Lifestyles of the Rich and Infamous, Pay-to-Play Fines and ‘Squeaky Clean’s’ Massive Fail: Lessons Learned from Recent SEC and FINRA Cases for August 2018


Broker-Dealer Challenges SEC’s Authority to Enforce Bank Secrecy Act:  In June of 2018, Alpine Securities Corp. (“Alpine”) petitioned the Second Circuit to compel a U.S. District Judge to dismiss the SEC’s enforcement action against Alpine for alleged violations of the SEC’s books and records requirements.  Alpine argued that the SEC overstepped its authority by bringing an enforcement action under the Bank Secrecy Act (“BSA”).  Alpine argued that the BSA grants general examination and enforcement authority to the U.S. Treasury Department.  Although the Treasury Department delegated its examination authority over broker-dealers to the SEC, it retains the authority to impose civil penalties through FinCEN, a bureau of the Treasury.  The SEC asserts that it has the authority under the Securities and Exchange Act Rule 17a-8 to require broker-dealers to maintain certain books and records, including those required under the BSA.  The Commission charged Alpine with violating Section 17(a) of the Exchange Act by filing deficient suspicious activity reports (“SARs”) and failing to maintain or retain required SAR documentation.

A key takeaway from this case is that the SEC continues to pursue broker-dealers for failing to file SARs.  Recent high profile cases, including those against Merrill Lynch (SEC and FINRA imposed $26 million in fines) and Wells Fargo (SEC fined Wells Fargo $3.5 million) and more recently against Aegis Capital Corporation (SEC and FINRA imposed fines of $1.3 million), show just how seriously the SEC considers these filing obligations.  Broker-dealers should ensure not only that they have policies and procedures in place, but that the SARs being filed are complete, accurate and provide sufficient details about the activity.  Supervisors and executives should also take note of the Aegis case where SEC also charged the firm’s CEO and two of its AML compliance officers.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant

Lifestyles of the Rich and Famous and their Books and Records:   It seems that Fidelity trader Thomas Bruderman’s infamous bachelor party that included dwarf tossing has been lost to the mists of history. Lavish spending has resurfaced in the brokerage world once again.   In the matter of BGC Financial L.P. (“BGC”), the SEC did not take kindly to the broker-dealer’s mischaracterizations of compensation, gifts, entertainment and expenses on its financials and in violation of its policies.  The SEC cited the firm for violations of the books and records rules in Section 17(a)(1) of the Securities Exchange Act and Rule 17 a-3 for incorrectly booking these expenses as travel and entertainment, and for violating firm policy by using firm funds for personal expenses.  Shining a light into the world of high-flying brokers and their benefits, the SEC found that BCG provided one broker with $600,000 worth of New York sports team tickets as part of his employment package. The tickets were described as “personal property” of the broker, which he used, sold or donated to charities, and only occasionally took clients to the games.  The SEC found tickets were incorrectly booked on the firm’s financials as “travel and entertainment” expenses instead of compensation in BGC’s general ledger. The firm also reimbursed the same broker to the tune of $100,000 for an international trip for him, eight members of his team and three friends for his birthday.  No customers attended, according to his expense reports.  And if that’s not enough, for four years the firm reimbursed this broker for thousands of dollars in expenses for international trips without adequate documentation of business purpose.

This broker was not the only recipient of the firm’s largesse.  The firm also reimbursed two brokers for concierge services, car services and tickets used by clients when the brokers were not present.  The expenses were booked as entertainment expenses, instead of as gifts, in violation of the firm’s gift policy. The brokers also failed to get pre-approval for these gifts, as required by firm policy.

In addition to the obvious lesson that firms should keep accurate books and records, this case indicates that a lax compliance culture leads to big regulatory trouble. In most of the situations, the brokers received pre-approval from their supervisors indicating that lavish spending on bachelor parties and trips to Las Vegas did not raise any red flags with the supervisor or the FINOP.   The SEC also noted that the firm’s compliance policies were well written, and stated that “records related to entertainment are ‘often requested by the regulators’ and ‘must be accurate,’ or we will have ‘books and records’ violations.” The specific references in the policies to regulator requests could indicate that expense reporting was an issue in the firm and management failed to act.  The SEC’s order does not discuss whether the broker-dealer’s annual audit identified these issues, which should have flagged the compensation issues and the large dollar amounts of entertainment expenses.  Maybe the issues were identified in audit reports and not corrected, which could be the reason the SEC hit BGC with a $1.25 million fine.  Of course, BGC had also deleted some phone recordings requested by the SEC, which may have raised the Commission’s ire.  In any event, this case reflects the importance of compliance having a good relationship with the Finance department and understanding the process for approving expenses, required documentation, as well as the scope and results of external audits. Chief Compliance Officers can use this case as a cautionary tale for annual compliance training, and as a basis for updating testing procedures to dig deeper into gifts and entertainment.  Although this case is specific to broker-dealers, registered investment advisers have a corresponding books and records requirement, and policies requiring reporting of gifts and entertainment should also be reviewed and tested.  Contributed by Heather D. Augustine, Senior Compliance Consultant

Petty Offenses under Pay-to-Play Rules Result in Major Fines for Advisers.  In three separate cases, advisers were fined $100,000 to $500,000 for violations of Rule 206(4)-5(a)(1) which bans an adviser from providing investment advisory services for compensation to a government entity for two years following a contribution by the adviser or its covered associates to any elected official or candidate of such government entity whose office may have influence on the selection of an investment adviser.

In the Sofinnova case, an exempt reporting adviser (ERA) continued to collect investment management fees for eight months following a $2,500 contribution by a covered associate to a gubernatorial candidate with the ability to influence investments by one of the firm’s investors, a state retirement plan.  The plan was already an investor in the firm’s closed-end fund at the time of the contribution and upon request, the contribution was returned.  Nonetheless, the SEC issued $120,000 fine, noting that the intent to influence an adviser appointment decision is not required to be a violation.  In the matter of Oaktree Capital Management, L.P., three covered associates contributed $500 to $1,400 to candidates with the ability to influence investments by certain existing governmental investors in the firm’s private closed-end funds.  Oaktree was fined $100,000 and agreed to stop collecting management fees from these investors during the requisite two-year ban.  In the matter of Encap, a similar fact pattern emerged, though the contributions (and the subsequent fine) were larger.  Contributions leading to the violation totaled just over $90,000 with a resulting fine of $500,000.

Key take-aways?  First, the amount of the contributions need not be material – the total contributions made by Sofinnova and Oaktree were $2,500 and $2,900, respectively.  Second, ERAs must comply with the same pay to play rule as RIAs.  Third, requesting the return of the contribution may be beneficial for compliance management purposes but does not eliminate the two-year ban on fees. Fourth, the two-year time-out applies even when a government plan is already a client or investor before a contribution is made. ERAs and RIAs should carefully consider their political contribution procedures to ensure that, where the firm or a covered associate makes any political contribution outside the de minimis thresholds, the firm does not collect management fees from any client over which the receiving candidate has investment influence during the two-year ban.  Preclearance procedures are a valuable and important control for many firms, but these cases highlight a need to dig deeper.  Contributed by Cari A. Hopfensperger, Compliance Consultant

 Using Squeaky Clean Reputation Service Results in Black Marks for Advisers  The SEC announced five settled proceedings against two registered investment advisers, three investment adviser representatives (IARs) and marketing consultant Leonard Schwartz for violations of the Rule 206(4)-1(a)(1), also known as the Testimonial Rule. The cases involved Romano Brothers & Company, HBA Advisors, LLC and Jaime Enrique Biel, William M. Greenfield and Brian S. Eyster, and marketing consultant Leonard S. Schwartz.   Except for the Romano Brothers case, all the other cases involved Mr. Schwartz, a marketing consultant and president of Create Your Fate, LLC.  Mr. Schwartz sold his Squeaky Clean reputation service to some investment advisers, telling them that his social media marketing efforts were “100% compliant.”  The service involved soliciting positive reviews of investment advisers from their clients and getting them posted on,,, and  One adviser, described in the proceeding against Mr. Schwartz as Advisor A, quickly realized that the testimonials solicited by Create Your Fate and posted on the internet violated the Testimonial Rule, and requested that they be removed.   Advisor A also provided Mr. Schwartz with the text of the Testimonial Rule, and a link to the SEC’s guidance on the rule, and suggested that this rule applied to other advisers using his service. Although Mr. Schwartz didn’t remove the testimonials until months later, Advisor A was able (presumably) to avoid trouble with the SEC by having proof that it acted quickly to prevent further violations of the rule.

The first lesson learned from this case is to perform due diligence on your service providers.  The advertising rule under the Advisers Act is complicated, and firms should determine whether their marketing consultants have an understanding of the rule and its interpretations.  Moreover, marketing consultants, like other service providers, have very limited liability. They are not subject to extensive regulations, and, except for Mr. Schwartz, are generally not subject to SEC sanctions.  Another key takeaway from this case is that any marketing initiatives should be discussed with compliance.  Even in situations where testimonials are on an independent third-party site like, the fact that an adviser then purchases an advertisement on that links to the testimonials can be viewed as a violation of the Testimonial Rule.  A final lesson from this case is never trust anyone who tells you that their marketing is “100% compliant” or who uses the phrase “Squeaky Clean Reputation.”   Contributed by Jaqueline M. Hummel, Partner and Managing Director

Insanity is Doing the Same Thing Over and Over Again and Expecting Different Results:  New Silk Route Advisors, L.P. found out the hard way what happens when you fail to comply with the Advisers Act Custody Rule (Rule 206(4)-2).  For six years in a row, this private fund manager failed to distribute the annual audited financial statements to the limited partners in its funds by the 120-day deadline.  The SEC fined the adviser $75,000.  Aside from the obvious lesson about meeting the delivery deadline, a key takeaway from this case is to learn from your failures.  New Silk Route consistently failed to meet the financial statement deadline each year, but, according to the SEC, did not change its processes or procedures to prevent future failures.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

Worth Reading:

Issues to Consider when Billing on Assets under Advisement:  Great discussion by Michael Kitces about charging fees on held-away assets.

Beware of Social Media Consultants:  Doug Cornelius at Compliance Building highlights the dangers of hiring social media consultants who do not understand the advertising rules under the Advisers Act.

Help! My Aging Advisor’s Cognitive Decline:  Julie Ragatz at Barrons provides an interesting read on dealing with a decline in an investment adviser’s competence.

Compliance Testing Survey:  The Investment Adviser Association released the results of its 2018 compliance testing survey.  The hottest topic?  Cybersecurity.

Regulation of Investment Advisers by the U.S. Securities and Exchange Commission:  Robert Plaze, who served as Deputy Director of the Division of Investment Management at the SEC, updated this classic resource on RIA regulation.

What I Learned About Working Parenthood after My Kids Grew Up:  Avivah Wittenberg-Cox writes that aging has its advantages.  This article hit home for me!

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