- RIA/BD CCO Charged with Providing Fabricated Compliance Documentation. In this case, SEC examiners requested compliance reviews related to the fund’s decision to invest in the securities of a company shortly before that company’s acquisition was announced. The CCO represented to the SEC that those reviews had been completed prior to the hedge fund’s investment in the company’s securities. The SEC, however, alleged that after failing to conduct and document such reviews as requested by her manager, the CCO created two backdated and factually inaccurate versions of a memorandum that claimed to memorialize the reviews. According to the order, the CCO’s conduct delayed and impeded the exam staff's inquiry into the fund’s investment. The CCO consented to a cease and desist order and agreed to pay a civil penalty of $25,000. She was also suspended from appearing before the SEC as an attorney in any matter for at least one year and from acting in a compliance capacity for at least three years. This case is another unfortunate lesson that the cover up is often worse than the crime, and it is far better to admit that a review has not occurred than to fabricate compliance records. Contributed by Doug MacKinnon, Senior Compliance Consultant.
- Personal Liability and Industry Ban for Two Former Fund Officers for their Role in Inflating Fund Valuations. Portfolio managers, CCOs and CEOs are not the only targets of the SEC. The Commission imposed personal liability on the Chief Financial and Chief Operating Officers of fund manager TCA Fund Management Group Corp. (“TCA”), a firm that managed a private fund with a master-feeder structure. In this case, TCA’s Master Fund provided financing investments of about $1 to $5 million to small and medium-sized enterprises. The fees and interest earned on these financing deals were counted as fund assets. TCA, however, was routinely recording financing deals as revenue on the Master Fund’s financial statements, even when the deals had not been consummated. As a result, the net asset value was being inflated, resulting in greater management fees for TCA and less money for investors.
The big takeaway here is that the SEC went after two TCA executives, the Chief Accounting/Chief Financial Officer, Steven Rosen, and Michael Vernon, the Chief Operating Officer. The SEC alleged that the two passed along data supporting the inflated valuations, even though they knew, or should have known, it was untrue. Both received a three-year industry ban and fines of $35,000. TCA already faced SEC allegations of fraud for inflating fund valuations, resulting in the appointment of a receiver over those entities and the TCA funds. Contributed by Jaqueline M. Hummel, Partner and Managing Director
- Hedge Fund Adviser Settles Over Custody Rule and Performance Fee Violations. The SEC recently found that Florida-based Finser International Corporation (Finser), a registered investment adviser and private fund manager, “willfully violated” Sections 206(2) and 206(4) of the Advisers. Finser and its sole principal owner, Andrew Jacobus, managed a private fund with approximately $8 million in assets. According to the SEC’s findings, Finser and Jacobus charged the fund $51,000 in performance fees from January 2015 through September 2017, without ever meeting the high-water mark detailed in the fund’s private placement memorandum (PPM). The SEC also found Finser and Jacobus violated the Custody Rule by commingling fund assets with non-fund-assets and failing to distribute audited financials to investors. Finally, the SEC determined Finser failed to maintain adequate written policies and procedures with respect to performance fees and custody of client assets.
Private fund managers should take note. This is a prime example of why the SEC remains focused on private funds and their managers. We all know that disclosure to investors is imperative when it comes to private funds, but firms confirm that their compliance program has adequate policies and procedures in place to ensure they do what they say they are going to do. OCIE’s June Risk Alert outlines three areas of concern commonly identified during examinations of private fund advisers: conflicts of interest, fees and expenses, and policies and procedures relating to MNPI. This Risk Alert should serve as a starting point for checking the adequacy of your compliance program and identifying areas that could be improved. (Read here for Hardin’s previous coverage of the alert.) Ultimately, the SEC ordered Finser and Jacobus to cease and desist from any further violations of the Advisers Act and Rules, censured them, and ordered disgorgement in the amount of $61,808 and a civil penalty of $70,000. Finser is currently seeking registration with the state of Florida and plans to withdraw its registration from the Commission. Contributed by Jennifer L. Cagadas, Compliance Consultant.
- Transamerica Asset Management Settles Charges for Disclosure Failures. This is a perfect example of why it “pays” to self-report. In this case, Transamerica Asset Management, Inc. failed to accurately reflect the annual operating expenses of four money market funds that it managed, resulting in material misstatements and omissions to investors over a three-year period. The fees and expenses excluded from the calculation of annual operating expenses related to “recaptured amounts.” Recaptured amounts are reimbursements of fees and expenses incurred during prior periods but waived in order to prevent fund expenses from exceeding an agreed-upon expense cap or to prevent the funds from experiencing a negative yield. When Transamerica realized the oversight, they promptly self-reported and took remedial action, which included engaging a third-party consultant to assess damages and reimbursing clients. In doing so, Transamerica avoided a civil penalty. Contributed by Rochelle A. Truzzi, Managing Director.
- Regulatory Sneak Attack! Broker-Dealer Gets Massive Fine for Texting Failures Exposed During Unrelated Investigation. It doesn’t seem fair, but JonesTrading Institutional Services LLC (“JonesTrading”) came under the SEC’s scrutiny after producing documents in an unrelated SEC enforcement investigation. According to the SEC’s administrative order, “JonesTrading produced communication records referencing the existence of text message communications between JonesTrading registered representatives and a firm customer that were responsive to the staff’s request. However, because the text messages were not retained on one of JonesTrading’s firm-sponsored systems, JonesTrading failed to produce the referenced text messages to Commission staff.”
To make a long story short, the SEC fined JonesTrading $100,000 for books and records violations. Embarrassingly, the SEC pointed out that JonesTrading senior management, including compliance staff, sent and received business-related text messages, in contravention of the firm’s policy prohibiting the use of texting. To its credit, JonesTrading took immediate action by implementing a software solution to preserve text messages sent or received for business purposes on employees’ personal devices. Contributed by Jaqueline M. Hummel, Partner and Managing Director.
- FINRA is About to Make it MUCH Harder to Obtain Expungement – Part Two. This Ulmer and Berne blog post is the 2nd in a two-part series by Chris Seps addressing FINRA rule changes to revamp the expungement process. The key take-away, in the words of the author, is that these changes (three years in the making) will “make it much, much harder to expunge customer dispute disclosures.” Find Part One here.
- Pay at Your Own Risk: OFAC Issues Advisory on Potential Sanctions Risks Stemming from Ransomware Payments. Between a rock and hard place… Morrison Foerster summarizes a recent OFAC advisory highlighting the lose-lose position facing victims of ransomware attacks – either suffer the consequences of the ransomed data or pay the ransom and face potential OFAC sanctions exposure. One more reason for investing in resources and training to prevent attacks. See Happy Cybersecurity Awareness Month: OFAC and FinCEN Issue New Advisories on Ransomware Payments by Cozen O’Connor for more insight on the OFAC and FinCEN advisories.
- How ‘Free’ RIA Custodians Make it Difficult to Determine Which is Actually the Most Expensive. Michael Kitces’ guest columnist Yang Xu, the CEO of Trading Front, provides insight into the real costs of “zero-commission” trading and why there is no free lunch.
- Diversity & Inclusion at the SEC. The SEC recently launched a new Diversity & Inclusion webpage with information regarding its D&I goals, initiatives and resources.
- Record-setting Year for SEC Whistleblower Program. September 30th marked the fiscal year end of the SEC’s Whistleblower Program with a bang, as it announced four new whistleblower awards totaling just under $5 million.
- How to Develop an Effective Data Retention Policy. Onna Technologies, Inc., with platform services to address information governance, archiving, e-discovery and compliance needs, published this blog post that highlights the most important considerations when developing a data retention policy.
- Purchasing Cybersecurity Insurance. An easy read by Kevin LaCroix, as a guest writer for the D&O Diary blog. It is not specific to financial services but provides several useful tips to consider when evaluating cybersecurity insurance.
Photo Credit: Photo by Tim Mossholder on Unsplash