Lessons Learned from Recent SEC and FINRA Cases: June 2018


SEC charges 13 Private Fund Advisers for Failing to File Form PF:  Ever wonder what happens when an adviser fails to make a required filing?  They get fined, as some investment advisers recently discovered.  On June 1, the SEC announced settlements with 13 registered investment advisers, both private equity and hedge fund managers, that were delinquent in filing annual reports on Form PF over multi-year periods. Since 2012, Form PF is a required filing for advisers to report about the private funds that they advise, including the amount of assets under management, fund strategy, performance, and use of leverage and derivatives. To remedy the situation, the 13 advisers agreed to pay a $75,000 civil penalty – as well as making the necessary filings. Still have questions? Read the latest responses on the Form PF FAQ page on the SEC’s website.  Contributed by Maria Bernabo, Compliance Associate

SEC Slams Firm For Failing to Disclose Payments From Outside Managers:  Lyxor Asset Management, Inc. (“Lyxor”) agreed to be censured and pay a $500,000 fine after the SEC charged the firm with failing to disclose conflicts of interest, failing to implement policies and procedures to identify and mitigate conflicts, and failing to maintain books and records.   The conflicts of interest violation stemmed from a side letter Lyxor signed with two affiliated third-party investment advisers. The side letter required the third-party advisers to make payments to Lyxor for Lyxor client assets placed in funds managed by the third-party advisers.  Lyxor received about $648,000 in fees over a two-year period.  Lyxor did not disclose the arrangement to its clients.  The side letter contradicted the terms of two different client agreements.  To complicate matters, the third-party advisers signed an additional side letter with Lyxor’s corporate parent, Lyxor S.A.S., which directed that payments from the Lyxor side letter be paid to Lyxor S.A.S.  The arrangement was uncovered during an SEC examination (hence the books and records violation for not booking the payments on Lyxor’s financials).

This sounds like a classic case of someone forgetting to invite legal and compliance to the meetings.  It’s so important in bigger corporate entities, where silos form, that the right people are involved in negotiating deals and that proper review of agreements take place. The SEC noted that Lyxor tried to negotiate in good faith on behalf of their clients initially, but the third-party advisers would not agree which probably led to the bright idea of diverting the payments to the corporate entity.  Apparently, someone in this equation also forgot that emails are retained and archived which is how this creative maneuvering was discovered.  Contributed by Heather Augustine, Senior Compliance Consultant

SEC fines RIA $8 million for Failure to Disclose Kickbacks:  deVere USA, Inc. (DVU) had a unique industry niche.  A registered investment adviser, DVU advised clients that had pensions from past employment in the U.K., similar to defined benefit and 401(k) plans in the U.S.  DVU recommended and assisted clients in rolling over their U.K. pension assets to retirement plans that would receive favorable tax treatment under U.K. tax laws. DVU would then provide investment advice for the transferred assets.  DVU’s dirty little secret was that the firm’s investment adviser representatives (IARs) received payments from various service providers the firm recommended, such as custodians, trustees, and foreign exchange providers, and received front-end sales loads from European investments.  None of these payments were disclosed on the Firm’s Form ADV Part 2A.  The SEC issued a deficiency letter to DVU in March 2015 specifically citing these disclosure failures.

In the administrative order, the SEC also noted that DVU misled clients about the benefits of transferring their assets.  The $8-million penalty will be used to establish a Fair Fund to be distributed to affected clients.  The SEC also ordered DVU to notify clients of the proceeding, provide four hours of training each year for the next two years to all employees on fiduciaries duties, and to retain an independent compliance consultant to review the firm’s compliance program.  Separate charges have been filed against former DVU CEO, Benjamin Alderson, and Bradley Hamilton, both of whom were IARs of the firm.

The lessons from this case are nothing new.  Investment advisers should understand by now that payments received from service providers are conflicts of interest and must be disclosed.  Second, advisers should address issues cited in a deficiency letter promptly.  Third, all firm employees should understand what it means to be a fiduciary.  The firm’s annual training presentation should include a section on “Fiduciary Obligations.”

Worth Reading:

 Humans Have an Uncanny Ability to Sniff out Hypocrisy:  Great post by Matt Kelly on why you can’t delegate ethical responsibility.

Is It Back to the Future for the DOL’s Fiduciary Rule?  Great summary of current status of the fiduciary rule by NAPA.net.

Lots of Financial Regulation is Illegal:  Matt Levine provides comic relief in his discussion of the Supreme Court’s findings that the SEC’s Administrative Law Judges are unconstitutional.

AARP’s Campaign to Close the Loophole on Regulation Best Interest:  As of June 29, 2018, there are about 2,820 comments letters on the SEC’s Proposed Rule: Regulation Best Interest, with a common theme:  the SEC should “close the loophole” that “makes it easy for many advisers to take advantage of hard-working Americans and line their own pockets with our retirement savings.” AARP has made it easy for individuals to provide comments to the SEC, providing talking points and an easy-to-use form to send the comments to the SEC.

Paul Weiss provides this excellent analysis of the Lucia v. SEC case.

Written by:


Foreside on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.