Private Fund Principals Charged with Disclosure Violations, Is Your Auditor Properly Registered with PCAOB?, ESG and DOL Fiduciary Exemption Resources and More: Lessons Learned and Worth Reading for May 2021

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SEC Charges Auditor for Failing to Register with the PCAOB. Why is this case important for broker-dealers and investment advisers to read? Because situations like this can result in multiple rule violations such as violation of Section 102(a) of the Sarbanes-Oxley Act of 2002, Rule 2-02 (b)(1) of Regulation S-X, SEA Rule 17a-5, and Rule 206(4)-2 of the Advisers Act. Brokers and advisers can avoid this situation by adopting simple written procedures that require the firm to conduct the initial and ongoing due diligence of its auditors. Due diligence procedures should include verifying an auditor’s PCAOB status before engagement and any audit or attestation commencement. Research your auditor on the PCAOB website at: https://pcaobus.org/oversight/registration/registered-firms. Contributed by Rochelle A. Truzzi, Managing Director.

Lies of Omission are Still Lies - Individuals Censured, Barred Over Private Fund Disclosures. Taylor C. Sadek (“Sadek”), former co-principal of the Indiana state-registered investment advisory firm, Foundry Capital Group, LLC (“Foundry”), was censured by the SEC and ordered to pay a civil money penalty of $30,000. The censure and fine were related to Sadek’s misrepresentations and omissions to investors on the performance of a private fund managed by Foundry. Troy Marchand (“Marchand”), another former co-principal of Foundry and portfolio manager to the fund, was also barred from the securities industry for at least five years over his misrepresentation and omissions to investors.

From February to November 2017, Sadek and Marchand sent misleading quarterly newsletters to the private fund’s investors. The fund made investments in two entities experiencing financial difficulties. At the same time, investor newsletters reported expected performance that included accrued interest payments from these entities even though they stopped making interest payments for the past eleven months. To make matters worse, the interest due from these investments comprised about 40% of the interest due to the fund. The newsletters also omitted material information, such as Sadek’s concerns over the success of these two entities. Both new and existing investors made investments in the fund after they received the newsletters.

The SEC also censured Scott Wolfrum (“Wolfrum”), an investment advisor and brokerage representative who raised more than $20 million for Foundry’s fund. Wolfrum was ordered to pay disgorgement of $140,125, prejudgment interest of $21,354, and a civil money penalty of $75,000, resulting from his failure to disclose his conflict of interest in the offer and sale of the fund to investors. Wolfrum failed to tell investors that he obtained finders fees from the fund’s investment in certain entities and that his family held an equity interest in certain fund holdings.

Whether a firm is an SEC or state-registered investment adviser, broker-dealer, or security issuer, each must follow applicable anti-fraud laws, rules, and regulations and provide disclosures to allow a reasonable person to make an informed investment decision. This includes disclosing unfavorable information, all material information, and conflicts of interest such as a family or close personal relationship with a portfolio company, and any direct or indirect compensation received from the offer and sale of a security. Contributed by Glenn R. Skreppen, Senior Compliance Consultant.

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