). The SEC acknowledged that the funds’ documents disclosed Blackstone’s potential receipt of monitoring fees, but the SEC alleged that Blackstone failed to disclose that the monitoring agreements provided for the acceleration of monitoring fees to be triggered by certain events (e.g., upon either the private sale or initial public offering of a portfolio company), and that from 2010 to 2015, Blackstone had terminated certain monitoring agreements and accelerated the payment of future monitoring fees. The SEC alleged particularly that, in some instances, Blackstone had accelerated the monitoring fees, notwithstanding that a fund had completely exited the portfolio company and Blackstone would no longer be

the Advisers Act.

prejudgment interest of $2,686,553, and a civil money penalty of $10,000,000.

providing any monitoring services. The SEC also alleged that, although Blackstone disclosed its ability to collect monitoring fees to the funds and to their investors prior to their commitment of capital, Blackstone did not disclose to the funds, their investors or the funds’ limited partnership advisory committees its practice of accelerating monitoring fees until Blackstone had taken the accelerated fees. Perhaps most noteworthy, the SEC alleged that the receipt of the accelerated monitoring fees presented Blackstone with a conflict of interest such that Blackstone could not effectively consent to the practice on behalf of the funds.

A second matter underlying the settlement order was an alleged undisclosed discount of legal fees that Blackstone had negotiated with its primary outside counsel. Under the agreement, according to the SEC, Blackstone received a discount for external legal fees that was substantially greater than the discount received by the funds. Although Blackstone maintained that the discount rate reflected a “different mix of work” performed by the law firm for the funds and for Blackstone, the SEC alleged that Blackstone failed to adequately disclose the disparate legal fee discounts to the funds and their investors. The SEC also alleged that Blackstone faced a conflict of interest as the beneficiary of the discounts and could not effectively consent to the practice on behalf of the funds.

The settlement principally involves inadequate

disclosure of practices by Blackstone that appear to have since been curtailed, eliminated and/or disclosed to investors. The SEC’s order acknowledges remedial efforts by Blackstone, including voluntarily ending the disparate legal fee arrangement and modifying practices relating to the acceleration of monitoring fees (both practices were not uncommon in the industry in the past).

http://www.sec.gov/litigation/admin/2015/ia-4219.pdf

9/30/15

Alleged Failure to Supervise an Investment Advisory Representative

Alleged Failure to Adopt and Implement Internal Controls to Prevent and Detect Violations of the Advisers Act

Alleged Failure to Disclose Conflicts of Interest in Fund Investments

In Securus Wealth Management, LLC, Advisers Act Release No. 4,213 (Sept. 30, 2015), the SEC instituted cease-and-desist proceedings against Securus Wealth Management, LLC (“Securus”), an Advisers Act-registered investment adviser, and James Goodland, president and owner of Securus, for failure to supervise an investment advisory representative and failure to adopt and implement an adequate system of internal compliance controls.

According to the SEC, from January 2010 through July 2013, an investment advisory representative associated with Securus conducted a scheme using client accounts to support the market price of the common stock of a start-up company in which the representative personally owned shares. The SEC alleged that the representative bought shares on behalf of client accounts on a discretionary basis to influence the start-up’s stock price and prevented sales of shares that could place downward pressure on the market price. The representative, according to the SEC, ultimately caused his clients to

The SEC alleged that Securus willfully violated, and Mr. Goodland willfully aided and abetted and caused Securus’ violations of, Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

Mr. Goodland and Securus agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Securus agreed to censure.

Mr. Goodland agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to pay a civil money penalty of $30,000.

invest over $1 million in shares of stock in the start-up, notwithstanding that Securus’ primary business model involved investing in mutual funds as opposed to purchasing individual stocks and bonds. The SEC alleged that, in furtherance of the scheme, the representative made material misrepresentations to clients about the market for the start-up’s stock and failed to disclose the significant conflicts of interest arising from his personal ownership of shares of and close involvement with the start-up company.

The SEC alleged that Securus failed to reasonably implement policies and procedures for reviewing internal e-mails and for monitoring trades for potential market manipulation. The SEC also alleged that Securus failed to develop and implement policies and procedures to monitor conflicts of interest and ensure full disclosure to clients. Mr. Goodland, according to the SEC, failed to adequately respond to suspicious activity concerning the investment advisory representative’s conflicts of interest, his unusual trading, and his numerous e-mails with an insider at the start-up.

http://www.sec.gov/litigation/admin/2015/ia-4213.pdf

9/23/15

Allegedly Defrauding Private Equity Fund Investors Alleged Misuse of Private Equity Client

In Covenant Partners, L.P., Advisers Act Release No. 4,206 (Sept. 23, 2015), the SEC instituted cease-and-desist proceedings against Covenant Partners, L.P. (“Covenant”), a now-defunct private equity fund, Covenant Capital Management Partners, L.P. (“CCMP”), the general partner of Covenant and non-Advisers Act-registered investment adviser, William B.

The SEC alleged that Mr. Fretz, Mr. Freeman and CCMP willfully violated, and Covenant violated, Sections 10(b) and

Mr. Fretz, Mr. Freeman, CCMP and Covenant agreed to cease and desist from committing or causing any violations and any future violations of the

Investments

Fretz, Jr., limited partner of CCMP and investment adviser to Covenant, and John P. Freeman, limited partner of CCMP and investment adviser to Covenant, for defrauding private equity fund investors and misusing investor funds.

According to the SEC, Mr. Fretz and Mr. Freeman made a series of statements to Covenant investors indicating that Covenant’s proceeds would only be invested in securities or otherwise applied to business expenses, that the general partners would not unfairly profit from any transaction, and that Covenant would only pay the adviser performance fees if certain conditions were met. The SEC alleged that Mr. Fretz and Mr. Freeman, through CCMP, however, used the majority of investor funds for their own personal use, to repay debt obligations, and to provide $1.1 million to a failing broker-dealer that they operated and controlled. According to the SEC, Mr. Fretz and Mr. Freeman failed to disclose these payments to Covenant investors and paid themselves nearly $600,000 in performance fees that they had not earned.

As Covenant filed for bankruptcy in September 2014, its offer of settlement is subject to bankruptcy court approval.

https://www.sec.gov/litigation/admin/2015/33-9925.pdf

17(a) of, and Rule 10b-5 under, the Securities Act.

The SEC alleged that Mr. Fretz, Mr. Freeman and CCMP willfully violated Sections 206(1), 206(2), and 206(4) of, and Rule

206(4)-8 under, the Advisers Act.

charges, and to pay disgorgement of $5,476,928 and prejudgment interest of $353,582.

Mr. Fretz and Mr. Freeman agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, and to each pay a civil penalty of $500,000.

9/22/15

Alleged Violation of the Safeguards

In R. T. Jones Capital Equities Management, Inc., Advisers Act Release No. 4,204 (Sept. 22, 2015), the SEC instituted first of its kind cease-and-desist

The SEC alleged that R.T. Jones willfully violated

R.T. Jones agreed to cease and desist from committing or causing

Rule

Alleged Failure to Adopt Written Policies and Procedures Reasonably Designed to Safeguard Customer Information

proceedings against R.T. Jones Capital Equities Management, Inc. (“R.T. Jones”), an Advisers Act-registered investment adviser, for failing to adopt written policies and procedures reasonably designed to protect customer records and information.

According to the SEC, in facilitating R.T. Jones’ advisory agreements with retirement plan participants, R.T. Jones possessed non-public personal information including names, dates of birth, and social security numbers for over 100,000 individuals. The SEC alleged that, from at least September 2009 through July 2013, R.T. Jones stored this sensitive, personally identifiable information on its third-party-hosted web server without adopting written policies and procedures regarding the security and confidentiality of that information or the protection of that information from anticipated threats or unauthorized access. In July 2013, according to the SEC, R.T. Jones’ web server was attacked by an unauthorized intruder who gained access to the data. The SEC alleged that, as a result, the sensitive and personally identifiable information of thousands of R.T. Jones’ clients was made vulnerable to threat.

The SEC alleged that R.T. Jones’ failure to adopt written policies and procedures reasonably designed to safeguard customer information was in violation of Rule 20(a) of Regulation S-P (the “Safeguards Rule”), which requires that every investment adviser registered with the Commission adopt policies and procedures reasonably designed to: (1) ensure the security and

Rule 30(a) of Regulation S-P.

any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $75,000.

confidentiality of customer records and information; (2) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and (3) protect against unauthorized access to, or use of, customer records or information that could result in substantial harm or inconvenience to any customer.

In determining to accept R.T. Jones’ offer, the SEC considered the remedial acts promptly undertaken by R.T. Jones, including the appointment of an information security manager to oversee data security, the retention of a cybersecurity firm to provide ongoing reports and advice, and R.T. Jones’ overall cooperation with SEC staff.

http://www.sec.gov/litigation/admin/2015/ia-4204.pdf

9/21/15

Alleged Improper Use of Fund Assets to Pay Distribution Fees

Allegedly Misleading Investors Regarding Use of Fund Assets

Distribution-in-Guise Initiative

In First Eagle Investment Management, LLC, Advisers Act Release No. 4,199 (Sept. 21, 2015), the SEC instituted cease-and-desist proceedings against First Eagle Investment Management, LLC (“First Eagle”), an Advisers Act-registered investment adviser, and FEF Distributors, LLC (“FEF”), an Exchange Act-registered broker-dealer and wholly-owned subsidiary of First Eagle, for improperly using approximately $25 million in mutual fund assets to pay for the distribution and marketing of fund shares outside of a written plan approved in accordance with Rule 12b-1 under the 1940 Act.

Section 12(b) of, and Rule 12b-1 under, the 1940 Act

The SEC alleged that First Eagle willfully violated Section 206(2) of the Advisers Act and Section 34(b) of the 1940 Act.

The SEC alleged that First Eagle and FEF caused violations of Section 12(b) of, and Rule 12b-1

First Eagle and FEF agreed to cease and desist from committing or causing any violations and any future violations of the charges, to pay a civil money penalty of $12,500,000, to deposit $39,747,879 into a distribution fund, to facilitate distribution fund payments to shareholder accounts

make it unlawful to use a registered investment company’s assets to “engage directly or indirectly in financing any activity which is primarily intended to result in the sale of” the investment company’s shares outside of a written Rule 12b-1 plan approved by the investment company’s board. If no Rule 12b-1 plan that permits the investment company’s adviser to use the investment company’s assets to pay for distribution is adopted and approved, then assets cannot be used to pay for the activity.

The SEC alleged that FEF entered into agreements with two financial intermediaries to provide distribution and marketing services to registered investment companies but treated the agreements as though they were for sub-transfer agency services, allowing FEF and First Eagle to use the investment companies’ assets to pay for distribution and marketing in violation of Section 12(b) of, and Rule 12b-1 under, the 1940 Act. According to the SEC, First Eagle inaccurately reported to the investment companies’ boards that these distribution and marketing fees were sub-transfer agency fees. The SEC also alleged that the investment companies’ prospectus disclosures inaccurately indicated that FEF and its affiliates were bearing distribution expenses not covered by the investment companies’ Rule 12b-1 plan, when the investment companies themselves were bearing these expenses.

In accepting the offer of settlement, the SEC considered remedial acts undertaken by First Eagle and FEF and

under, the 1940 Act.

that held shares during the relevant period, and to complete the disbursement of all amounts payable within 90 days of the Commission’s approving the calculation of payments.

First Eagle agreed to censure and to pay disgorgement of $24,907,354 and prejudgment interest of $2,340,525.

FEF agreed to certain undertakings, including retaining an independent compliance consultant and adopting that compliance consultant’s recommendations.

their cooperation with SEC staff. According to the SEC, First Eagle and FEF aided the investigation by voluntarily providing information and producing documents to the staff.

The First Eagle settlement is particularly noteworthy as it appears to be the first arising out of the Distribution-in-Guise Initiative, a recent SEC examination staff initiative designed to protect registered investment company shareholders from bearing the costs when firms improperly use investment company assets to pay for distribution-related services.

http://www.sec.gov/litigation/admin/2015/ia-4199.pdf

9/15/15

Alleged Failure to Disclose Personal Expense Reimbursements

Alleged Submission of False Expenses

In Jeffrey B. Rubin, Advisers Act Release No. 4,196 (Sept. 15, 2015), the SEC instituted cease-and-desist proceedings against Jeffrey B. Rubin, a former Advisers Act-registered investment adviser, for allegedly defrauding his professional athlete clients and failing to disclose expense reimbursements that he used for personal luxury purchases.

According to the SEC, in 2007, Mr. Rubin started Pro Sports Financial, Inc. (“Pro Sports”) as a service designed to both assist professional athletes with their everyday needs and to serve as their investment adviser. The SEC alleged that, starting in 2008, at least 30 of Mr. Rubin’s clients, upon his recommendation, invested a total of $40 million in the development of an entertainment complex and casino. Mr. Rubin, according to the SEC, actively marketed offerings in the

The SEC alleged that Mr. Rubin willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act, and Sections 206(1) and 206(2) of the Advisers Act.

Mr. Rubin agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, and to pay a civil money

project to investors around the country, and in turn was reimbursed by the casino project developer for marketing costs. The SEC alleged that Mr. Rubin submitted $600,000 in false expenses to the developer under the guise of legitimate marketing expenses and used them to fund lavish purchases including a mortgage on a multi-million dollar home, a stake in a Florida nightclub, and other luxury items. According to the SEC, Mr. Rubin did not disclose to Pro Sports’ Clients that he had been reimbursed from the offering proceeds for these personal expenses.

In January 2010, according to the SEC, law enforcement shut down the casino due to issues related to the legality of electronic bingo; the project developer and Mr. Rubin nonetheless continued to solicit investor proceedings to reopen the establishment, but it never reopened.

http://www.sec.gov/litigation/admin/2015/33-9913.pdf

penalty of $250,000.

9/9/15

Alleged Material Misstatements and Omissions Regarding Client Investments

Alleged Fraudulent Inflation of Data Related to Managed Assets and Investment

In Bennett Group Financial Services, LLC, Advisers Act Release No. 4,191 (Sept. 9, 2015), the SEC instituted cease-and-desist proceedings against Bennett Group Financial Services, LLC (“Bennett Group”), a formerly Advisers Act-registered investment adviser, and Dawn J. Bennett, Bennett Group’s founder, majority owner, and chief executive officer, for fraudulently exaggerating both Bennett Group’s amount of managed assets and the investment returns obtained on behalf of its clients.

The SEC alleged that, from at least 2009 through 2011,

The SEC alleged that Ms. Bennett and Bennett Group willfully violated Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1) and 206(2) of the

The SEC instituted cease-and-desist proceedings to determine what, if any, remedial action including, but not limited to,

disgorgement, interest and civil penalties is appropriate against Ms. Bennett and Bennett

Returns

Ms. Bennett and Bennett Group made various material misstatements and omissions in an effort to attract new clients to Bennett Group’s investment advisory business. According to the SEC, Ms. Bennett and Bennett Group, for example, overstated managed assets by at least $1.5 billion to a national financial advisor ranking service, knowing that the ranking service would then publish the fraudulent statements. The SEC also alleged that Ms. Bennett told both her clients and listeners of her paid radio program that Bennett Group’s investment returns placed it in the “top 1 percent” of firms worldwide, failing to disclose that these profitable returns were calculated for a model portfolio and were not based on actual investor performance. The SEC alleged further that Ms. Bennett and Bennett Group made multiple fraudulent submissions to Barron’s magazine, exaggerating the value of managed assets and typical client account values, knowing that these reports would be reprinted and distributed to the public. According to the SEC, Ms. Bennett and Bennett Group then promoted the publication’s misrepresented rankings and articles on Bennett Group’s website and in social media.

The SEC alleged that, while their misstatements were under investigation, Ms. Bennett and Bennett Group made additional false statements in an attempt to cover up their fraud, including saying that Bennett Group provided advice regarding short-term cash management to three clients covering more than $1.5 billion in assets, when Bennett Group never provided any form of

Advisers Act.

The SEC alleged that Bennett Group willfully violated, and Ms. Bennett willfully aided and abetted and caused violations of, Section 206(4) of, and Rules 206(4)-1(a)(5) and 206(4)-7 under, the Advisers Act.

Group.

management for assets greater than $107 million.

The SEC alleged that, in addition to the material misstatements noted above, Ms. Bennett and Bennett Group failed to adopt and implement full and complete written policies and procedures related to the calculation and advertisement of assets managed and of investment returns.

http://www.sec.gov/litigation/admin/2015/33-9910.pdf

9/2/15

Alleged Improper Retention of Fees from Collateralized Debt Obligation Clients

Alleged Failure to Disclose Conflicts of Interest Related to Fee Arrangements

In Taberna Capital Management, LLC, Advisers Act Release No. 4,186 (Sept. 2, 2015), the SEC instituted cease-and-desist proceedings against Taberna Capital Management, LLC (“Taberna”), a former Advisers Act-registered investment adviser, Michael Fralin, Taberna’s former managing director, and Raphael Licht, Taberna’s former chief legal officer and chief administrative officer, for the impermissible retention of fees and for failure to disclose related conflicts of interest to clients.

According to the SEC, Taberna managed a series of collateralized debt obligations (“CDOs”), special-purpose vehicles that issue debt to investors and use the proceeds to invest in fixed income securities or loans. Between 2009 and 2012, Taberna began charging issuers in the CDOs’ underlying debt obligations a special fee in connection with exchanges involved in restructuring their portfolios (“Exchange Fee”). An exchange, according to the SEC, is a transaction in which the CDO returns an issuer’s securities in exchange for new securities and/or consideration. The

The SEC alleged that Taberna willfully violated Section 15(a) of the Exchange Act, and Sections 206(1), 206(2), and 207 of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Mr. Fralin and Mr. Licht willfully aided and abetted and caused Taberna’s violations of Section 206(2) of

Taberna, Mr. Fralin and Mr. Licht agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Mr. Fralin and Mr. Licht agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, with the right to apply for reentry after five

SEC alleged that Taberna executed over 50 exchange transactions during the period in question and retained over $15 million in Exchange Fees, even though the CDOs’ governing documents said that the retention of these Exchange Fees was impermissible and that any such fees should go directly to the CDOs. According to the SEC, Taberna instead obscured the nature of these fees in the CDOs’ documents, characterizing them as compensation for third-party expenses or omitting them entirely.

The SEC alleged that Taberna’s use of Exchange Fees caused a conflict of interest, as Taberna retained the fees in connection with exchanges but not with other types of restructurings. Taberna, according to the SEC, had, as a result, an incentive to steer issuers towards exchanges over other forms of restructuring. According to the SEC, Taberna failed to disclose this conflict of interest to its clients and to its investors in its Forms ADV.

The SEC alleged that Mr. Fralin and Mr. Licht were key contributors to Taberna’s misconduct, with Mr. Fralin responsible for the exchange negotiations and the resulting documents, and Mr. Licht approving of and supervising Mr. Fralin’s efforts to generate Exchange Fees.

http://www.sec.gov/litigation/admin/2015/34-75814.pdf

the Advisers Act.

The SEC alleged that Mr. Fralin willfully aided and abetted and caused Taberna’s violations of Section 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Mr. Taberna willfully violated, and Mr. Licht willfully aided and abetted and caused Mr. Taberna’s violation of, Section 207 of the Advisers Act.

years, and to be denied the privilege of appearing or practicing before the Commission as an attorney.

Mr. Licht agreed to pay a civil money penalty of $75,000.

Taberna agreed to pay disgorgement of $13,000,000, prejudgment interest of $2,000,000, and a civil penalty of $6,500,000. Taberna also agreed to comply with certain undertakings, including not acting or seeking to act as an investment adviser for three years, posting prominently on its website a summary of and hyperlink to the order, and providing a copy of the order to all current managers of the CDOs.

8/17/15

Alleged Material Misstatements in

In Citigroup Alternative Investments LLC, Advisers Act Release No. 4,174 (Aug. 17, 2015), the SEC instituted

The SEC alleged that CAI and

CAI and CGMI agreed to cease and desist

the Offer and Sale of Securities

cease-and-desist proceedings against Citigroup Alternative Investments LLC (“CAI”), an Advisers Act-registered investment adviser, and Citigroup Global Markets Inc. (“CGMI”), an Advisers Act-registered investment adviser and Exchange Act-registered broker-dealer, for allegedly misrepresenting fund risk and performance to advisory clients of two hedge funds, collectively raising nearly $3 billion in capital from approximately 4,000 investors before the funds collapsed.

According to the SEC, CGMF’s financial advisers and CAI’s fund manager misrepresented the risks and performance of two now-defunct hedge funds to advisory clients, telling them that the investments were “safe,” “low-risk” “bond substitutes” that were suitable for traditional bond investors, when the funds were not low-risk investments or bond substitutes, and investment carried significantly greater risk than a bond investment. The SEC also alleged that CAI misrepresented the results of back-testing analysis of one of the funds that demonstrated that an investment carried far greater risk than was described to investors.

The SEC alleged that, in making these misrepresentations, the financial advisers and the fund manager minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage. According to the SEC, as the funds began experiencing liquidity and leverage problems, the financial advisers and the fund manager continued to offer and sell the

CGMI willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.

The SEC alleged that CGMI willfully violated Section 206(2) of the Advisers Act.

The SEC alleged that CAI willfully violated Section 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

from committing or causing any violations and any future violations of the charges, to censure, and to pay disgorgement of $139,950,239 and prejudgment interest of $39,612,089.

funds as a safe, low-risk investment.

The SEC alleged further that CAI failed to adopt and implement policies and procedures preventing the financial advisers and fund manager from making contradictory and false representations.

http://www.sec.gov/litigation/admin/2015/33-9893.pdf

8/12/15

Alleged Misuse of Confidential Trade Information by a Broker-Dealer in Connection with a Dark Pool

Alleged Fraudulent Business Practices by a Broker-Dealer

Alleged Failure to Disclose Proprietary Trading Activities

In ITG Inc., Exchange Act Release No. 75,672 (Aug. 12, 2015), the SEC instituted cease-and-desist proceedings against ITG Inc., an Exchange Act-registered broker-dealer, and AlterNet Securities, Inc., a subsidiary of ITG Inc. providing sell-side services (collectively, “ITG”), for allegedly operating a secret trading desk and misusing clients’ confidential trading information.

According to the SEC, ITG operated between April 2010 and July 2011 an undisclosed proprietary trading desk known internally as “Project Omega.” The SEC alleged that, through Project Omega, ITG accessed live feeds of confidential order and execution information from its customers and from subscribers to its dark pool alternative trading system, POSIT. According to the SEC, ITG then made proprietary algorithmic trades through strategies based on that information, including instances in which ITG traded against its own POSIT subscribers. The SEC alleged that Project Omega was managed by an ITG senior executive who designed and led its trading strategies notwithstanding that these strategies violated ITG’s written compliance policies

The SEC alleged that ITG violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.

The SEC alleged that ITG Inc. violated Rules 301(b)(2) and 301(b)(10) of the SEC’s Regulation ATS.

ITG agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay disgorgement of $2,081,304, prejudgment interest of $256,532, and a civil money penalty of $18,000,000.

ITG Inc. agreed to cease and desist from committing or causing any violations and any future violations of the charges.

restricting Project Omega’s access to customer information.

According to the SEC, Project Omega traded approximately 1.3 billion shares, resulting in gross trading revenues of approximately $2,081,304. According to the SEC, ITG was, while the trading was occurring, misleadingly promoting itself and POSIT as an independent “agency-only” broker that did not engage in proprietary trading on its own account, did not have conflicts of interest with its customers, and protected the confidentiality of its customers’ trade information.

The SEC alleged that ITG Inc. failed to file an amendment on Form ATS at least 20 days before launching Project Omega to disclose its proprietary trading activities and to indicate that one of its strategies would involve accessing and trading off of subscribers’ confidential information. The SEC also alleged that ITG Inc. failed to establish adequate safeguards and procedures to protect POSIT subscribers’ confidential information by failing to limit access only to employees operating POSIT or responsible for its compliance.

http://www.sec.gov/litigation/admin/2015/33-9887.pdf

8/11/15

Alleged Improper Account Redemptions

Alleged Breach

In Acadia Asset Management, LLC, Advisers Act Release No. 4,165 (Aug. 11, 2015), the SEC instituted cease-and-desist proceedings against Acadia Asset Management, LLC (“Acadia”), a company providing investment advisory services, and Eric D. Jacobs,

The SEC alleged that Mr. Jacobs and Acadia willfully violated Section 17(a) of

Mr. Jacobs and Acadia agreed to cease and desist from committing or causing any violations and any

of Fiduciary Duties by a Hedge Fund Adviser

Alleged Misrepresentation of Investment Risk

principal owner and managing member of Acadia, for breaching their fiduciary duties as investment advisers and misrepresenting certain risks to investors.

According to the SEC, Mr. Jacobs had a personal account with one of Acadia’s private fund clients. The SEC alleged that, in 2010, Mr. Jacobs made a series of redemption requests with respect to the fund, knowing that his capital account balance was insufficient to cover the redemptions. According to the SEC, Mr. Jacobs, as a result, received $57,000 in redemptions to which he was not entitled. The SEC also alleged that Mr. Jacobs directed the same fund to pay Acadia excess management fees that he knew, or was reckless in not knowing, that Acadia was not entitled to, as Acadia and Mr. Jacobs owed the fund money due to their over-redemptions, management fee over-payments, and pending expense reimbursements.

According to the SEC, the private fund was rendered illiquid in the aftermath of the financial crisis, and in 2008 began to offer “in-kind” redemptions to investors. The SEC alleged that Mr. Jacobs proceeded to redeem his own investment interest and that of his father in preference over those of other fund investors, and in an amount exceeding the redemption caps placed on the other liquidating partners.

The SEC alleged that Mr. Jacobs and Acadia disseminated materially false and misleading statements misrepresenting the risk involved with investment in

the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

future violations of the charges, and to pay disgorgement of $321,365 and prejudgment interest of $32,750.

Acadia agreed to censure.

Mr. Jacobs agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, and to pay a civil money penalty of $300,000.

one of the funds that Acadia advised, manipulating historical performance tables, misrepresenting the levels of volatility, and downplaying the fund’s high use of leverage.

https://www.sec.gov/litigation/admin/2015/33-9886.pdf

8/10/15

Alleged Breach of Fiduciary Duty for Failing to Disclose a Senior Executive’s Conflicts of Interest Surrounding a Personal Loan Received From an Advisory Client

Alleged Miscategorization of Investments as Managed Assets

Alleged Failure to Implement Adequate Compliance Policies and Procedures

In Guggenheim Partners Investment Management, LLC, Advisers Act Release No. 4,163 (Aug. 10, 2015), the SEC instituted cease-and-desist proceedings against Guggenheim Partners Investment Management, LLC (“GPIM”), an Advisers Act-registered investment adviser, for failing to disclose a $50 million loan that one of its senior executives received from an advisory client, billing a client for asset management fees on non-managed assets, and failing to implement adequate compliance policies and procedures.

According to the SEC, a senior GPIM executive obtained in July 2010 a $50 million loan from a GPIM client in seeking to personally participate in an acquisition led by GPIM’s parent company. The SEC alleged that, in August 2010, GPIM then invested nine other advisory clients in two transactions with the same client with which the GPIM executive had executed his loan, failing to disclose the executive’s loan to the other clients participating in the transaction. The SEC alleged that senior officials at GPIM knew of the loan, but that they failed to alert the firm’s compliance staff of its existence; as a result, GPIM failed to disclose the loan or the potential conflict of interest that it created. The SEC alleged further that GPIM did not act reasonably in

The SEC alleged that GPIM willfully violated Sections 204A, 204(a), 206(2), and 206(4) of, and Rules 204A-1, 204-2(a)(3), 204-2(a)(5), and 206(4)-7 under, the Advisers Act.

GPIM agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $20 million.

GPIM also agreed to certain undertakings, including retaining the services of an independent compliance consultant, adopting all of the consultant’s recommendations, ensuring the consultant’s independence, and preserving a record of its compliance with the undertakings set out in the SEC’s order for at

connection with the loan, as it had failed to adopt measures to provide meaningful oversight of the GPIM executive’s non-advisory business dealings.

The SEC alleged that, over a multi-year period, GPIM billed a client for asset management fees on non-managed assets, charging the client approximately $6.5 million in asset management fees for investments it did not manage. According to the SEC, GPIM had coded certain non-managed investments incorrectly in its books and records, resulting in the inclusion of non-advisory fees, including back-office processing, pricing, and recordkeeping, in the calculation of asset management fees for managed investments. The SEC alleged further that, after GPIM identified the error, it did not issue a credit to the client for another two years.

According to the SEC, GPIM did not properly implement its compliance policies and procedures, resulting in a compliance program that was not reasonably designed to prevent violations of the federal securities laws. According to the SEC, GPIM also failed to enforce its code of ethics, as evidenced by its nondisclosure of the GPIM executive’s loan with its client. The SEC alleged that additional code of ethics violations included GPIM employees accepting inappropriate gifts from clients, including 44 unreported flights on private planes. The SEC alleged that GPIM failed to properly document trade errors and neglected to maintain sufficient books and records.

least six years.

http://www.sec.gov/litigation/admin/2015/ia-4163.pdf

8/6/15

Auditors’ Alleged Failure to Complete Surprise Examinations

Auditors’ Allegedly Causing an Investment Adviser to Violate the Advisers Act’s Custody Rule

In StarkSchenkein, LLP, Advisers Act Release No. 4,162 (Aug. 6, 2015), the SEC instituted cease-and-desist proceedings against StarkSchenkein, LLP (“StarkSchenkein”), a public accounting firm registered with the Public Company Accounting Oversight Board, and Wesley N. Stark, CPA, a founding partner and former owner of StarkSchenkein, LLP, for failing to adequately complete surprise examinations pursuant to Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act.

According to the SEC, a former registered investment adviser retained StarkSchenkein to perform surprise examinations, as required by the Custody Rule, to verify client funds and securities for the years 2010, 2011 and 2012. The SEC alleged that Mr. Stark and StarkSchenkein accepted this responsibility despite lacking knowledge of, or experience with, the Custody Rule, and that the lack of knowledge caused them to fail to adequately complete the surprise examinations. According to the SEC, StarkSchenkein had never performed a surprise examination for an Advisers Act-registered investment adviser prior to the 2010 examination, and the engagement team assigned to the examination had no prior experience performing surprise examinations for registered investment advisers. The SEC alleged that, for both the 2010 and 2011 examinations, StarkSchenkein filed a Form ADV-E under the Advisers Act and Report of Independent

The SEC alleged that Mr. Stark and StarkSchenkein caused an investment adviser’s violation of Section 206(4) of, and Rule 206(4)-2 under, the Advisers Act, and engaged in improper professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

Mr. Stark and StarkSchenkein agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Mr. Stark agreed to be denied the privilege of appearing or practicing before the Commission as an accountant, with the ability to request reinstatement after three years, and to pay a civil money penalty of $15,000.

StarkSchenkein agreed to be denied the privilege of appearing or practicing before the Commission as an accountant, with the ability to request reinstatement after one year, and to pay

Registered Accountant certifying that the investment adviser was in compliance with the Custody Rule when it was not. The SEC alleged further that, for the 2012 examination, StarkSchenkein did not complete its work and failed to file any report or document relating to that examination. According to the SEC, Mr. Stark also failed to obtain sufficient evidence to support the conclusion that the investment adviser was in compliance with the Custody Rule, and StarkSchenkein failed to obtain engagement quality control review for the completed 2010 and 2011 surprise examinations at any time before or after the reports of those examinations were released.

The failure to conduct surprise examinations in accordance with applicable standards, according to the SEC, caused the investment adviser to violate the Custody Rule. The SEC alleged further that Mr. Stark’s conducting the surprise examinations violated the professional standards for certified public accountants set out in the American Institute of Certified Public Accountants’ Attestation Standards and Compliance Attest Procedures.

http://www.sec.gov/litigation/admin/2015/34-75627.pdf

disgorgement of $12,750, prejudgment interest of $1,353, and civil penalties of $15,000.

8/6/15

Alleged Undisclosed Principal Transactions

Alleged Violation

In Parallax Investments, LLC, Advisers Act Release No. 4,159 (Aug. 6, 2015), the SEC instituted cease-and-desist proceedings against Parallax Investments, LLC (“Parallax”), an investment adviser registered under the Advisers Act during the relevant periods, John P. Bott, II, Parallax’s sole owner and manager, and F. Robert

The SEC alleged that Parallax willfully violated Sections 204A, 206(3) and 206(4) of, and Rules

Parallax agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, to

of the Advisers Act’s Custody Rule

Alleged Failure of a Registered Investment Adviser to Implement Written Compliance Procedures and a Written Code of Ethics

Falkenberg, Parallax’s CCO, for willfully violating the principal transaction prohibitions and the custody and compliance rules under the Advisers Act. The Commission originally instituted public administrative and cease-and-desist proceedings against these parties on November 26, 2013.

The SEC alleged that Parallax engaged in at least 2,000 undisclosed principal transactions without obtaining client consent on a transaction-by-transaction basis. According to the SEC, Parallax engaged Tri-Star Financial (“TSF”), an affiliated broker-dealer (by virtue of Mr. Bott’s owning 40 percent of TSF), to execute trades and provide fixed income analysis without previously providing disclosure to and obtaining informed consent from clients in violation of Section 206(3) of the Advisers Act. Section 206(3), by its express terms, prohibits an investment adviser from purchasing from a client or selling securities to a client on a principal basis without disclosing to the client in writing prior to the completion of the transaction the capacity in which the adviser is acting and obtaining the client’s informed consent. The SEC has in the past indicated that, notwithstanding the Section’s express terms, it can be applied to an entity affiliated with an Advisers Act-registered investment adviser. Mr. Bott personally received approximately $1 million of the $1.9 million in fees that Parallax paid TSF. The SEC also alleged that Parallax had implemented the terms of a compliance manual that contained a chapter that described the Section 206(3) prohibition on principal

204A-1, 206(4)-2 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. Bott and Mr. Falkenberg willfully aided and abetted and caused Parallax’s violations of Sections 204A and 206(4) of, and Rules 204A-1 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. Bott willfully aided and abetted and caused Parallax’s violations of Section 206(3) of the Advisers Act.

pay a civil money penalty of $200,000, prejudgment interest of $5,604, and a civil money penalty of $70,000, and to retain a compliance consultant or an independent compliance consultant to render compliance services for a period of at least one year from the entry of the SEC’s order.

Mr. Falkenberg agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay prejudgment interest of $5,604 and a civil money penalty of $70,000.

Mr. Bott agreed to cease and desist from committing or causing any violations and any

transactions, but that Mr. Bott had failed to read the chapter.

The SEC alleged that Parallax violated the Custody Rule, as Parallax had failed to either obtain an annual surprise exam or distribute audited financial statements to investors in a private fund managed by Parallax within 120 days of the fund’s fiscal year end. Parallax, the SEC asserted, had elected to distribute the audited financial statements but missed the deadline by a month and failed to use, as required by the Custody Rule, an auditor registered with the Public Company Accounting Oversight Board.

The SEC alleged that Parallax failed for two years to adopt and implement written compliance policies and procedures designed to prevent violations of the Advisers Act’s prohibition on principal transactions as required by Advisers Act Rule 206(4)-7 and failed to maintain and enforce a written code of ethics as required by Advisers Act Rule 204A-1. Parallax also, the SEC maintained, failed to perform the required annual compliance reviews, and the SEC alleged that Mr. Falkenberg created a memo purporting to show the review had been done after the SEC requested to review the records.

http://www.sec.gov/litigation/admin/2015/34-75625.pdf

future violations of the charges and to censure.

Parallax and Mr. Bott agreed to distribute $450,000 to compensate certain advisory clients as an approximation of a portion of certain sales credits Mr. Bott received in connection with the principal transactions.

Mr. Falkenberg also agreed to complete 30 hours of compliance training.

8/6/15

Allegedly Engaging in Principal

In Tri-Star Advisors, Inc., Advisers Act Release No. 4,160 (Aug. 6, 2015), a companion case to Parallax Investments, LLC described above, the SEC instituted

The SEC alleged that TSA willfully violated Sections

TSA agreed to cease and desist from committing or causing

Transactions Through a Broker-Dealer Without Providing Written Disclosure or Obtaining Consent

cease-and-desist proceedings against Tri-Star Advisors, Inc. (“TSA”), an Advisers Act-registered investment adviser, William T. Payne, TSA’s chief executive officer, and Jon C. Vaughan, TSA’s president. The SEC alleged that TSA engaged in approximately 2,212 undisclosed principal transactions between July 2009 and July 2011 involving Tri-Star Financial (“TSF”), an affiliated broker-dealer (by virtue of Mr. Payne and Mr. Vaughan’s collectively owning 60 percent of TSF). The Commission originally instituted public administrative and cease-and-desist proceedings against these parties on November 26, 2013.

The SEC asserted that TSA executed securities trades and provided fixed income analysis without providing disclosure to TSA’s clients and obtaining their consent on a transaction-by-transaction basis in violation of Section 206(3). Mr. Vaughn and Mr. Payne, according to the SEC, received 55 percent of the sales credits generated by the undisclosed principal trades.

The SEC alleged that TSA failed to adopt and implement written compliance policies and procedures designed to prevent violations of the Advisers Act’s provisions relating to affiliated principal transactions as required by Rule 206(4)-7 under the Advisers Act, known as the “Compliance Rule.”

http://www.sec.gov/litigation/admin/2015/ia-4160.pdf

206(3) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. Payne and Mr. Vaughn caused TSA’s violations of Sections 206(3) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

any violations or any future violations of the charges, to censure, and to pay a civil money penalty of $150,000.

Mr. Payne agreed to cease and desist from committing or causing any violations or any future violations of the charges, and to pay disgorgement of $142,500, prejudgment interest of $3,235, and a civil money penalty of $195,735.

Mr. Vaughan agreed to cease and desist from committing or causing any violations or any future violations of the charges, and to pay disgorgement of $232,500 and a civil money penalty of $50,000.

TSA also agreed to certain undertakings,

including retaining a compliance consultant for at least one year, requiring the consultant to conduct a comprehensive compliance review, submitting a report approved by the consultant to the staff of the Commission, and posting prominently on its principal website a summary of the SEC’s order with a hyperlink to the order.

7/31/15

Alleged False and Misleading Material Statements to Investors

Alleged Fraudulent or Deceitful Practices in Advising a Pooled Investment Vehicle

In Reliance Financial Advisers, LLC, Advisers Act Release No. 4,152 (July 31, 2015), the SEC instituted cease-and-desist proceedings against Reliance Financial Advisors, LLC (“Reliance Financial”), an Advisers-Act registered investment adviser, and Walter F. Grenda, Jr., a co-founder and managing partner of Reliance Financial, for knowingly or recklessly making or using false and misleading statements to advisory clients in recommending and selling investments in a hedge fund managed by an investment advisory firm not registered with the SEC under the Advisers Act. The Commission originally instituted public administrative and cease-and-desist proceedings against these parties on December 10, 2014.

The SEC alleged that Reliance Financial and Mr. Grenda violated Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1) and 206(2) of the Advisers Act.

The SEC alleged

Reliance Financial and Mr. Grenda agreed to cease and desist from committing or causing any violations and any future violations of the charges and to dissolve Reliance Financial.

Reliance Financial agreed to censure and to have its registration as an investment adviser revoked.

According to the SEC, Timothy S. Dembski, co-founder and managing partner of Reliance Financial, and the principal of the unregistered firm, Scott M. Stephan, established a fund not registered under the 1940 Act to trade on the basis of an automated trading strategy designed by Mr. Stephan. The SEC alleged that neither Mr. Dembski nor Mr. Stephan had experience managing a private fund on the basis of such a strategy and that neither had conducted any real-time testing of the strategy.

The SEC alleged that, in recommending that clients invest in the private fund, Mr. Grenda knew or recklessly disregarded: (1) that the fund was a speculative investment; (2) that Mr. Stephan had no prior experience operating an automated trading strategy or advising a private fund and had virtually no experience trading or investing; and (3) that Mr. Grenda’s advisory clients did not know Mr. Stephan and, thus, had no reason to trust or invest with Mr. Stephan. The SEC further alleged that Mr. Grenda knew or recklessly disregarded that Mr. Stephan’s biography in the private fund’s private placement memorandum was false and misleading.

The Commission asserted that, by failing to inform their advisory clients of the shortcomings of the manager of the private fund—Mr. Stephan—and by disseminating a private placement memorandum that falsely described Mr. Stephan’s experience, Mr. Grenda failed to act as a reasonably careful person would in similar

that Mr. Grenda willfully aided and abetted and caused the private fund’s violations of Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, Section 206(4) of, and Rule 206(4)-8 under, the Advisers Act, and Reliance Financial’s violations of Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1) and 206(2) of the Advisers Act.

Mr. Grenda agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, with the right to apply for reentry after three years; and to pay disgorgement of $25,000, prejudgment interest of $2,410, and civil penalties totaling $50,000.

circumstances. In addition, the SEC asserted that Mr. Grenda made false and misleading statements and omissions to two advisory clients in seeking to borrow approximately $250,000 from them, using a large portion of the money to pay personal expenses and debts.

http://www.sec.gov/litigation/admin/2015/33-9872.pdf

7/24/15

Alleged Failure to Disclose Conflicts of Interest Related to Third-Party Compensation Arrangements

Alleged Omission of Material Facts Regarding Compensation Arrangements in Form ADV Filings

In Dion Money Management, LLC, Advisers Act Release No. 4,146 (July 24, 2015), the SEC instituted cease-and-desist proceedings against Dion Money Management, LLC (“DMM”), an Advisers Act-registered investment adviser, for failing to disclose conflicts of interest related to compensation arrangements under which the adviser received payments from third parties.

According to the SEC, DMM entered into a series of service agreements with (1) an adviser to a family of mutual funds registered under the 1940 Act that DMM recommended to its clients, (2) a distributor for another family of mutual funds that DMM recommended to its clients, and (3) a broker. The SEC alleged that DMM received, with respect to these agreements, payments based on a percentage of its client’s assets, including those (1) invested in mutual funds that were advised by the adviser, (2) advised by an affiliate of the distributor, or (3) held in custody by the broker. The broker’s platform, according to the SEC, carried mutual funds that were also a part of the adviser’s and the distributor’s families of funds, which meant that the

The SEC alleged that DMM willfully violated Sections 206(2) and 207 of the Advisers Act.

DMM agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $50,000. DMM was further required to comply with certain undertakings, including making additional disclosures in its Form ADV, providing notice to advisory clients including a copy of the SEC’s order, and issuing a certification of compliance certifying its compliance with its

possibility existed that DMM would be paid from multiple sources based on the same client assets. The SEC alleged that, although DMM made certain disclosures referring to its agreements with the adviser, the distributor and the broker in its Form ADV, DMM did not disclose the possibility of payments from multiple sources on the same assets. The SEC also alleged that DMM misstated the maximum rate of compensation that DMM could receive under the service agreements. According to the SEC, DMM was at least negligent in failing to make complete and accurate disclosures to clients about the compensation terms of the services agreements and the potential conflicts of interest.

The SEC alleged further that DMM omitted in its 2011 and 2013 Forms ADV material information about compensation terms under the service agreements and failed to disclose the rate of compensation under the agreement with the broker.

http://www.sec.gov/litigation/admin/2015/ia-4146.pdf

undertakings.

7/14/15

Alleged Distribution of Inaccurate Trade Data to Prime Brokers

Allegedly Causing Brokers to Produce

In OZ Management, LP, Exchange Act Release No. 75,445 (July 14, 2015), the SEC instituted cease-and-desist proceedings against OZ Management, LP (“OZ Management”), an Advisers Act-registered investment adviser, for providing inaccurate trade data to its prime brokers and for causing them to produce inaccurate books and records.

According to the SEC, between January 2008 and

The SEC alleged that OZ Management violated Rule 105 of the SEC’s Regulation M under the Exchange Act and caused violations

OZ Management agreed to cease and desist from causing any violations and any future violations of the charges, and to pay a civil money penalty of $4.25 million, disgorgement of

Inaccurate Books and Records

Allegedly Engaging in Short Sales During a Restricted Period

December, 2013, OZ Management provided brokers acting on behalf of private funds advised by OZ Management with trade files that inaccurately listed the trade type (long or short) of sales. The SEC alleged that OZ Management’s in-house accounting software platform generated trade files for four prime brokers identifying sales as long or short based on the relevant fund’s position in the stock at the prime broker to which the trade was sent for settlement, and not based on whether the sale had been marked long or short when OZ Management sent it to the market through its executing brokers. According to the SEC, these actions sometimes caused trade types to be misidentified in the prime brokers’ view of the trade files, and OZ Management failed to inform the prime brokers that it sometimes did not provide the trade type accurately.

The SEC alleged that strategy-based filters in the trade files misreported long and short trade types if a fund had positions in a security firm-wide and also at the prime broker, and the strategy in that fund at the prime broker had no position in the security. OZ Management, according to the SEC, did not realize that this strategy-based filter was causing trades to be misidentified until October 2013 when SEC staff identified the discrepancies. The SEC alleged that the inaccurate trade files led OZ Management’s prime brokers to produce inaccurate books and records, along with inaccurate blue sheet reports produced to the Commission and FINRA.

of Section 17(a) of, and Rules 17a-3(a)(3) and 17a-25 under, the Exchange Act.

$214,380, and prejudgment interest of $29,047.

The SEC alleged further that OZ Management purchased shares in a secondary offering after engaging in short sales during the restricted period prior to the pricing of the offering. Under Rule 105 of Exchange Act Regulation M, this “restricted period” is defined as the shorter of the period (1) beginning five business days before the pricing of the offered securities and ending with the pricing; or (2) beginning with the initial filing of a registration statement on Form 1-A or Form 1-E and ending with the pricing. Because OZ Management had executed short sales during the restricted period, its purchase of shares in that offering violated Rule 105.

In determining to accept the offer of settlement, the SEC considered remedial acts undertaken by OZ Management and cooperation afforded the SEC staff.

http://www.sec.gov/litigation/admin/2015/34-75445.pdf

7/8/15

Alleged Failure to Obtain Notice and Consent Prior to Completing Transactions with an Affiliate

Allegedly Wrongfully Diverting Funds to a Subsidiary

In VERO Capital Management, LLC, Advisers Act Release No. 4,138 (July 8, 2015), the SEC instituted cease-and-desist proceedings against: VERO Capital Management, LLC (“VERO Capital”), an Advisers Act-registered investment adviser; Robert Geiger, co-owner, managing member, and president of VERO Capital; George Barbaresi, co-owner and general counsel of VERO Capital; and Steven Downey, co-owner and chief financial officer of VERO Capital. The Commission originally instituted public administrative and cease-and-desist proceedings against these parties on December 29, 2014.

The SEC alleged that VERO Capital, Mr. Geiger, Mr. Barbaresi and Mr. Downey violated Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

VERO Capital, Mr. Geiger, Mr. Barbaresi and Mr. Downey agreed to cease and desist from committing or causing any violations and any future violations of the charges, to jointly and severally pay disgorgement of $2,879,623 and

Alleged Violation of the Custody Rule

According to the SEC, between late 2010 and 2011, private funds managed by VERO Capital purchased notes from an entity affiliated with VERO Capital. The purchases were approved on behalf of the private funds by an investment committee that included Messrs. Geiger, Barbaresi and Downey, but included no person independent of VERO Capital. In following a longstanding interpretive position, the SEC concluded that the note transactions were principal transactions that should have been undertaken in accordance with Section 206(3) of the Advisers Act. The Commission concluded further that the approval of the note transactions by the investment committee did not meet the requirements of Section 206(3).

A second allegation made by the SEC was that VERO Capital, while serving as the private funds’ investment manager, was undertaking two new business initiatives, a risk management business and a financial services technology company. The SEC alleged that, beginning in December 2012 and continuing through October 2013, Messrs. Geiger, Barbaresi and Downey improperly diverted $2.8 million of the private funds’ assets to finance the operations of the new business initiatives by causing the funds to make a series of undocumented, undisclosed bridge loans with respect to the initiatives. The SEC alleged that the three men took no action to disclose the loans to investors in the private funds.

The SEC alleged that VERO Capital violated Sections 206(3) and 206(4) of, and Rule 206(4)-2 under, the Advisers Act.

The SEC alleged that Mr. Geiger, Mr. Barbaresi, and Mr. Downey willfully aided and abetted and caused VERO Capital’s violations of Sections 206(2), 206(3), and 206(4) of, and Rules 206(4)-2 and 206(4)-8 under, the Advisers Act.

prejudgment interest of $189,083, and to each pay a civil money penalty of $300,000.

Messrs. Geiger, Barbaresi and Downey agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from serving as, among other things, an employee of any advisory board or investment adviser, except that they could participate in completing the wind down of the private funds and continue to be associated with VERO Capital while VERO Capital acts as an investment adviser.

VERO Capital agreed to censure and to comply with certain undertakings including

The SEC further alleged that VERO Capital failed to comply with the Custody Rule by failing to provide notice to VERO Capital’s clients regarding transactions conducted on their behalf.

http://www.sec.gov/litigation/admin/2015/34-75401.pdf

ceasing investment advisory operations and deregistration as an investment adviser.

Mr. Downey agreed to be denied the privilege of appearing or practicing before the Commission as an accountant, with the ability to request reinstatement after three years.

Mr. Barbaresi agreed to be denied the privilege of appearing or practicing before the Commission as an attorney for three years.

7/1/15

Fraudulent Undisclosed Valuation of Securities Resulting in Increased Fees Due to Higher Net Asset Values

In AlphaBridge Capital Management, LLC, Advisers Act Release No. 4,135 (July 1, 2015), the SEC instituted cease-and-desist proceedings against AlphaBridge Capital Management, LLC (“AlphaBridge”), an Advisers Act-registered investment adviser, Thomas T. Kutzen, AlphaBridge’s founder, majority owner, president, chief executive officer and chief investment officer, and Michael J. Carino, AlphaBridge’s chief compliance officer and minority owner, for (1) valuing

The SEC alleged that AlphaBridge willfully violated, and Mr. Carino willfully aided and abetted and caused AlphaBridge’s violation of, Sections 206(1),

AlphaBridge, Mr. Kutzen and Mr. Carino agreed to cease and desist from causing any violations or any future violations of the charges, to jointly and severally pay disgorgement of

Charges Against Chief Compliance Officer for Valuation Violations

Related Action Against Registered Representative of a Broker-Dealer for its Role in Valuation Violations

the securities held by private fund clients in contravention of the disclosed method and (2) breaching their fiduciary duties to their advisory clients.

According to the SEC, from 2001 through at least April 2013, AlphaBridge made various misrepresentations to its private investment fund investors, administrator and auditor concerning AlphaBridge’s process for valuing mortgage-backed securities in the funds’ portfolio. AlphaBridge disclosed that it obtained monthly price quotes from two independent and reputable broker-dealers and used the average of these quotes as the prices for securities held by private fund clients. The SEC alleged that, since 2011, AlphaBridge provided valuations AlphaBridge generated to broker-dealer representatives who indicated that the valuations were their own. The broker-dealer representatives in turn provided the valuations as their own to the auditor and administrator. According to the SEC, when AlphaBridge’s prices increasingly differed from other valuation sources in 2011 and 2012, the auditor asked to speak directly with the broker-dealer representatives to provide market support for their prices. The SEC alleged that AlphaBridge subsequently scripted the representatives’ responses in seeking to continue to mislead and deceive the auditor and fund investors. The alleged inflating of the valuation of mortgage-backed securities, according to the SEC, caused the funds to pay AlphaBridge higher management and performance fees than had the securities been priced using other valuation sources.

206(2), and 206(4) of, and Rules 206(4)-7 and 206(4)-8 under, the Advisers Act.

The SEC alleged that Mr. Kutzen willfully aided and abetted and caused AlphaBridge’s violations of Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that AlphaBridge and Mr. Carino willfully violated Section 207 of the Advisers Act.

$4,025,000, and to comply with certain undertakings, including winding down operations of AlphaBridge’s funds, administering a Distribution Fund to reimburse affected current and former investors, engaging an independent compliance monitor, and causing AlphaBridge to withdraw its registration as an Advisers-Act registered investment adviser.

AlphaBridge agreed to censure and to pay a civil money penalty of $725,000.

Mr. Carino agreed to be barred from association with, among others, any broker, dealer or investment adviser, and to be prohibited from

The SEC alleged that AlphaBridge overstated its funds’ net assets and AlphaBridge’s assets under management in its Form ADV and annual amendments filed with the Commission, as the funds’ net asset value was inflated by the misvaluation of fund assets. In addition, according to the SEC, AlphaBridge failed to implement a valuation policy reasonably designed to prevent violations of the Advisers Act, and Mr. Carino aided and abetted and caused AlphaBridge’s failure to implement such policies and procedures.

The AlphaBridge case is noteworthy, as it reflects the SEC’s willingness to take action against an investment adviser’s chief compliance officer and against an outsider with respect to alleged misevaluation of assets by a registered investment adviser.

http://www.sec.gov/litigation/admin/2015/ia-4135.pdf

In a related case, Richard Lawrence Evans, Advisers Act Release No. 4,136 (July 1, 2015), the SEC instituted cease-and-desist proceedings against Richard Lawrence Evans, one of the registered broker-dealer representatives who passed on AlphaTitans’ valuations as the broker-dealer’s own independent valuation, for his role in the alleged scheme. Between 2000 and 2013, AlphaBridge was consistently one of Mr. Evans’ largest customers.

http://www.sec.gov/litigation/admin/2015/34-75340.pdf

The SEC alleged that Mr. Evans willfully aided and abetted and caused AlphaBridge’s violations of Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

serving as, among other things, an employee of any advisory board or investment adviser, with the right to apply for reentry after three years, subject to an exemption under which Mr. Carino could continue to be associated with AlphaBridge for select activities reasonably necessary to complete the winding down of the funds; and to pay a civil money penalty of $200,000.

Mr. Kutzen agreed to censure and to pay a civil money penalty of $50,000.

Mr. Evans agreed to cease and desist from committing or causing any violations and any future violations of the charges; to be barred from association with,

among others, any broker, dealer or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser with the right to reapply after one year; and to pay a civil money penalty of $15,000.

7/1/15

Alleged Violation of Auditor Independence Rule Under Regulation S-X

Action Taken Against Mutual Fund Independent Board Member

Action Taken Against Mutual Fund Administration

In Deloitte & Touche LLP, 1940 Act Release No. 31,703 (July 1, 2015), the SEC instituted cease-and-desist proceedings against the accounting firm of Deloitte & Touche LLP (“D&T”), ALPS Fund Services, Inc. (“ALPS”), an administrative service provider to 1940-Act registered investment companies, and Andrew C. Boynton, a non-interested member of the board of trustees and member of the audit committee of three registered investment companies audited by D&T and administered by ALPS, in connection with D&T’s violating the auditor independence rule under the Commission’s Regulation S-X.

An auditor independence violation in Regulation S-X consists of (1) an independence-impairing relationship; (2) existing during all or part of the period covered by the audit; followed by (3) issuance of an audit report asserting the auditor’s independence from the client. According to the SEC, in May of 2006, Mr. Boynton

The SEC alleged that D&T engaged in improper professional conduct in violation of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; violated Rule 2-02(b) of Regulation S-X; and caused its clients to violate Sections 20(a) and 30(a) of, and Rule

D&T agreed to censure, to cease and desist from committing or causing any violations and any future violations of the charges, and to pay disgorgement of $497,438, prejudgment interest of $116,478, and a civil money penalty of $500,000.

ALPS agreed to pay a civil money penalty of $45,000.

Mr. Boynton agreed to cease and desist from

entered into a business and consulting relationship with a D&T affiliate while he was serving on the boards and audit committees of three registered investment company audit clients of D&T. The SEC alleged that, although the policies for Deloitte LLP, D&T’s parent company, required an independence consultation prior to entering a new business relationship with a consultant, an independence consultation was not performed before Mr. Boynton entered into this business relationship or at any subsequent time. According to the SEC, D&T represented that it was independent in its audit reports for all three investment companies of which Mr. Boynton was a board member, despite his business relationship with a D&T affiliate, and included these reports of independence with the registered investment companies’ annual reports on 1940 Act Form N-CSR and proxy statements filed with the SEC. In addition, the SEC alleged that D&T expressly confirmed to the registered investment companies that it was “independent” and therefore able to serve as each investment company’s external auditor, failing to disclose Mr. Boynton’s relationship.

The SEC alleged that the registered investment companies failed to adopt written policies and procedures reasonably designed to prevent auditor independence violations, as the investment companies’ trustee and officer questionnaires did not expressly cover business relationships with the auditor’s affiliates, and the investment companies did not provide sufficient written policies or procedures designed to prevent

20a-1 under, the 1940 Act.

The SEC alleged that ALPS caused its registered investment company clients to violate Rule 38 a-1 under the 1940 Act, and that Mr. Boynton caused these clients to violate Sections 20(a) and 30(a) of, and Rule 20a-1 under, the 1940 Act.

causing any violations and any future violations of the charges, and to pay disgorgement of $30,000, prejudgment interest of $5,328, and a civil money penalty of $25,000.

violations of auditor independence or sufficient training to assist board members in discharging their responsibilities as to auditor independence. According to the SEC, Mr. Boynton did not identify his relationship with the D&T affiliate in his responses in his annual trustee and officer questionnaire or seek guidance on whether the relationship created a conflict.

The D&T case reflects one of a number of recent SEC proceedings in which the Commission has cited favorably remedial actions taken by industry participants. In particular, the SEC, in determining to accept D&T’s offer of settlement, considered the steps taken by D&T and its associated entities both before and after its detection of the independence issue, to enhance its independence quality and control systems. The SEC also cited favorably remedial steps undertaken by ALPS in determining to accept its offer of settlement.

Another noteworthy aspect of the D&T case is the SEC’s willingness to take action against a registered investment company independent trustee.

http://www.sec.gov/litigation/admin/2015/34-75343.pdf

6/29/15

Alleged Misallocation of Broken Deal Expenses to Private Equity Funds

In Kohlberg Kravis Roberts & Co. L.P., Advisers Act Release No. 4,131 (June 29, 2015), the SEC instituted cease-and-desist proceedings against the well-known and well-regarded private equity firm, Kohlberg Kravis Roberts & Co. L.P. (“KKR”), for allegedly misallocating broken deal expenses to its flagship private equity fund and for failing to implement a

The SEC alleged that KKR violated Sections 206(2) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

KKR agreed to cease and desist from committing or causing any violations and any future violations of the charges, to pay disgorgement of

Alleged Breach of Fiduciary Duty for Failing to Expressly Disclose Expense Allocation Practices

Alleged Failure to Adopt Compliance Policies and Procedures Governing Expense Allocation Practices

written compliance policy governing its expense allocation practices.

According to the SEC, during a six-year period ending in 2011, KKR, an Advisers Act-registered investment adviser, incurred $338 million in “broken deal expenses” related to unsuccessful buyout opportunities and similar expenses incurred in connection with private funds managed by KKR. Broken deal expenses generally include research costs, travel costs, professional fees, and other expenses incurred in deal sourcing activities related to deals that never materialize. The SEC alleged that KKR’s co-investment vehicles participated in private equity transactions undertaken on behalf of KKR private funds during the six-year time period and benefited from KKR’s deal sourcing efforts. KKR did not, however, according to the SEC, allocate any portion of the broken deal expenses to the co-investment vehicles. The SEC alleged moreover that the co-investment vehicles were, at least in part, owned by KKR executives, consultants, and certain others. Neither the limited partnership agreements nor the offering materials related to KKR’s private funds, according to the SEC, included express disclosure that KKR did not allocate broken deal expenses to KKR co-investment vehicles. KKR’s written policies did not address broken deal expense allocations between funds and co-investment vehicles, according to the SEC.

The KKR case is perhaps the most publicized of the

$14,165,968 and prejudgment interest of $4,511,441 to compensate the applicable funds, and to pay a civil money penalty of $10 million.

SEC’s recent efforts of taking a hard look at practices that have long been followed in the private equity business.

http://www.sec.gov/litigation/admin/2015/ia-4131.pdf

6/23/15

Alleged Failure to Enforce and Provide Appropriate Resources to Enforce Compliance Policies and Procedures

Failure to Seek Best Execution in the Context of a Mutual Fund’s Class of Shares for Investments

Failure to Comply with Adviser’s Policies and Procedures

Self-Reporting of Settling Parties Cited by SEC

In Pekin Singer Strauss Asset Management Inc., Advisers Act Release No. 4,126 (June 23, 2015), the SEC instituted cease-and-desist proceedings against Pekin Singer Strauss Asset Management Inc. (“Pekin Singer”), an Advisers Act-registered investment adviser, Ronald L. Strauss (“Mr. R. Strauss”), former president of Pekin Singer, William A. Pekin, portfolio manager and current chairman of Pekin Singer, and Joshua D. Strauss (“Mr. J. Strauss”), portfolio manager and current co-chief executive officer of Pekin Singer, for allegedly failing to conduct timely annual compliance program reviews, failing to implement and appropriately enforce compliance policies and procedures, and failing to seek best execution for Pekin Singer’s clients.

According to the SEC, in 2009 and 2010, Pekin Singer’s chief compliance officer (“CCO”) informed Mr. R. Strauss multiple times that the CCO needed help to fulfill his compliance responsibilities and expressed concern that Pekin Singer had not completed certain compliance testing. Mr. R. Strauss in his response, however, directed the CCO to prioritize other responsibilities and maintained that Pekin Singer could address compliance issues at a later time. The SEC alleged that, as a result of these actions, the CCO was unable to complete timely annual compliance program

The SEC alleged that Pekin Singer willfully violated Sections 204A, 206(2), 206(4), and 207 of, and Rules 204A-1 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. R. Strauss willfully violated Section 207 of the Advisers Act, and caused Pekin Singer’s violations of Sections 204A and 206(4) of, and Rules 204A-1 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Mr. Pekin and Mr. J. Strauss

Pekin Singer agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to pay a civil money penalty of $150,000.

Mr. R. Strauss agreed to cease and desist from committing or causing any violations and any future violations of the charges, to be suspended from association in a compliance or supervisory capacity with, among others, any broker or investment adviser for a period of 12 months, and to pay a civil money penalty of

reviews for 2009 or 2010 as required by Rule 206(4)-7 under the Advisers Act.

In January of 2011, according to the SEC, Pekin Singer engaged a compliance consultant to review Pekin Singer’s compliance processes. The consultant issued a report in June of 2011 outlining several compliance deficiencies. The SEC began in May 2011 an examination of Pekin Singer and cited the firm for several compliance deficiencies, including the failure to conduct annual compliance program reviews for two years and code of ethics violations by a Pekin Singer analyst related to personal trading. The SEC alleged that it took the firm an additional six months after receiving the report to complete its compliance reviews covering 2009 and 2010 and that the delay reflected Pekin Singer’s unwillingness to provide assistance to the CCO.

According to the SEC, Pekin Singer violated a number of its policies and procedures and its code of ethics between 2009 and 2011, and these violations were not detected until the compliance consultant and SEC exam staff examined Pekin Singer’s compliance program. The SEC also alleged that Pekin Singer made misleading disclosures in its Form ADV filings resulting from its failing to meet certain requirements and prohibitions outlined in the description of Pekin Singer’s code of ethics.

Pekin Singer, according to the SEC, reported to the

caused Pekin Singer’s violations of Sections 206(2) and 207 of the Advisers Act.

$45,000.

Mr. Pekin and Mr. J. Strauss agreed to cease and desist from committing or causing any violations and any future violations of the charges, to censure, and to each pay a civil money penalty of $45,000.

Commission that it invested its separately managed account clients in the investor share class of a mutual fund advised by Pekin Singer, despite these clients’ eligibility for conversion or placement in the fund’s institutional share class at a lower cost to the clients. The SEC alleged that in making these investments, Pekin Singer failed to seek best execution for it clients, and that the fees paid directly benefited Pekin Singer by $307,242. According to the SEC, the higher fees and the conflict of interest they created were not disclosed to the clients.

In determining to accept the offers of settlement, the SEC considered that Pekin Singer self-reported the best execution issue to the SEC, cooperated with SEC staff, and promptly undertook the various remedial acts.

http://www.sec.gov/litigation/admin/2015/ia-4126.pdf

6/17/15

Alleged Failure to Provide the Board of a Registered Investment Company Information Reasonably Necessary for the Board to Evaluate Fund Advisory Contracts

In Commonwealth Capital Management, LLC, 1940 Act Release No. 31,678 (June 17, 2015), the SEC instituted cease-and-desist proceedings against: Commonwealth Capital Management, LLC (“CCM”), an Advisers Act-registered investment adviser; Commonwealth Shareholder Services, Inc. (“CSS”), a mutual fund administrator; John Pasco, III, owner of CCM and CSS; and J. Gordon McKinley, III, Robert R. Burke, and Franklin A. Trice, III, non-interested trustees of a 1940 Act-registered investment company to which CCM and CSS provide services. The Commission alleged that all of these parties failed to satisfy their duties under Section 15(c) of the 1940 Act in evaluating fund

The SEC alleged that CCM, Mr. McKinley, Mr. Burke, and Mr. Trice willfully violated, and Mr. Pasco caused violations of, Section 15(c) of the 1940 Act. The SEC also alleged that CSS caused violations of

CCM, Mr. Pasco, Mr. McKinley, Mr. Burke, Mr. Trice, and CSS agreed to cease and desist from committing or causing any violations and any future violations of the charges.

Mr. McKinley, Mr. Burke, and Mr. Trice agreed to pay a civil

Failure to Include the Board’s Material Factors and Conclusions for Approving the Advisory Contract in Shareholder Report

advisory contracts.

According to the SEC, Mr. Pasco formed CCM and CSS as turnkey investment company platforms designed to provide services to registered investment companies including investment advisory services, fund accounting, fund administration, and distribution services. According to the SEC, turnkey platforms are designed to enable investment company advisers to manage registered investment companies without having to administer day-to-day operations such as the management of corporate governance and regulatory compliance. Mr. McKinley, Mr. Burke and Mr. Trice all served as non-interested trustees of a 1940 Act-registered investment company that used CCM and CSS’s services.

Section 15(c) of the 1940 Act requires the members of a registered investment company’s board to request and evaluate such information as may be reasonably necessary for the board to evaluate the terms of any contract under which a person or entity is to serve or act as an investment adviser to the investment company. According to the SEC, Section 15(c) does not define what may be “reasonably necessary” to evaluate a contract’s terms, but that analysis may be informed by factors known as the Gartenberg Factors, which include (1) the adviser’s cost in providing services to the investment company; (2) the nature and quality of the adviser’s services; (3) the extent to which the adviser realizes economies of scale as the investment company

Section 30(e) of, and Rule 30e-l under, the 1940 Act.

penalty of $3,250.

CCM, CSS, and Mr. Pasco agreed to be jointly and severally liable for a civil penalty of $50,000.

grows larger; (4) the adviser’s profitability in advising the investment company; (5) fee structures for comparable investment companies; (6) so-called “fallout” benefits accruing to the adviser or its affiliates; and (7) the independence, expertise, care and conscientiousness of the board.

According to the SEC, Messrs. McKinley, Burke and Trice requested information from CCM and Mr. Pasco to evaluate before approving an advisory contract between the investment company they served and CCM. The SEC alleged that CCM did not provide comparable fund fee information or a sufficient evaluation of the nature and quality of services provided by the adviser. The SEC alleged further that CCM provided another 1940 Act-registered investment company with inaccurate and incomplete comparable fund analysis tables, insufficient financial statements, inaccurate fee waiver information, and insufficient detail related to economies of scale and fund breakpoints. According to the SEC, both investment companies’ trustees approved the advisory contracts despite a lack of necessary information.

The SEC alleged that CSS violated fund reporting requirements by failing to include a summary of the process by which the advisory contracts of the registered investment companies it served were evaluated in registered investment company shareholder reports it prepared.

http://www.sec.gov/litigation/admin/2015/ic-31678.pdf

6/15/15

Alleged Failure to Adopt and Implement Policies and Procedures Reasonably Designed to Prevent the Misappropriation of Client Assets

Alleged Material Misstatements in Form ADV Filings

Alleged Failure of Chief Compliance Officer to Implement Compliance Policies

In SFX Financial Advisory Management Enterprises, Inc., Advisers Act Release No. 4,116 (June 15, 2015), the SEC instituted cease-and-desist proceedings against SFX Financial Advisory Management Enterprises, Inc. (“SFX”), a former Advisers Act-registered investment adviser, and Eugene S. Mason, its chief compliance officer, for allegedly failing to supervise SFX’s former president and for related compliance violations.

The SEC alleged that SFX failed to supervise its former vice president and president, Brian Ourand, who misappropriated $670,000 from three clients. According to the Commission, SFX’s policies enabled Mr. Ourand to circumvent secondary review of the unauthorized payments he made from client accounts. The SEC asserted that Mr. Mason learned that Mr. Ourand had misappropriated client assets when a client complained that he could not use one of his credit cards; SFX and Mr. Mason then conducted an internal investigation, terminated Mr. Ourand and reported his conduct to criminal authorities.

According to the SEC, individuals at SFX including Mr. Ourand had full signatory power over client bank accounts, resulting in a significant risk that those individuals could misappropriate funds. The SEC alleged that SFX’s compliance policies and procedures were not reasonably designed or effectively implemented to prevent this misappropriation. The SEC

The SEC alleged that SFX willfully violated Sections 203(e)(6), 206(2), and 207 of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

The SEC also alleged that Mr. Mason caused SFX’s violations of Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act, and that Mr. Mason willfully violated Section 207 of the Advisers Act.

SFX and Mr. Mason agreed to cease and desist from committing or causing any violations and any future violations of the charges and to be censured, and SFX agreed to pay a civil penalty of $150,000.

acknowledged that SFX’s compliance policy contemplated a review of “cash flows in client accounts,” but alleged that SFX and Mr. Mason did not effectively implement this provision for the client accounts used for bill-paying services.

According to the Commission, SFX’s Form ADV indicated that client bill-paying accounts would be reviewed several times each week by senior management. The Commission alleged that no one other than Mr. Ourand, however, reviewed the bill-paying accounts over which he had signing authority. In addition, according to the SEC, Mr. Mason failed to ensure that SFX completed an annual review of its compliance program in 2011.

The SFX Financial settlement is one of a number of recent enforcement actions directed at chief compliance officers of registered investment companies.

http://www.sec.gov/litigation/admin/2015/ia-4116.pdf

In a related case, Brian J. Ourand, Advisers Act Release No. 4,115, the SEC instituted cease and desist proceedings against Mr. Ourand for his misappropriation of fund assets.

http://www.sec.gov/litigation/admin/2015/ia-4115.pdf

The SEC alleged that Mr. Ourand willfully violated, or willfully aided and abetted and caused violations of, Sections 206(1) and 206(2) of the Advisers Act.

The SEC instituted cease-and-desist proceedings to seek, among other things, disgorgement and civil penalties.

6/4/15

Dismissal of an SEC Administrative Proceeding by an Administrative Law Judge

Determination that the SEC failed to show a failure to disclose a conflict of interest

Determination that the SEC failed to show inadequate disclosure on the part of a registered investment adviser

On June 4, 2015, an SEC administrative law judge (“ALJ”) issued an Initial Decision in The Robare Group, LTD., Admin Proc. File No. 3-16047, Initial Decision Release No. 806 (June 4, 2015), concluding that the SEC failed to carry its burden of showing that a registered investment adviser violated certain provisions of the Advisers Act. The decision related to an administrative proceeding instituted by the SEC against The Robare Group Ltd. (“Robare Group”), an investment adviser registered under the Advisers Act, Mark Robare, its founder, co-owner and chief compliance officer, and Jack Jones Jr., its co-owner. The SEC had alleged that Robare Group violated provisions of the Advisers Act by failing to disclose conflicts of interest to investors.

Robare Group, according to the SEC, entered into an agreement with a broker-dealer registered under the Exchange Act under which Robare Group received compensation in connection with purchases of shares of open-end investment companies registered under the 1940 Act distributed by the broker-dealer. The SEC alleged that this arrangement was not appropriately disclosed to Robare Group’s clients. In particular, the SEC asserted that the Robare Group’s Form ADV filings indicated that it “may” receive compensation in connection with purchases of investment company shares made on behalf of its client, when the disclosure should have indicated that Robare Group did receive compensation.

The SEC alleged that Robare Group and Mr. Robare willfully violated Sections 206(1), 206(2), and 207 of the Advisers Act.

The SEC alleged that Mr. Jones aided and abetted and caused the violations of Sections 206(1) and 206(2) of the Advisers Act and willfully violated Section 207 of the Advisers Act.

The ALJ ordered that the administrative proceeding be dismissed.

The ALJ determined that the SEC failed to carry its burden of showing violations of Sections 206(1), 206(2), and 207 of the Advisers Act based on the alleged failure to disclose conflicts of interest and dismissed the allegations. The ALJ agreed with the SEC’s position that “all conflicts of interest are material and must be disclosed,” and that the compensation from the broker-dealer is a conflict of interest that must be disclosed. The ALJ, however, determined that the SEC failed to show that Robare Group or Mr. Robare had acted with the required scienter or recklessness for a violation of Section 206(1) of the Advisers Act, which makes it unlawful to employ any device, scheme, or artifice to defraud any client. In coming to this conclusion, the ALJ found that Mr. Robare and Mr. Jones did not have the requisite intent to defraud, as the evidence presented to the ALJ indicated that the two men had relied on multiple compliance consultants and that their reliance on the consultants “belies any argument that [they] acted with an intent to deceive, manipulate, or defraud anyone.” The ALJ also noted in his decision that reliance on compliance professionals, and following their advice, prevents a showing of recklessness.

The ALJ further concluded that the SEC failed to show that Robare Group or Mr. Robare had acted with the required negligence for a violation of Section 206(2) of the Advisers Act, which makes it unlawful to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or

prospective client. The ALJ, in doing so, found that neither Mr. Robare nor Mr. Jones had expertise in preparing Form ADV disclosure and relied on the compliance experts to do so. According to the ALJ, the SEC did not show that Mr. Robare and Mr. Jones’ reliance on the compliance consultants violated an applicable reasonable care standard.

The ALJ took the position that the SEC failed to make the necessary showing that Robare Group, Mr. Robare and Mr. Jones made an untrue statement in filings with the SEC in violation of Section 207 of the Advisers Act. Section 207 makes it unlawful to willfully make any untrue statement of material fact in a filing with the SEC. The ALJ concluded that the diligence shown by the Robare Group and the two men together with the SEC’s failure to meet the burden of proving that they failed to act with reasonable care prevented them from having made a willful untrue statement.

https://www.sec.gov/alj/aljdec/2015/id806jeg.pdf

The Robare Group decision is most noteworthy, as it is relatively infrequent for the SEC to lose a case before an ALJ. The lasting effects of the Robare decision on disclosure practices under the Advisers Act is difficult to assess at present, as the SEC’s Division of Enforcement has petitioned the Commission to review the ALJ’s initial decision. The Division of Enforcement argues in its petition, among other things, that the ALJ’s conclusions as discussed above disregard well-

established law and create a new standard.

http://www.sec.gov/litigation/apdocuments/3-16047-event-57.pdf

5/21/15

Alleged Unsuitable Investment Recommendations

Material Misrepresentations to Pension Plan Clients

In a well-publicized case, Gray Financial Group, Inc., Advisers Act Release No. 4,094 (May 21, 2015), the SEC instituted cease-and-desist proceedings against Gray Financial Group, Inc. (“Gray Financial”), an Advisers Act-registered investment adviser, Laurence 0. Gray, president and former chief executive officer of Gray Financial, and Robert C. Hubbard, IV, chief operating officer and current chief executive officer of Gray Financial, for providing unsuitable investment recommendations to Gray Financial’s public pension clients and for making material misrepresentations in connection with these recommendations.

In July of 2012, the State of Georgia allowed, for the first time, most of its public pension plans to invest in alternative investments subject to specific restrictions as to investment size and timing. The SEC alleged that, between July 2012 and August 2013, Gray Financial recommended and sold interests in an alternative investment fund of funds advised by Gray Financial to four Georgia public pension clients, despite the fact that they knew, were reckless in not knowing, or should have known that these investments did not comply with the restrictions on alternative investments imposed by Georgia law. According to the SEC, by recommending and selling the fund, Gray Financial breached its fiduciary duty to its advisory clients.

The SEC alleged that Gray Financial and Mr. Gray willfully violated Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Mr. Hubbard willfully violated Section 17(a) of the Securities Act and Section 10(b) of, and Rule 10b-5 under, the Exchange Act; or, alternatively, that Mr. Hubbard

The SEC instituted cease-and-desist proceedings to seek, among other things, disgorgement and civil penalties.

The SEC further alleged that, in October 2012, when recommending investment in the alternative investment fund to one of its clients, Gray Financial gave assurance concerning the investment’s compliance with Georgia law and the number and identity of prior investors in the fund. According to the SEC, Mr. Gray noted in this connection, for example, that the investment was “absolutely” consistent with the law. The SEC alleged that Mr. Gray was reckless in not knowing, or should have known that his claim was false.

http://www.sec.gov/litigation/admin/2015/33-9789.pdf

willfully aided, abetted, and caused Gray Financial and Mr. Gray’s violations of such sections and rules.

The SEC alleged that Mr. Hubbard willfully aided, abetted and caused Gray Financial and Mr. Gray’s violations of Sections 206(1), 206(2), and 206(4) of, and Rule 206(4) under, the Advisers Act.

5/18/15

Failure to Correct Ongoing Securities Violations

Allegations of Recidivist Conduct

In Trust & Investment Advisors, Inc., Advisers Act Release No. 4,087 (May 18, 2015), the SEC instituted cease-and-desist proceedings against Trust & Investment Advisors, Inc. (“TIA”), an Advisers Act-registered investment adviser, Larry K. Pitts, chief executive officer, sole owner and portfolio manager of TIA, and George M. Prugh, senior vice president and chief financial officer of TIA, for failing to correct advertising and compliance deficiencies identified during previous examinations of TIA.

The SEC alleged that TIA willfully violated, and Mr. Pitts and Mr. Prugh willfully aided and abetted and caused TIA’s violations of, Sections 206(2) and 206(4) of, and Rules

TIA, Mr. Pitts and Mr. Prugh agreed to cease and desist from committing or causing any violations and any future violations of the charges and to censure.

TIA and Mr. Pitts agreed to pay a civil money penalty of

According to the SEC, its Office of Compliance Inspections and Examinations (“OCIE”) cited, during on-site examinations, numerous deficiencies, including TIA’s failure to complete an annual compliance review or develop a compliance manual as required by Advisers Act Rule 206(4)-7, and TIA’s use of misleading performance numbers that were gross of fees in its marketing materials without appropriate disclosures on the effect of the fees on performance. The SEC alleged that, despite OCIE’s warnings of deficiencies resulting in possible securities law violations and assurances from TIA that its errors would be corrected after the 2005 and 2007 exams, OCIE identified the same deficiencies in a 2011 exam. The SEC alleged that TIA’s marketing materials after the 2007 exam compared its performance with dividends reinvested against the S&P 500 index without actual dividends reinvested.

http://www.sec.gov/litigation/admin/2015/ia-4087.pdf

206(4)-1(a)(5) and 206(4)-7 under, the Advisers Act.

$50,000. Mr. Prugh agreed to pay a civil money penalty of $10,000.

TIA, Mr. Pitts and Mr. Prugh were further required to comply with certain undertakings, including compliance training and engaging a compliance consultant.

5/14/15

Failure to Price Redemption Orders on Day Delivered

Intentionally Delaying Receipt of Orders

In Nationwide Life Insurance Company, 1940 Act Release No. 31,601 (May 14, 2015), the SEC instituted cease-and-desist proceedings against Nationwide Life Insurance Company (“Nationwide”), a life insurance company, for intentionally delaying receipt of orders for shares of investment companies registered under the Act received by mail in attempting to process the orders at the next day’s price. The SEC alleged the intentional delay was in violation of Rule 22c-1 under the 1940 Act.

Rule 22c-1(a) under the 1940 Act requires, among other

The SEC alleged that Nationwide willfully violated Rule 22c-1 under the 1940 Act.

Nationwide agreed to cease and desist from committing or causing any violations and any future violations of the charges and pay a civil money penalty of $8,000,000.

things, that a registered investment company issuing any redeemable security sell, redeem, or purchase the security based on the next net asset value (“NAV”) of the security computed after receipt of the order. Rule 22c-1(b) under the 1940 Act requires that a registered investment company’s current NAV be computed at least once daily, Monday through Friday. Orders received prior to the investment company’s NAV calculation must be priced at that day’s price, with orders received after the calculation priced at the next day’s price. Nationwide was subject to Rule 22c-1, as it was designated in Nationwide’s variable insurance contract prospectuses as authorized to consummate transactions in shares of registered investment companies underlying the variable insurance contracts.

According to the SEC, Nationwide, despite having access to orders contained in a post office box early each morning, delayed the retrieval of the orders and waited until 4:00 p.m. to deliver the orders to its offices. The SEC alleged that Nationwide then processed the orders using the next day’s variable contract accumulation unit value (“AUV”) and transmitted the orders to the underlying investment companies for processing using the next day’s NAV, notwithstanding prospectus disclosure indicating a 4:00 p.m. cutoff for determining whether an order was assigned the current day’s AUV and NAV or the next day’s AUV and NAV. According to the SEC, Nationwide had the Post Office separate the redemption orders from its other mail in attempting to control the time at which any orders

related to its variable contracts were delivered to its office. The SEC alleged that Nationwide also stressed to the Post Office that it needed “late delivery” of redemption orders “due to regulations that require Nationwide to process any mail received by 4:00 p.m. the same day.”

http://www.sec.gov/litigation/admin/2015/ic-31601.pdf

5/12/15

Fraud and Misrepresentation

In Paul Tabet, Advisers Act Release No. 4,082 (May 12, 2015), the SEC instituted cease-and-desist proceedings against Paul Tabet for raising at least $9.9 million from approximately 110 investors as investments in several limited liability companies (“LLCs”) affiliated with Mr. Tabet on the basis of false representations and misappropriating the offering proceeds to pay previous investors and cover Mr. Tabet’s personal expenses. The SEC alleged that Mr. Tabet and his business partner Craig Berkman, when offering and selling membership interests in the various LLCs, made numerous material misrepresentations to investors that Messrs. Tabet and Berkman knew, or were reckless in not knowing, were false.

According to the SEC, Mr. Tabet told investors in several LLCs that their investments would be used to acquire highly desired, pre-initial public offering (“IPO”) shares of Facebook, Inc., Linkedln, Inc., Groupon, Inc., and Zynga Inc. The SEC alleged that Mr. Berkman instead used investor money to make payments to investors in his earlier investment schemes to cover his own personal expenses. According to the

The SEC alleged that Mr. Tabet, his associated investment advisers, and their associated LLCs committed violations of, and Mr. Tabet willfully violated and aided and abetted and caused violations of, Section 17(a) of the Securities Act, Section 10(b) of, and Rule 10b-5 under, the Exchange Act, and Sections 206(1), 206(2), and 206(4), and Rule 206(4)-8 under, the Advisers Act.

Mr. Tabet agreed to cease and desist from committing or causing any violations and any future violations of the charges; to be barred from association with, among others, any broker, dealer or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser; to pay disgorgement of $502,368 and prejudgment interest of $30,945; and to pay a civil money penalty of $376,776.

SEC, Mr. Berkman used $600,000 of the $9.9 million raised with respect to the LLCs to purchase a small interest in an unrelated fund that had acquired pre-IPO Facebook stock. The interest in the fund did not provide any of the LLCs with ownership of Facebook shares.

The SEC alleged that Mr. Tabet forged a law firm letter about that investment in falsely representing to investors that an LLC owned nearly half a million shares of Facebook stock. According to the SEC, as the end of the lock up period for pre-IPO Facebook stock approached and investors began making requests for their distributions, Mr. Tabet and others knowingly or recklessly made, or caused to be made, misrepresentations to investors to keep the investors from learning of the fraud and demanding the return of their funds.

http://www.sec.gov/litigation/admin/2015/33-9771.pdf

4/29/15

Improper Allocation of Private Fund Assets to Pay Adviser-Related Operating Expenses

Breach of Fiduciary Duty

Action Against

In Alpha Titans, LLC, Advisers Act Release No. 4,073 (Apr. 29, 2015), the SEC instituted cease-and-desist proceedings against Alpha Titans LLC (“Alpha Titans”), an Advisers Act-registered investment adviser, its principal Timothy P. McCormack, and its general counsel Kelly D. Kaeser, for improper allocation of fund assets to pay adviser-related expenses.

According to the SEC, Alpha Titans and Mr. McCormack used assets of two private funds managed by Alpha Titans to pay more than $450,000 in office rent, employee salaries and benefits, and similar

The SEC alleged that Alpha Titans and Mr. McCormack willfully violated, and Mr. Kaeser willfully aided and abetted and caused their violation of, Sections 206(2) and 206(4) of, and Rule 206(4)-8

Alpha Titans agreed to be censured, and along with Mr. McCormack agreed to cease and desist from committing or causing any future violations of the charges, to pay disgorgement of $469,522 and prejudgment interest of $28,928 on a joint and

an Adviser’s General Counsel

Failure to Comply with Generally Accepted Accounting Principles in Violation of the Custody Rule

expenses without clear authorization in the funds’ operating agreements and without accurate and complete disclosures that fund assets were being used for these purposes. The SEC further alleged that Alpha Titans’ Forms ADV did not disclose that Alpha Titans’ clients paid most of Alpha Titans’ operating expenses.

The SEC alleged that audited financial statements provided to investors in the private funds failed to disclose almost $3 million in expenses tied to transactions involving other entities controlled by Mr. McCormack. According to the SEC, Alpha Titans violated the Custody Rule by distributing financial statements that were not in accordance with Generally Accepted Accounting Principles (“GAAP”), as the statements failed to disclose related party relationships and material related party transactions concerning the payment of adviser-related operating expenses.

According to the SEC, Alpha Titans’ policies and procedures lacked provisions reasonably designed to prevent violations of the Advisers Act arising from failures to disclose material conflicts of interest or to act in the best interest of clients in connection with related party transactions involving Alpha Titans’ private fund clients.

http://www.sec.gov/litigation/admin/2015/34-74828.pdf

In a related case, Simon Lesser, Advisers Act Release No. 4,071 (Apr. 29, 2015), the SEC instituted cease-

under, the Advisers Act.

The SEC alleged that Alpha Titans willfully violated, and Mr. McCormack and Mr. Kaeser willfully aided and abetted and caused Alpha Titans’ violations of, Sections 206(4) of, and Rules 206(4)-2 and 206(4)-7 under, the Advisers Act.

The SEC alleged that Alpha Titans and Mr. McCormack willfully violated Section 207 of the Advisers Act.

several basis, to pay a civil money penalty of $200,000 on a joint and several basis, and to administer a fund to compensate investors.

Mr. Kaeser agreed to cease and desist from committing or causing any future violations of the charges and to be suspended from appearing or practicing before the SEC as an attorney for 12 months.

Mr. McCormack and Mr. Kaeser agreed to be barred from association with, among others, any broker, dealer or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser for a period of 12 months.

and-desist proceedings against Mr. Lesser, a certified public accountant, alleging that Mr. Lesser issued audit reports containing unqualified opinions that Alpha Titans’ financial statements were presented fairly in conformity with GAAP when the statements did not adequately disclose related party relationships or material related party transactions. According to the SEC, Mr. Lesser engaged in improper professional conduct in performing the audits for the funds.

http://www.sec.gov/litigation/admin/2015/34-74827.pdf

Alpha Titans and Mr. McCormack were further required to comply with certain undertakings (including winding down fund operations and discontinuing the solicitation of or acceptance of any investments).

4/20/15

Undisclosed Conflict of Interest

Breach of Fiduciary Duty

Sanctioning of a Chief Compliance Officer

Failure to Report a Material Compliance Matter to the Board of an Investment Company Registered under

In BlackRock Advisors, LLC, Advisers Act Release No. 4,065 (Apr. 20, 2015), the SEC instituted cease-and-desist proceedings against BlackRock Advisors, LLC (“BlackRock”), an Advisers Act-registered investment adviser, and Bartholomew A. Battista, former chief compliance officer of BlackRock, for failing to disclose to the boards of 1940 Act-registered investment companies managed by BlackRock that a BlackRock portfolio manager involved with the day-to-day management of the investment companies had a significant interest in an entity in which the investment companies invested.

According to the SEC, a well-known BlackRock portfolio manager responsible for managing the assets of registered investment companies and other clients founded an oil-and-natural gas company. In particular, according to the SEC, the portfolio manager was the general partner of the oil and gas company and personally invested $50 million in the company; the

The SEC alleged that BlackRock willfully violated Sections 206(2) and 206(4) of, and Rule 206(4)-7 under, the Advisers Act.

The SEC alleged that BlackRock and Mr. Battista caused violations of Rule 38a-1(a) under the 1940 Act, and that Mr. Battista caused BlackRock’s violations of Section 206(4) of,

BlackRock agreed to cease and desist from committing or causing any violations and any future violations of the charges, accept censure, and pay a civil money penalty of $12 million.

Mr. Battista agreed to cease and desist from committing any future violations of the charges and to pay a civil money penalty of $60,000.

BlackRock was further required to comply

the 1940 Act.

company later formed a joint venture with a publicly-traded coal company that eventually became the largest holding of the largest registered investment company managed by the portfolio manager. The SEC alleged that BlackRock knew and approved of the portfolio manager’s investment and involvement in the oil and gas company as well as the joint venture, but failed to disclose the potential conflict of interest associated with the investment and involvement to the board of the registered investment company and to the boards of other investment companies holding interests in the joint venture. The lack of disclosure, the SEC asserted, was in violation of an applicable BlackRock compliance policy.

In settling the action against BlackRock, the SEC observed significantly that: “[a]s an investment adviser, BlackRock ha[d] a fiduciary duty to exercise the utmost good faith in dealing with its clients – including to fully and fairly disclose all material facts and to employ reasonable care to avoid misleading its clients. It is the client, not the investment adviser, who is entitled to determine whether a conflict of interest might cause a portfolio manager – consciously or unconsciously – to render advice that is not disinterested.”

The SEC alleged that neither BlackRock nor Mr. Battista reported the portfolio manager’s violations, which, according to the SEC, were a “material compliance matter” under 1940 Act Rule 38a-1, to the boards of the investment companies. According to the

and Rule 206(4)-7 under, the Advisers Act.

with certain undertakings (including increased compliance procedures and retaining an independent compliance consultant).

SEC, BlackRock also failed to adopt and implement policies and procedures that addressed how the outside activities of BlackRock employees were to be assessed for conflicts purposes.

http://www.sec.gov/litigation/admin/2015/ia-4065.pdf

4/17/15

Material Misrepresentations and Failure to Disclose Material Facts to Investors

Breach of Fiduciary Duty by an Unregistered Investment Adviser

Unregistered Offers and Sales of Securities

Inability to Rely on Regulation D when Securities are Offered and Sold to Unsophisticated Persons without Access to

In Joseph John Labadia, Advisers Act Release No. 4,064 (Apr. 17, 2015), the SEC instituted cease-and-desist proceedings against Joseph John Labadia, an investment adviser not registered under the Advisers Act, for making material misrepresentations and failing to disclose material facts to investors and advisory clients in connection with unregistered offers and sales of securities.

According to the SEC, Mr. Labadia was a one-third owner and management committee member of Raintree Racing, LLC (“Raintree Racing”), a company engaged in the purchase and sale of thoroughbred horses; and was the president and control person of Atlanta Rehab Capital, LLC (“Atlanta Rehab”), a company that was principally engaged in the business of real estate lending. The SEC alleged that, from 2007 to at least 2010, Mr. Labadia solicited at least $1,973,000 from investors in Raintree Racing and approximately $1,137,000 from Atlanta Rehab, and characterized their investments as “loans” that were “extremely low risk,” providing written statements that investors would receive an annualized return of 20 percent on their investment and that invested principal would be returned at the maturity date. According to the SEC,

The SEC alleged that Mr. Labadia willfully violated Sections 5(a), 5(c), and 17(a) of the Securities Act; Section 10(b) of, and Rule 10b-5 under, the Exchange Act; and Sections 206(1) and 206(2) of the Advisers Act.

Mr. Labadia agreed to cease and desist from committing or causing any violations and any future violations of the charges; to be barred from association with, among others, any broker, dealer or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser; and to pay a disgorgement penalty of $48,337 and prejudgment interest of $4,797.

Information

Mr. Labadia knew, or was reckless in not knowing, that the investment in Raintree Racing involved significant risk, as Raintree Racing did not have cash flow or other resources to pay the promised 20 percent interest and return their principal.

The SEC alleged that Mr. Labadia engaged in the offer and sale of Raintree Racing’s securities without filing an effective registration statement under the Securities Act in violation of Section 5 of the Securities Act, which generally requires an issuer, in the absence of an applicable exemption, to file a registration statement made effective by the SEC prior to the offer and sale of securities. According to the SEC, the offer and sale of Raintree Racing’s securities did not comply with the private placement exemption in Section 4(a)(2) of the Securities Act, as Mr. Labadia sold the securities to unsophisticated investors, and also violated Regulation D under the Securities Act by selling to investors who were not qualified as “accredited investors,” within the meaning of Regulation D, and by failing to provide these investors with appropriate non-financial and financial information. The SEC also asserted that Mr. Labadia offered and sold $362,000 in securities of Raintree Thoroughbred Farm, Inc., a company that Raintree Racing invested in, in reliance on Regulation D, but that the offering did not qualify for Regulation D, as sales were made to investors that were not sophisticated investors or qualified as accredited investors. According to the SEC, investors were also not provided with access to the type of information

contemplated by Regulation D.

The SEC alleged that Mr. Labadia made misrepresentations in connection with Atlanta Rehab, leading its investors to believe that their funds were invested in real estate located in Atlanta, Georgia when a substantial portion of the funds were invested in Raintree Racing. Mr. Labadia, according to the SEC, breached his fiduciary duty to clients by charging them advisory fees based on inflated portfolio values that overstated the value of investments in Raintree Racing and by making misrepresentations about these values.

http://www.sec.gov/litigation/admin/2015/33-9752.pdf

4/1/15

Violation of Whistleblower Protections

In KBR, Inc., Exchange Act Release No. 74,619 (Apr. 1, 2015), the SEC instituted cease-and-desist proceedings against KBR, Inc. (“KBR”), a corporation formed under Delaware law having common stock registered with the SEC under the Exchange Act, for violating whistleblower protections established by Rule 21F-17 under the Exchange Act.

KBR, according to the SEC, required witnesses in investigations conducted by KBR to sign confidentiality statements warning that they could face disciplinary actions including termination of their employment if they discussed matters relating to the negotiations with outside parties without the prior approval of KBR’s legal department. Rule 21F-17 prohibits any person, which includes companies, from taking any actions that impede an individual from communicating directly with

The SEC alleged that KBR violated Rule 21F-17 under the Exchange Act.

KBR agreed to cease and desist from committing or causing any violations and any future violations of the charges and to pay a civil money penalty of $130,000.

KBR was further required to comply with certain undertakings, including making reasonable efforts to contact employees who signed the confidentiality

the SEC about possible securities law violations, including enforcing, or threatening to enforce, a confidentiality agreement with respect to such communications. The SEC noted that KBR’s internal investigations could involve allegations of possible securities law violations. As a result, the SEC took the position that the terms of the KBR confidentiality statement violated Rule 21F-17. The SEC did not allege that KBR at any time prevented employees from communicating with the SEC about securities law violations, but did allege that a blanket prohibition against witnesses discussing the substance of an interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC. KBR agreed to amend the language of its confidentiality agreement to include the following statement:

“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

statement and providing them with a statement that KBR does not require the employee to seek permission before communicating with any governmental agency or entity.

The SEC’s action against KBR is noteworthy as it appears to be the first time that the SEC has asserted a violation of Rule 2 1F-17 on the basis of a blanket prohibition on disclosing confidential information and reflects the SEC’s support of whistleblowers as a vital source of SEC information.

http://www.sec.gov/litigation/admin/2015/34-74619.pdf

3/30/15

Failure to File Timely and Accurate Form ADV Filings

Failure to Maintain Required Books and Records

In Aegis Capital, LLC, Advisers Act Release No. 4,054 (Mar. 30, 2015), the SEC instituted cease-and-desist proceedings against Aegis Capital, LLC (“Aegis Capital”), an investment adviser registered with the State of North Carolina and at one time an adviser registered under the Advisers Act; Circle One Wealth Management, LLC (“Circle One”), also at one time an Advisers Act-registered investment adviser and affiliate of Aegis Capital; Strategic Consulting Advisors, LLC (“SC Advisors”), an investment management consulting firm; Diane W. Lamm, chief operating officer of Aegis Capital and Circle One; and David I. Osunkwo, a compliance consultant who acted as chief compliance officer of Aegis Capital during the relevant period.

Aegis Capital and Circle One, according to the SEC, failed to file timely and accurate reports with the Commission and to maintain required books and records. According to the SEC, the two entities outsourced their compliance responsibilities to SC Advisors and Mr. Osunkwo and Mr. Osunkwo reported to, and worked closely with, Ms. Lamm.

The SEC alleged that Aegis Capital willfully violated, and SC Advisors and Mr. Osunkwo caused violations of, Section 204 of, and Rule 204-1(a)(1) under, the Advisers Act.

The SEC alleged that Aegis Capital and Circle One willfully violated, and Ms. Lamm willfully aided and abetted and caused violations of, Section 204 of, and Rule 204-2(a) under, the

The SEC instituted cease-and-desist proceedings in seeking, among other things, disgorgement and civil penalties.

The SEC alleged that, in Form ADV filings in March 2010 and March 2011, Aegis Capital and Circle One each overstated its assets under management and total number of client accounts. According to the SEC, Mr. Osunkwo requested the information from Aegis Capital’s and Circle One’s chief investment officer, who had little to no involvement with the entities’ investment advisory client accounts, only hours before the filing was due and falsely claimed that the chief investment officer had certified the assets under management and number of client accounts, forging a signature to that effect.

According to the SEC, Aegis Capital and Circle One failed to keep their books and records maintained in a segregated fashion. The SEC alleged that they mixed records related to, among other things, financial statements, financial journals, and bank statements with affiliated entities. Aegis Capital and Circle One were unable to produce the books and records requested by the SEC.

The action against Aegis Capital and Circle One is noteworthy because it reflects a willingness on the part of the SEC to assert relatively technical violations of the Advisers Act against entities not registered under the Act.

http://www.sec.gov/litigation/admin/2015/34-74608.pdf

Advisers Act.

The SEC alleged that Aegis Capital, Circle One, Ms. Lamm, SC Advisors, and Mr. Osunkwo willfully violated Section 207 of the Advisers Act.

3/30/15

Undisclosed Valuation

In Lynn Tilton, Advisers Act Release No. 4,053 (Mar. 30, 2015), the SEC instituted cease-and-desist

The SEC alleged that Ms. Tilton,

The SEC instituted cease-and-desist

Methodologies

False and Misleading Statements

Undisclosed Conflicts of Interest

Financial Statement not in Compliance with Generally Accepted Accounting Principles (“GAAP”)

proceedings against Patriarch Partners, LLC (“Patriarch”), an Advisers Act-registered investment adviser, certain advisers affiliated with Patriarch (the “Affiliated Advisers”), and Lynn Tilton, the control person of Patriarch and the Affiliated Advisers, for (1) allegedly using undisclosed valuation methodologies on loan assets in three collateralized loan obligation (“CLO”) funds managed by Patriarch and (2) providing investors in the funds with financial statements not in compliance with Generally Accepted Accounting Principles (“GAAP”).

The SEC alleged that Ms. Tilton, Patriarch and the Affiliated Advisers failed to value assets using the objective valuation methodologies described to investors in offering documents for the CLO funds. According to the SEC, Ms. Tilton was principally responsible for valuing the assets held by the CLO funds and reported the values as unchanged to investors in the funds, notwithstanding that many of the companies to which the loans were made contributed only partial or no interest payments to the funds for several years. The SEC alleged that Ms. Tilton did not provide for the valuations to be made on the basis of objective criteria but instead based the valuations on subjective criteria. The SEC further alleged that Ms. Tilton caused a loan’s value to be lowered only when she changed her view of the company to which the loan was made and that Ms. Tilton did not disclose this discretionary approach to valuation to investors in the funds. Ms. Tilton, according to the SEC, did not disclose the conflict of

Patriarch, and other Patriarch personnel willfully violated Sections 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Patriarch alternatively willfully aided and abetted and caused violations of Sections 206(1), 206(2), and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

proceedings to seek, among other things, disgorgement and civil penalties.

3/16/15

Failure to Disclose

interest inherent in the valuation methodology she used and received almost $200 million more in fees as a result of her subjective valuation methodologies. The SEC alleged that these actions prevented investors from benefiting from additional control over the funds’ investments that they would have gained had the investments’ value been lowered.

The SEC further alleged that Ms. Tilton, Patriarch and the Affiliated Advisers were responsible for misstatements in the funds’ quarterly financial statements and for failing to conduct an impairment analysis required under GAAP on the funds’ assets despite disclosing that such GAAP compliant analysis had occurred. According to the SEC, the financial statements also falsely stated that the assets of the funds were reported at fair value.

The SEC’s action against Ms. Tilton, who is a well-known money manager, has been well publicized largely as a result of Ms. Tilton’s filing suit against the SEC on constitutional grounds. In particular, she argued that the SEC should have brought the allegations against her in federal court as opposed to in an administrative proceeding. On June 30, 2015, a federal judge struck down her suit, allowing the case to move forward before an administrative law judge.

http://www.sec.gov/litigation/admin/2015/ia-4053.pdf In Joseph Stilwell, Advisers Act Release No. 4,049 (Mar. 16, 2015), the SEC instituted cease-and-desist

The SEC alleged that Stilwell Value

Stilwell Value and Mr. Stilwell agreed to cease

Conflicts of Interest

Failure to Adopt Proper Written Compliance Policies and Procedures

proceedings against Stilwell Value LLC (“Stilwell Value”), an Advisers Act-registered investment adviser, and Joseph Stilwell, owner and managing member of Stilwell Value, alleging that Stilwell Value and Mr. Stilwell failed to appropriately disclose the existence and terms of loans made between certain private funds managed by Stilwell Value as well as the related conflicts of interest presented by the loans.

According to the SEC, from at least 2003 to 2013, Stillwell Value directed certain funds it managed to make a series of loans totaling approximately $20 million to other funds it managed to help finance significant aspects of the borrowing funds’ investment strategies. The SEC alleged that all of the loans were repaid, but that the existence and terms of the loans were not appropriately disclosed to the funds or to the investors in the funds. These loans, according to the SEC, presented potential or actual conflicts of interest because Stillwell Value was solely responsible for (a) directing the lender funds to make the loans, (b) determining the loan terms, and (c) determining when and whether the borrower funds repaid those loans. The SEC alleged that, by virtue of the lender funds not receiving pertinent information about the loans, the lender funds were exposed to the risk that they would have no recourse should the borrower funds default, and that the default of the loans was at the discretion of Stillwell Value. The Stillwell settlement appears to represent a case of the SEC’s “broken windows” enforcement as the SEC did not allege that any investors

and Mr. Stilwell willfully violated Sections 206(2) and 206(4) of, and Rule 206(4)-8 under, the Advisers Act.

The SEC alleged that Stilwell Value willfully violated, and Mr. Stilwell willfully aided and abetted and caused Stilwell Value’s violations of, Section 207 of, and Rule 206(4)-7 under, the Advisers Act.

and desist from committing or causing any violations and any future violations of the charges, and pay a disgorgement of $193,356 and prejudgment interest of $45,801.

Stilwell Value agreed to censure and to pay a civil penalty of $250,000.

Mr. Stilwell agreed to be suspended from association with, among others, any broker or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser for a period of 12 months; and to pay a civil penalty of $100,000.

Stilwell Value was

were harmed as a result of the loans.

The SEC alleged that Stilwell Value’s compliance manual did not contain policies and procedures sufficient to address the compliance risks posed by the inter-fund loans, and that Stilwell Value failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. According to the SEC, Stilwell Value also failed to disclose the practice of inter-fund lending or the potential or actual conflicts of interest presented by such lending in its Form ADV filings.

http://www.sec.gov/litigation/admin/2015/ia-4049.pdf

further required to comply with certain undertakings including increased compliance procedures and retaining an independent monitor to conduct a

comprehensive ongoing review of Stilwell Value’s compliance and control systems for three years.

3/10/15

Undisclosed Conflict of Interest

Filing False and Misleading Documents

In Edgar R. Page, Advisers Act Release No. 4,044 (Mar. 10, 2015), the SEC instituted cease-and-desist proceedings against PageOne Financial, Inc. (“PageOne”), an Advisers Act-registered investment adviser, and Edgar R. Page, its principal owner, control person, and chief compliance officer. The SEC alleged that PageOne and Mr. Page hid serious conflicts of interest from their advisory clients in connection with recommending investments in three private investment funds to their advisory clients.

The SEC alleged that, from early 2009 through approximately September 2011, PageOne and Mr. Page knowingly or recklessly failed to tell their advisory clients that the manager of certain private funds that PageOne was recommending was in the process of acquiring at least 49 percent of PageOne for

The SEC alleged that PageOne and Mr. Page willfully violated, and Mr. Page willfully aided and abetted and caused PageOne’s violations of, Sections 206(1), 206(2), and 207 of the Advisers Act.

PageOne and Mr. Page were ordered to cease and desist from committing or causing any violations or any future violations of the charges, and were censured.

The administrative proceeding is continued to determine what, if any, additional remedial action including, but not limited to, disgorgement, interest

approximately $2.7 million and that, as part of that acquisition, Mr. Page had agreed to raise millions of dollars for such private funds. According to the SEC, the manager of the private funds was paying for the acquisition by making a series of installment payments over time, the timing and amounts of which were at least partially tied to PageOne’s ability to direct client money into the private funds.

The Form ADVs filed by Mr. Page on behalf of PageOne, according to the SEC, materially misrepresented both the nature and amounts of the fund manager’s payments to PageOne. One Form ADV indicated, for example, that PageOne would receive a referral fee on the amounts invested by PageOne’s clients when PageOne knew, or should have known, that the payments were installment payments. The SEC alleged that, as a result of the misleading disclosure, PageOne’s clients were unaware of the nature and extent of the conflicts of interest when the private funds were recommended to them.

http://www.sec.gov/litigation/admin/2015/ia-4044.pdf

and civil penalties is appropriate against PageOne and Mr. Page.

2/19/15

Improper Registration

Overstating of Assets Under Management

Deficient

In Logical Wealth Management, Inc., Advisers Act Release No. 4,027 (Feb. 19, 2015), the SEC instituted cease-and-desist proceedings against Logical Wealth Management, Inc. (“Logical Wealth”), an Advisers Act-registered investment adviser; and Daniel J. Gopen, its owner, president, and chief compliance officer. The SEC alleged that Logical Wealth falsely claimed eligibility for registration, failed to implement adequate

The SEC alleged that Logical Wealth willfully violated Sections 203A, 204(a), 204A, 206(4), and 207 of, and Rules 204-2(a)(2),

Logical Wealth and Mr. Gopen were ordered to cease and desist from committing or causing any violations and any future violations of the

Compliance Procedures

Recordkeeping Violations

compliance procedures, and failed to comply with certain recording requirements.

According to the SEC, between 2006 and 2011, Logical Wealth overstated its assets under management in filings with the SEC, creating the appearance that it qualified under Section 203 A of the Advisers Act for registration with the SEC. The SEC also alleged that, in June 2012, Logical Wealth represented that its principal office and principal place of business was in Wyoming, a state that does not regulate investment advisers, to maintain its registration even though Logical Wealth had never operated from any location in Wyoming. According to the SEC, Logical Wealth was never qualified to be registered with the SEC; and these false filings were a violation of Section 207 of the Advisers Act, which makes it unlawful to make any untrue statement of material fact in a registration application filed with the SEC.

The SEC alleged that Logical Wealth, as a registered investment adviser, had failed to adopt and implement the required compliance policies and procedures as required under Rule 206(4)-7 and failed to establish policies designed to deter inside trading and a code of ethics as required under Section 204A of, and Rule 204A-1 under, the Advisers Act. Logical Wealth also, according to the SEC, failed to make and keep accurate books and records required under the Advisers Act.

http://www.sec.gov/litigation/admin/2015/ia-4027.pdf

204-2(a)(6), 204-2(a)(8), 204A-1, and 206(4)-7 under, the Advisers Act

The SEC alleged that Mr. Gopen willfully violated Section 207 of the Advisers Act, and willfully aided and abetted and caused Logical Wealth’s violations of Sections 203A, 204(a), 204A, and 206(4) of, and Rules 204-2(a)(2), 204-2(a)(6), 204-2(a)(8), 204A-1, and 206(4)-7 under, the Advisers Act.

charges.

The SEC revoked Logical Wealth’s registration under the Advisers Act and barred Mr. Gopen from the securities industry.

Mr. Gopen was ordered to pay civil penalties of $25,000.

2/19/15

Fraud in Securities Auctions

In VCAP Securities, LLC, Advisers Act Release No. 4,026 (Feb. 19, 2015), the SEC instituted cease-and-desist proceedings against VCAP Securities, LLC (“VCAP”), a broker-dealer registered with the SEC, and Brett Thomas Graham, VCAP’s chief executive officer, alleging that they fraudulently deceived the trustees of certain collateralized debt obligations (“CDOs”) and other investors while acting as liquidation agent of the CDOs. The SEC alleged that the fraudulent activities improperly benefited an auction participant known by Mr. Graham and funds managed by Vertical Capital, LLC (“Vertical”), VCAP’s affiliated investment adviser.

According to the SEC, VCAP and Mr. Graham indirectly acquired CDOs in CDO auctions that VCAP was conducting as liquidation agent. The SEC alleged that, after Mr. Graham had discussed bidding arrangements with a third-party broker-dealer, VCAP and Mr. Graham falsely represented in engagement agreements that they and their affiliates would not bid in the auctions or misuse confidential bidding information. The SEC alleged further that VCAP and Mr. Graham arranged for the third-party broker-dealer to secretly bid at these auctions on behalf of Vertical based on confidential information VCAP received as liquidation agent, then sold the CDOs to Vertical shortly after the auction. According to the SEC, under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions. According to the SEC, VCAP provided the various trustees with

The SEC alleged that VCAP and Mr. Graham willfully violated Section 10(b) of, and Rule 10b-5 under, the Exchange Act.

VCAP agreed to cease and desist from committing or causing any violations and any future violations of the charges, accept censure, and pay a disgorgement penalty of $1,064,555 and prejudgment interest of $85,044.

Mr. Graham agreed to cease and desist from committing or causing any violations and any future violations of the charges; to be barred from association with, among others, any broker or investment adviser and prohibited from serving as, among other things, an employee of any advisory board or investment adviser with the right to reapply after three years, except that Mr. Graham was able to be employed by

documents that did not disclose that Vertical was the winning bidder in five auctions.

The SEC alleged that, during the course of a CDO liquidation, Mr. Graham used confidential information to give preferential treatment to an auction participant. According to the SEC, Mr. Graham instructed the participant to cut its bid in half, which resulted in the trustee only receiving half as much in proceeds as it otherwise would have received. Mr. Graham had not requested permission to disclose the confidential information from the trustee.

http://www.sec.gov/litigation/admin/2015/34-74305.pdf

Vertical in a limited capacity for one year; and pay a disgorgement penalty of $118,284, prejudgment interest of $9,449, and a civil money penalty of $200,000.

Mr. Graham was further required to comply with certain undertakings (including increased compliance procedures).

2/12/15

Violation of 1940 Act Custody Rules

1940 Act Compliance Deficiencies

In Water Island Capital, LLC, 1940 Act Release No. 31,255 (Feb. 12, 2015), the SEC instituted cease-and-desist proceedings against Water Island Capital LLC (“Water Island”), an Advisers Act-registered investment adviser that manages investment companies registered under the 1940 Act that engage in alternative investment strategies (the “Funds”). These funds are commonly referred to as “alternative investments mutual funds.”

Section 17(f)(5) of the 1940 Act generally requires that a registered investment company maintain its securities and similar investments in the custody of a qualified bank, along with the cash proceeds from the sale of such securities and investments. According to the SEC, from at least January 2012 to September 2012, Water Island violated this requirement by allowing the Funds’ broker-

The SEC alleged that Water Island willfully violated Sections 12(b) and 17(f) of, and Rules 12b-1 and 38a-1 under, the 1940 Act.

Water Island agreed to cease and desist from committing or causing any violations and any future violations of the charges and pay a civil penalty of $50,000.

dealer counterparties to hold assets consisting of approximately $247 million in cash collateral relating to certain total return and portfolio return swaps in which the Funds had entered.

The SEC further alleged that Water Island failed to create and maintain an approved list of executing brokers for the Funds pursuant to Rule 12b-1(h) under the 1940 Act and also failed to maintain documentation reflecting monitoring of the Funds’ compliance with the Rule 12b-1(h) policies and procedures. Under Rule 12b-1(h), a registered investment company is prohibited from compensating a broker-dealer for promoting or selling shares of the investment company by directing brokerage transactions to the broker. The rule also specifies, however, that a broker-dealer that can provide best execution with respect to certain types of portfolio transactions undertaken on behalf of a registered investment company can sell shares of the investment company. The SEC alleged that Water Island failed to implement policies and procedures adopted by the funds in connection with Rule 12b-1(h). The SEC alleged further that Water Island failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws as mandated under Rule 38a-1.

This case is particularly noteworthy as it shows the SEC’s willingness to bring enforcement cases for very technical provisions of the 1940 Act even in the absence of harm to shareholders of registered investment

companies.

http://www.sec.gov/litigation/admin/2015/ic-31455.pdf

1/21/15

Repeated Failure to Adopt Proper Written Compliance Policies and Procedures

In du Pasquier & Co., Inc., Advisers Act Release No. 4,004 (Jan. 21, 2015), the SEC instituted cease-and-desist proceedings against du Pasquier & Co., Inc. (“du Pasquier”), a formerly Advisers Act-registered investment adviser and Exchange Act-registered broker-dealer, alleging that du Pasquier had failed to maintain adequate investment advisory compliance policies and procedures and to ensure proper and timely disclosures about its investment advisory business. The SEC alleged that, at various times from at least 2007 forward, du Pasquier failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules, including relying on an “off-the-shelf” template for a compliance manual without modifying certain sections of the template to take into consideration the nature of du Pasquier’s investment advisory business. The SEC further alleged that du Pasquier failed to implement procedures it did adopt, for example, failing to conduct adequate “best execution” reviews and failing to adequately review the firm’s marketing materials. According to the SEC, du Pasquier also failed to annually review the adequacy of its compliance policies and procedures and the effectiveness of their implementation, failed to amend its Form ADV under the Advisers Act to correct certain misstatements in the Form, and failed to deliver its Form ADV Part 2A and Part 2B to various clients.

The SEC alleged that du Pasquier violated Sections 204, 204A, 206(4) and 207 of, and Rules 204-1(a)(1), 204-1(a)(2), 204-3(b), 204A-1, and 206(4)-7(a) and (b) under, the Advisers Act.

Du Pasquier agreed to cease and desist from committing or causing any violations and any future violations of the charges and to pay a civil penalty of $50,000.

According to the SEC, a number of the violations were recurring, continuing from at least 2007, despite du Pasquier’s being alerted to potential compliance failures through examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) in 2004 and 2007. Du Pasquier remediated some deficiencies identified in those examinations, but failed to prevent the violations described above.

Most noteworthy about the du Pasquier proceeding is that it is one of only a very small number of actions the sole basis of which is a violation of the Advisers Act’s compliance and recordkeeping requirements. In short, the proceeding appears to reflect the importance the SEC currently places on a registered investment adviser’s compliance and recordkeeping procedures and policies.

http://www.sec.gov/litigation/admin/2015/ia-4004.pdf

1/16/15

Failure to Disclose Conflicts of Interest

In Consulting Services Group, LLC, Advisers Act Release No. 4,000 (Jan. 16, 2015), the SEC instituted cease-and-desist proceedings against Consulting Services Group, LLC (“CSG”), an Advisers Act-registered investment adviser until October 4, 2013. In October 2007, the Commission had censured CSG and ordered it to pay a civil penalty of $20,000 for: failing to adopt a code of ethics compliant with applicable rules; failing to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act; and the backdating of written code of

The SEC alleged that CSG violated Sections 206(2) and 207 of the Advisers Act.

CSG agreed to cease and desist from committing or causing any violations and any future violations of the charges and to pay a civil penalty of $150,000.

ethics acknowledgment forms by CSG’s supervised persons in violation of Sections 204 and 206(4) of, and Rules 204-2(a)(12), 204A-1(a)(5), and 206(4)-7 under, the Advisers Act.

The SEC alleged that CSG either failed to disclose or mischaracterized in its Forms ADV a 2009 $50,000 personal loan between its then chief executive officer and a third party investment adviser that CSG had recommended to certain of its public pension and other clients. According to the SEC, in August 2009, the compliance unit of CSG discovered the loan through regular e-mail surveillance but did not disclose it to clients. The SEC alleged that CSG then continued to file false and misleading Forms ADV Part 2A that failed to disclose key information about the loan.

http://www.sec.gov/litigation/admin/2015/ia-4000.pdf

1/13/15

Failure to Disclose Compensation Received

Conflicts of Interest

In Shelton Financial Group, Inc., Advisers Act Release No. 3,993 (Jan. 13, 2015), the SEC instituted cease-and-desist proceedings against Shelton Financial Group, Inc. (“SFG”), an Advisers Act-registered investment adviser; and Jeffrey Shelton, founder, sole owner, president, and former chief compliance officer of SFG.

According to the SEC, during an on-site exam in 2012, Commission staff discovered that SFG had inadequate policies and procedures regarding, among other things, conflicts of interest, and that its compliance policies were not tailored to its business. In addition, according to the SEC, a brokerage firm became a custodian for

The SEC alleged that SFG and Mr. Shelton violated Sections 206(2) and 207 of the Advisers Act.

The SEC alleged that SFG violated Section 206(4) of, and Rule 206(4)-7 under, the Advisers Act, and

SFG and Shelton agreed to cease and desist from committing or causing any violations and any future violations of the charges, accept censure, pay a disgorgement penalty of $99,114.19 and prejudgment interest of $20,952.91, and pay a civil penalty of

SFG clients in 2008, and as part of fee negotiations proposed an addendum to its contract in which the brokerage firm agreed to pay SFG a certain percentage of every dollar that its client invested in no transaction fee mutual funds other than proprietary funds advised by affiliates of the brokerage firm. SFG agreed in exchange to perform certain “custodial support services” for the brokerage firm. The addendum was memorialized in an agreement, which was not formally signed until November 2013. The SEC alleged that, from May 2009 through March 2010, SFG did not disclose the existence of the agreement in its Forms ADV. The SEC also alleged that SFG failed to disclose fully compensation received from third parties for providing investment advisory services to clients, as well as the conflicts of interests inherent in an agreement relating to those services or how SFG would address such conflicts.

http://www.sec.gov/litigation/admin/2015/ia-3993.pdf

that Mr. Shelton caused these violations by SFG.

$70,000.

SFG was further required to comply with certain undertakings (including increased compliance procedures).

Increase examination coverage of investment advisers and other key entities who interact with retail and institutional investors;

Further leverage cutting-edge technology to permit the SEC to better keep pace with the entities, markets, and products we regulate;

Protect investors by enhancing our enforcement program’s investigative capabilities and strengthen our ability to litigate against wrongdoers;

Further bolster the SEC’s economic and risk analysis functions; and

Hire market and other experts to enable the SEC to more expertly and efficiently discharge its current rulemaking and oversight responsibilities.

Expanding data analytic tools that assist in the integration and analysis of huge volumes of financial market data, employing algorithms and quantitative models that can lead to earlier

detection of fraud or suspicious behavior and ultimately enabling the agency to allocate its resources more effectively. For example, SEC staff has used data analytic (including pattern recognition) tools to, among other things, detect potential fraudulent or manipulative trading, identify financial statement outliers or unusual trends indicative of possible accounting fraud, discover possible money laundering, sift through massive volumes of trading data to detect suspicious trading patterns, and flag higher risk registrants for examination prioritization.

Increasing investments in Information Security to address, as a top priority, the ability to monitor and avoid advanced persistent threats. The SEC’s IT security program plans to focus its efforts on improved risk management and monitoring and continuing to invest in modernizing and securing the SEC’s infrastructure to enhance workflow and document management, the SEC’s electronic discovery program, operational resiliency, and internal communications to staff.

Redesigning the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, an ongoing, multi-year effort to simplify and optimize the financial reporting process to promote automation and reduce filer burden. With a more modern EDGAR, both the investing public and SEC staff will benefit from having improved access to better data. We are also making incremental enhancements to the existing system to improve the user experience, accommodate new submission requirements, and other improvements that are needed prior to the full redesign.

Improving examinations through risk assessment and surveillance tools that will help staff monitor for trends and emerging fraud risks, as well as improving the efficiency of the examination program so it can cover higher risk areas with its resources.

Enhancing the Tips, Complaints, and Referral system (TCR) to bolster its flexibility, configurability, and adaptability. TCR investments will provide more flexible and comprehensive intake, triage, resolution tracking, searching, and reporting functionalities, with full auditing capabilities.

Improving enforcement investigation and litigation tracking to better handle the substantial volume of materials produced during investigations and litigation. Among other initiatives, the SEC needs to build capacity to electronically transmit data for tracking and loading (versus the current practice of receiving content via the mail); implement a document management system for Enforcement’s internal case files; and revamp the tools used to collect trading data from market participants.

Further modernize SEC.gov to make one of the most widely used Federal Government websites more flexible, informative, easier to navigate, and secure for investors, public companies, registrants, and the general public.

Invest in further business process automation and improvements to build workflow applications that will improve the efficiency and effectiveness of the agency in serving the public.

increasing the experienced forensic accountants, attorneys, industry experts, and information technology and support staff needed to promptly detect, prioritize, and investigate areas appropriate for enhanced enforcement efforts (30 positions);

adding experienced trial attorneys to prosecute the growing number of highly-complex enforcement actions (12 positions);

enhancing Enforcement’s data analytics expertise to assist in the implementation of data intensive projects, state-of-the-art investigative tools (such as eDiscovery and knowledge management), and improved forensic capabilities (5 positions); and

bolstering staffing for intelligence functions, including the collection, analysis, triage, referral, monitoring, and follow-through on the thousands of TCRs received each year (5 positions).

Examination Priorities - 2016

Letter to National Securities Exchanges

1.

Examining matters of importance to retail investors, including investors saving for retirement;

2.

Assessing issues related to market-wide risks; and

3.

Using our evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity.

ReTIRE. In June 2015, we launched a multi-year examination initiative, focusing on SEC-registered investment advisers and broker-dealers and the services they offer to investors with retirement accounts.⁴ We will continue this initiative, which includes examining the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.

Exchange-Traded Funds (“ETFs”). We will examine ETFs for compliance with applicable exemptive relief granted under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and with other regulatory requirements, as well as review the ETFs’ unit creation and redemption process. We will also focus on sales strategies, trading practices, and disclosures involving ETFs, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs.

Branch Offices. We will continue to review regulated entities’ supervision of registered representatives and investment adviser representatives in branch offices of SEC-registered investment advisers and broker-dealers, including using data analytics to identify registered representatives in branches that appear to be engaged in potentially inappropriate trading.

Fee Selection and Reverse Churning. We will continue to examine investment advisers and dually-registered investment adviser/broker-dealers that offer retail investors a variety of fee arrangements (e.g., asset-based fees, hourly fees, wrap fees, commissions). We will focus on recommendations of account types and whether the recommendations are in the best interest of the retail investor at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such arrangements.

Variable Annuities. Variable annuities have become a part of the retirement and investment plans of many Americans.⁵ We will assess the suitability of sales of variable annuities to investors (e.g., exchange recommendations and product classes), as well as the adequacy of disclosure and the supervision of such sales.

Public Pension Advisers. We will examine advisers to municipalities and other government entities, focusing on pay-to-play and certain other key risk areas related to advisers to public pensions, including identification of undisclosed gifts and entertainment.

Adopted final rules to update and expand Regulation A (commonly referred to as Regulation A+), an exemption from registration for small offerings of securities, to facilitate smaller companies’ access to capital;

Adopted new rules under Title VII of the Dodd-Frank Act to provide a comprehensive, efficient process for security-based swap dealers and major security-based swap participants to register with the SEC and proposed new procedures addressing statutorily disqualified associated persons;

Adopted new rules to permit securities-based crowdfunding offerings by issuers and the operation of funding portals to intermediate such offerings;

Adopted amendments to remove credit rating references in the principal rule that governs money market funds and the form that money market funds use to report information to the Commission each month about their portfolio holdings;

Adopted a rule that requires public companies to disclose the ratio of the compensation of their chief executive officer to the median compensation of its employees;

Proposed rules governing the application of certain requirements to security-based swap transactions connected with a non-U.S. person’s dealing activity in the United States;

Proposed rules to require companies to disclose the relationship between executive compensation and the financial performance of a company;

Proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require recovery of incentive-based compensation erroneously awarded to executive officers; and

Proposed amendments related to regulatory access to security-based swap data held by security-based swap data repositories.

Proposed rules to require that broker-dealers trading in off-exchange venues become members of a national securities association to enhance regulatory oversight of active proprietary trading firms, such as high-frequency traders;

Proposed two sets of rules to modernize the reporting and disclosure of information by investment companies and investment advisers to enhance the quality of information available to investors and allow the Commission to more effectively collect and use data provided by investment companies and investment advisers;

Proposed rules designed to promote effective liquidity risk management for open-end funds (except money market funds) and permit the use of swing pricing for open-end funds (except money market funds and exchange-traded funds (ETFs));

Proposed amendments to Securities Act Rule 147 to modernize the rule for intrastate offerings, including through intrastate crowdfunding provisions, and to Rule 504 to increase the aggregate limit on offers and sales and to provide additional investor protections;

Proposed two sets of amendments to the SEC rules governing its administrative proceedings that, if adopted, would among other things adjust the timing of administrative proceedings and permit parties to take depositions of witnesses as part of discovery;

Issued a request for comment on the effectiveness of financial disclosures about entities other than the registrant under Regulation S-X; and

Issued a concept release about possible revisions to audit committee disclosures.

Portfolio Reporting. A new monthly portfolio reporting form, Form N-PORT, would require registered funds other than money market funds to provide portfolio-wide and position-level holdings data to the Commission on a monthly basis.

Census Reporting. Registered funds would be required to annually report certain census-type information to the Commission on Form N-CEN, and the form currently used to report fund

census information (Form N-SAR) would be rescinded. Proposed Form N-CEN would streamline and update information reported to the Commission to reflect current information needs, such as requiring more information on ETFs and securities lending.

Structured Data. Funds would report portfolio and census information in a structured data format, which would improve the ability of the Commission and the public both to aggregate and analyze information across all funds and to link the reported information with information from other sources.

Enhanced Disclosure and Website Communications. Funds would be required to provide enhanced and standardized financial statement disclosures, and could provide shareholder reports by making them accessible on their website, while providing shareholders the option of continuing to receive paper copies.

Liquidity Risk Management Programs. Mutual funds and other open-end management investment companies, including ETFs, would be required to have a liquidity risk management program. The proposed rule would exclude money market funds from the requirements because they are already subject to liquidity requirements tailored to their particular structure and operations.

Swing Pricing. Mutual funds (except money market funds or ETFs) would be permitted to use “swing pricing.”^[7]

Enhanced Disclosures. Mutual funds and other open-end funds would be required to provide enhanced disclosure regarding fund liquidity and redemption practices, the methods used by funds to meet redemptions, and, if used, swing pricing. Funds would also be required to disclose information regarding committed lines of credit, interfund borrowing and lending, and swing pricing.

Use of Derivatives by Investment Companies. SEC staff is working on recommendations to the Commission to propose new requirements related to the use of derivatives by registered funds, including measures to appropriately limit the leverage these instruments may create and enhance risk management programs for such activities.

Transition Plans for Investment Advisers. Staff is also developing recommendations for the Commission to propose requiring investment advisers registered with the Commission to create and maintain transition plans to prepare for a major disruption in their business.

Stress Testing for Large Investment Advisers and Large Investment Companies. Staff is also considering recommending that the Commission propose new requirements for stress testing by large investment advisers and large investment companies. Such rules would implement in part requirements under section 165(i) of the Dodd Frank Act.

Third-Party Compliance Reviews. At my direction, staff is also preparing a recommendation to the Commission for proposed rules requiring third-party compliance reviews for registered investment advisers. The reviews would not replace examinations conducted by our Office of Compliance Inspections and Examinations, but would be designed to improve overall compliance by registered investment advisers.

The registration status of certain active proprietary traders and improvements to firms’ risk management of trading algorithms;

Enhanced disclosure requirements concerning a broker’s order routing practices;

An anti-disruptive trading rule that would address the use of aggressive, destabilizing trading strategies in vulnerable market conditions; and

The development and implementation of a consolidated audit trail.

Use of Derivatives by Investment Companies – The Division, in close consultation with staff in the SEC’s Division of Economic and Risk Analysis, is considering recommending that the Commission propose new requirements related to the use of derivatives by funds, including measures to appropriately limit the leverage these instruments may create, and measures to enhance risk management programs for such activities.

Transition Plans for Investment Advisers – The Division also is considering recommending that the Commission propose a new requirement that investment advisers registered with the Commission create and maintain transition plans to prepare for a major disruption in their business.

Stress Testing for Large Investment Advisers and Large Investment Companies – In addition, the Division is considering recommending that the Commission propose new requirements for stress testing by large investment advisers and large investment companies. Such rules would implement section 165(i) of the Dodd Frank Act.

Third-Party Compliance Reviews – Division staff, working in conjunction with the staff from the SEC’s Office of Compliance Inspections and Examinations (OCIE), is developing a recommendation for the Commission’s consideration that, if proposed and adopted, would establish a program of third-party compliance reviews for registered investment advisers. The

reviews would not replace examinations conducted by OCIE, but would supplement them in order to improve compliance by registered investment advisers.