Investment Advisers

Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action

Published on: March 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Division Reviews Investment Advisers Act As It Applies to Private Fund Advisers

Currently examining the way applies the 1940 Investment Advisers Act to private fund advisers, the Securities and Exchange Commission is reportedly concentrating specifically on the areas of Form ADV and advertising. SEC Division of Investment Manager Director Norm Champ, who recently spoke at an Investment Adviser Association compliance conference, said that rules related to both areas might have to be modified in the wake of changes brought about due to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Advisers Act’s Rule 206(4)-1 doesn’t let adviser use advertising that includes misleading or false statements or refers to testimonials. Champ, however, noted that because of the advent of new forms of communications, including social media, as well as the birth of new business models since the rule was promulgated decades ago, there might be a need to revise the rule. As to Form ADV, which new registrants to the SEC must fill out, Champ pointed out that the way it is designed may not be take into consideration the sometimes complex nature of private funds.

FINRA CEO Says Now is Time to Make Investment Advisers and Brokers Adhere to a Fiduciary Standard

Published on: March 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum, now is the right time to make brokerage firms and investment advisers that provide personalized retail financial advice adhere to a uniform fiduciary standard. However, he warned that such a standard, whether by itself or combined with other regulatory harmonization, does not guarantee misconduct will not happen.

Establishing a uniform fiduciary duty for investment advisers and setting up new oversight for them were both recommended in Securities and Exchange Commission studies that were conducted over two years ago under the order of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Earlier this month, the SEC requested quantitative and economic information to help it decide what that standard of care should be. It also engaged in the conversation of whether investors would benefit more if rules were harmonized in other sectors of investment adviser and broker-dealer regulation, including supervision, firm licensing, advertising, individual qualification, books and records, and others.

Addressing the Consumer Federation of America earlier this month,

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M

Published on: March 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Focus Capital Wealth Management and its owner Nicholas Rowe are now barred from having a license to serve as either an investment adviser or a broker-dealer in New Hampshire. Rowe and his financial firm are accused of elder financial fraud. Per the settlement with the state, they must pay $2.4 million in client restitution.

The Bureau of Securities Regulation acted against Rowe last year following complaints from clients claiming they’d lost significant amounts of money in risky investments of leveraged exchange-traded funds, which are also known as ETFs. According to the bureau, these investments are not for clients who have a low or medium tolerance for risk. Rowe also allegedly misrepresented his credentials and charged investors unreasonable fees, claiming that these were going to third parties with close Wall Street ties, when, actually, he was keeping part of that money.

Rowe eventually consented to FINRA arbitration over claims filed by a number of his former clients, who alleged civil fraud and negligence. One of the arbitrator’s panels ruled against him for $1.8M in restitution.

Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund

Published on: March 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Oppenheimer Alternative Investment Management and Oppenheimer Asset Management, which are two Oppenheimer & Co. investment advisers, with misleading customers about the valuation policies and performance of a private equity fund under their management. To settle the allegations, Oppenheimer will pay over $2.8M. It has also resolved the related action that was filed by Massachusetts Attorney General Martha Coakley.

According to the SEC, from 10/09 to 6/10, the two Oppenheimer investment advisers put out marketing collaterals and quarterly reports that were misleading and claimed that Oppenheimer Global Resource Private Equity Fund I L.P.’s holdings in private equity funds had values that were determined according to the estimated values of the underlying manager. In truth, contends the regulator, Oppenheimer’s portfolio manager actually valued the largest investment of the fund, Cartesian Investors-A LLC, at a markup that was considerable to the underlying manager’s estimated value. This discrepancy made it appear as if the fund’s performance was much better, per its internal rate of return. For example, at the conclusion of the quarter ending on June 30, 2009, the markup of the investment upped the internal return rate from 3.8% to 38.3%

Among the alleged misrepresentations made by ex-OAM employees to potential investors were:

NASAA Wants Investment Advisers To Be Banned From Forcing Clients Into Mandatory Arbitration

Published on: March 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrations Association Inc. wants Congress to put into place a law to bar investment advisers from making clients go through arbitration to resolve their securities claims. They also want lawmakers to make either the SEC propose a rule that would get rid of the pre-dispute arbitration clauses currently found in broker firm contracts or push for similarly purposed legislation. The association recently unveiled its legislative priorities, which includes getting a discourse going about a recent FINRA panel ruling that found that the self-regulatory organization could not prevent Charles Schwab Corp. (SCHW) from using agreements that include mandatory pre-arbitration clauses to bar clients from taking part in class action securities cases.

NASAA President Heath Abshure has spoken about how giving investors options when it comes to settling claims is key to making them feel more confident about the financial markets. He said that when seeking relief they should have the option of going to the forum of their choice. The association also wants there to be legislation that would let the SEC impose user fees when investment advisors take exams (The group’s members believe this would enhance adviser oversight), as well as a law that would let crowdfunding victims file class action securities lawsuits. Crowdfunding involves using the Internet to sell securities in small batches to nonaccredited investors.

NASAA is hoping that the significant turnover that occurred in both the House and the Senate will give the organization a chance to generate new support.

Virgin Islands-Based Investment Adviser Faces SEC Fraud Charges Involving Alleged Kickbacks

Published on: February 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Change Commission is charging TAG Virgin Islands owner James S. Tagliaferri with securities fraud. The investment adviser is accused of getting kickbacks from putting investors’ funds in companies that were being thinly traded in and then employing a Ponzi-like scam to give clients their supposed “returns.”

According to the SEC’s Enforcement division, Tagliaferri allegedly exercised his discretionary authority over his clients’ accounts to buy promissory notes that were put out by certain private companies. TAG was given millions of dollars in compensation, including cash in return for financing these companies-a conflict that investors didn’t know about. When it was time to pay these investors, Tagliaferri then used other clients’ funds to meet these obligations.

Specifically, contends the regulator, after 2007 the Virgin Islands-based investment adviser began placing TAG clients’ money in securities that were highly illiquid, including in promissory notes put out by different private companies that actually were holding companies, as well as $40M of investor funds in notes in International Equine Acquisitions Holdings, Inc.

FINRA Pulls Back on Regulating Registered Investment Advisers

Published on: February 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority Chief Executive and Chairman Richard Ketchum, the SRO is pulling back from its bid to regulate Regulating Registered Investment Advisers. This move comes after FINRA spent the last couple of years lobbing to become the main regulator for RIAs.

However, according to Ketchum, in the wake of the current political climate and changes in leadership during the 2012 election, he does not expect that the House of Representative Financial Services Committee will try to revamp the way RIAs are currently regulated, which is via the Securities and Exchange Commission. For advisers that did not want FINRA overseeing them, this is good news.

However, not all of those that were against the SRO taking over RIA regulation are convinced that FINRA has completely given up. Some are worried that the regulator intends to return to the issue at a later date.

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending

Published on: February 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

NH Investment Adviser to Pay $1.8M to Investors in FINRA Securities Arbitration Case Over Leveraged and Inverse Exchange-Traded Funds

Published on: February 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel has ruled that Focus Capital Wealth Management Inc. and its owner Nicholas Rowe must pay investors $1.8 million over securities fraud allegations related to the sale of high-risk exchange-traded funds. The investment adviser is accused of civil fraud, negligence, and other misdeeds related to the funds’ sale to nine clients, some of them older investors.

The claimants’ investments had been heavily concentrated in inverse and leveraged ETFs. They contend that Rowe upped their risk by purchasing and holding the ETFs for up to a few months-a strategy that some consider practically guaranteed there would be loss. Focus and Rowe have been named in civil proceedings initiated by the New Hampshire Bureau of Securities Regulation. Meantime, a state court has put out a temporary order barring Rowe and his firm from conducting business.

Exchange-Traded Funds

Ernst &Young Auditor Suspended Over Part Played in Botched 2004 Audit of AA Investors Management LLC

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a divided decision, the SEC has decided that suspending Ernst & Young auditor Wendy McNeeley from Commission practice for half a year for her conduct as manager of the audit of investment adviser AA Investors Management LLC and a related fund is appropriate. According to the agency, McNeeley and her engagement partner Gerard Oprin did not apply due professional care when assessing a $1.92 million related-party “tax loan” from client accounts to alleged fraudster John Orecchio, who co-owns AA Capital. She is also accused of choosing not to investigate further even after she encountered a number of red flags over a material transaction involving a related party.

The SEC filed its administrative proceedings against her and Oprin for not conducting the 2004 audit of AA Capital Equity Fund LLP and AA Capital, per generally accepted auditing standards. This alleged misconduct, contends the Commission, resulted in Ernst & Young putting out audit reports that were not properly qualified yet came with disclosures noting that they conformed to general accounting principles. McNeeley and Oprin are accused of not getting enough “competent evidential matter” or exercising the professional care required to their evaluation and disclosure of the loan to Orecchio. Instead, they allegedly depended on information from AA Capital’s chief financial officer that hadn’t been substantiated. Oprin was also accused of not properly supervising the audit.

While an administrative law judge would go on to dismiss the allegations facing Oprin, McNeeley was barred from appearing as an SEC accountant for a year. She appealed.