Investment Advisers

Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar

Published on: July 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a survey issued by Morningstar Inc., financial advisers may be using the wrong benchmark when evaluating and choosing alternative investments. The research firm and Barron’s magazine questioned 301 advisers and 372 institutional investors.

Right now, the most popular way that advisers assess their investments’ performance is with a standard benchmark index and not by measuring performance against customized benchmarks, competitor funds, or risk-adjusted analysis. While about 25% are using the Russell 2000, the S & P 500, or similar benchmarks, the rest of those who were surveyed work with different methods.

Now, however, there are industry executives and analysts who are saying the index benchmarks are not up to the job of assessing the funds’ performance. Alternative investments typically employ different strategies and may have distinct goals.

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty

Published on: July 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is ordering the comptroller and principals of SignalPoint Asset Management to pay $215,000 for breach of fiduciary. The regulator claims that the Missouri-based registered investment adviser breached its fiduciary duty when it did not tell clients about certain conflicts of interest.

The SEC says that SignalPoint principals Dennis R. Walker, Jonathan C. Timson and John W. Handy Jr. failed to disclose that they had control of the RIA when they advised clients to invest in it. This failure to disclose the conflict is a violation of the Advisers Act.

Michael Orzel, SignalPoint’s comptroller, was responsible for filing and drafting the RIA’s Form ADVs that also failed to disclose that Walker, Timson, and Handy were not just the principals of the registered investment adviser but also its control persons.

Pennsylvania Private Equity Firm Settles SEC Charges Over “Pay to Play” Violations Related to Political Campaign Contributions

Published on: June 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

TL Ventures Inc. has agreed to pay almost $300,000 to settle Securities and Exchange Commission charges. The regulator contends that the Pennsylvania-based private equity firm violated “pay-to-play” rules for advisory fees it continued to get from state pension funds and the city of Philadelphia even after an associate made campaign contributions to the mayoral candidate and the state’s governor.

This is the SEC’s first case under the investment advisers’ pay-to-play rules, which went into effect in 2010. Under the rules, investment adviser are not allowed to provide compensatory services via pooled investment vehicles or to a government client for two years after a firm or one of its associates makes campaign contributions to political candidates or anyone able to impact the retention of advisers to oversee government client assets.

Philadelphia’s mayor gets to appoint three members of the Philadelphia Board of Pensions and Retirement. Pennsylvania’s governor gets to choose six of the state’s retirement system board members.

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions

Published on: June 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has submitted an order against Dennis J. Malouf accusing him of investment adviser fraud. The regulator says that he allegedly took trading commissions that he wasn’t entitled to for himself. He was in charge of UASNM’s bond trading operation between 2008 and May 2011. Malouf, who was the CEO of UASNM Inc. is now with M Wealth Management.

According to the Commission, he set up a secret verbal deal with someone at a broker-dealer branch to send him the commissions generated by the broker for bond trades that this person did with Malouf’s firm. The regulator claims that rather than look for the best way to make the bond trades happen, UASNM worked only with the broker-dealer. Over the approximately three-year period, the investment advisory firm made over 200 bond trades through the unnamed branch. This was about $30 million to $40 million in trades every year, for which Malouf obtained about $1.1M in commissions.

In 2011, UASNM fired Malouf, who was a majority owner,because of misconduct allegations. He then sued for wrongful termination and that is when the firm’s attorneys discovered the purported commission deal.

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud

Published on: June 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is temporarily shutting down investment adviser Scott Valente and his ELIV Group LLC. The regulator is charging both with defrauding about 80 investors of $8.8 million. The regulator says that Valente promised huge returns to customers, who are mostly from the Warwick and Albany areas.

However, rather than earning positive returns, he took close to $3 million of investor money and spent the funds on his own expenses, including mortgage payments and jewelry. Meantime, he charged these unsophisticated investors a 1% yearly fee for assets under management.

The SEC said that Valente kept the fraud going by issuing bogus investment statements every month that showed returns and assets under management that had been inflated. In fact, contends the regulator, in its few years of operation the investment firm lost $1.2 million and placed client money in illiquid and speculative privately held-companies. Also, while Valente said he had $17 million in assets under management, that amount was actually just $3.8 million.

State Senator Reprimanded For Violating the Texas Securities Act

Published on: May 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Texas State Securities Board has reprimanded Senator Ken Paxton and ordered him pay a $1,000 fine for soliciting investment clients even though he wasn’t properly registered. According to the board’s disciplinary order, Paxton, who is running for state attorney general, violated the Texas Securities Act. Under the Act’s Section 12.B, a person cannot act as an investment adviser representative unless he/she is registered as one for that investment adviser in particular.

The Texas Tribune reports that Paxton started working as a solicitor for companies belonging to Fritz Mowery in 2001. On three occasions, in 2004, 2005, and 2012, he took part in unregistered solicitations and referred the customers to Mowery Capital Management, LLC. The fine is for the last incident, which occurred within the last five years. (One of the incidents led to a Texas securities fraud case in 2009 when investors Teri and David Goettsche sued Paxton and Mowery for breach of duty.

In their Texas investment fraud case, the Goettsches claimed that Paxton recommended they invest with Mowery while failing to mention that he would get a 30% commission for the referral. The couple later dropped the securities lawsuit.

SEC Charges Total Wealth Management With Securities Fraud, Receiving Undisclosed Kickbacks

Published on: April 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed a financial fraud case against Total Wealth Management Inc., an investment advisory firm based in Southern California. The regulator is accusing the firm of getting undisclosed kickbacks over investments recommended to clients. It is also alleging breach of fiduciary duty.

According to the SEC’s complaint, Total Wealth placed about 75% of 481 client accounts into Altus Funds, which is a family of proprietary funds. The investment advisory firm has a revenue-sharing deal that allows them to get kickbacks. The regulator says this was a conflict of interest because customers did not know about the agreement.

The Wall Street Journal reports that according to the SEC, Altus invested 92% of all its investments-$32 million-in funds that had revenue sharing deals with Total Wealth. The agency says that clients likely wouldn’t have put their money with Total Wealth if they had known that the majority of the Altus funds were paying the firm.

FINRA Doesn’t Want Oversight Over Financial Advisers, Says CEO Ketchum

Published on: April 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority CEO Richard G. Ketchum, the regulator no longer wants to be given oversight over financial advisers. Speaking to The Wall Street Journal, Ketchum said the self-regulatory agency had done all it could to be granted authority over investment advisers and has decided to stop with additional attempts.

FINRA currently oversees brokers. Meantime, the Securities and Exchange Commission and the states oversee registered investment advisers. The SEC had been exploring having FINRA or another agency police RIAs instead. However, the majority of investment advisers were against such a move because of the way FINRA handles enforcement. They don’t think the regulator understands the way investment advisers operated.

Ketchum is now saying that Congress should give the SEC the resources it needs to enhance its examination program of advisers. The Commission has been asking for more money because it can only afford to examine investment advisor firms about once a decade, which isn’t much oversight at all.

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online

Published on: April 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that investment advisers are allowed to publish comments from the public about their services on an independent social media website but that they must include both negative and positive reviews in unedited form. Also, the adviser must not have any affiliation with the site or the ability to influence it. The SEC made the announcement this week in a guidance update.

SEC rules typically don’t allow “testimonials.” The guidance, however, now says that Commission-registered advisers can direct potential clients to the reviews as long as certain conditions are met. The changes are in part because of the rapidly evolving social media market and the fact that this area is becoming a primary way that businesses communicate with prospective customers.

The regulator said that client reviews could only appear on review sites or independent social media. This means, for example, that they cannot be published on an adviser Facebook page. Also, an adviser cannot promise a customer anything in return for favorable reviews and employees are not allowed to write these testimonials.

SEC Reveals Plans to Examine Never-Before-Inspected RIAs

Published on: February 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has unveiled its Never-Before-Examined Initiative, which will allow it to look at registered investment advisers that have yet to be examined. The SEC shared details of its plan in a letter to these unexamined advisers, of which there are about 4,000. Some of these firms have been registered with the regulator for more than three years.

The SEC says it intends to inspect a significant number of the advisers who haven’t been examined yet but that the agency will place its emphasis on those who have been registered for at least three years. Its initiative will employ two approaches-focused reviews and risk assessment. The former will look at RIAs’ compliance programs, disclosures, filings, portfolio management, marketing, and client asset safekeeping:

Compliance Programs: Examiners will look at the effectiveness of an RIA’s compliance program. They will also review records and advisory books to figure out if an adviser has properly identified interest conflicts and risks, put into place the appropriate measures and procedures and policies to manage and mitigate both, and hire a competent Chief Compliance Officer.