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SEC Cancels Internet RIA Registration for Failure to Launch


The SEC cancelled the adviser registration of a purported internet investment adviser because the registrant failed to launch its website in the three years since registering.  The registrant filed as an RIA under the internet adviser exception whereby an adviser without assets under management is eligible to register if the adviser provides advice exclusively through an interactive website.  The adviser registered in May 2015 and still has not launched its website due to personal events and product complexity.  The registrant argued that the internet adviser exception allows a grace period for development.  The SEC concedes that an internet adviser may be allowed some leeway beyond 120 days (the stated time period for new advisers), but three years is “well over any reasonable grace period.”  Additionally, the SEC places the burden on the adviser to demonstrate “substantial efforts and progress toward developing an interactive website” in order for the Commission to exercise discretion to allow registration beyond the initial 120-day period. 

This decision states for the first time that internet advisers may get more than 120 days to launch so long as they can demonstrate significant progress.  The SEC will grant a grace period, but three years is too long.    

Non-U.S. Adviser Lied on Form ADV

The SEC censured and barred from the industry the principal of a non-U.S.-based investment manager for making false Form ADV statements.  The SEC charges the firm with falsely claiming (i) to have over $100 Million in assets under management, (ii) to have retained a nationally recognized auditor and prime broker for its funds, and (iii) a principal place of business in the United States, which was only a virtual office.  The SEC alleges that the Form ADV statements violated the antifraud rules of both the Securities Act and the Investment Advisers Act.  The SEC asserts jurisdiction because the respondents used interstate electronic communications to further the fraud.  The SEC claims proper venue because the defendants maintained a virtual office in New York. 

Form ADV is a securities law filing that gives rise to antifraud liability for misstatements.  The regulators will not overlook untruths as innocent marketing exaggerations.  Hire a lawyer or compli-pro to help prepare an accurate Form.   

Adviser Falsely Claimed SEC Registration Eligibility

The SEC barred from the industry the principal of a registered investment adviser for falsely claiming SEC registration eligibility.  In his initial Form ADV filing, the respondent claimed over $500 Million in assets under management, but the SEC asserts the firm managed no assets.  A year later, the respondent claimed a Wyoming principal place of business and assets under management in excess of $25 Million.  The SEC maintains that the firm operated from New York and had assets less than $5.4 Million.  In both years, the respondent electronically signed the Form ADV “under penalty of perjury.”

The SEC does not look kindly on advisers that lie on Form ADV to claim registration eligibility.  The regulator already supervises over 13,000 advisers that legally qualify for federal registration. 

Adviser Lacked Required AUM to Register with the SEC

The SEC fined and suspended the principal of a defunct investment adviser for falsely claiming SEC registration eligibility.  The firm claimed that it had at least $25 Million in assets under management through 2011 and then suddenly claimed it had at least $100 Million assets under management following passage of the Dodd-Frank in 2012.  The SEC asserts the firm had no basis for claiming SEC registration eligibility because it did not have the purported assets under management.  The SEC also alleges violations of the custody rule arising from the firm’s role as a private fund manager.

OUR TAKE: Lying to the SEC about registration eligibility is more than mere marketing puffery.  It can prompt a public enforcement action.  Make sure you have records to support the claimed assets under management.

https://www.sec.gov/litigation/admin/2018/ia-4875.pdf

SEC Accuses Adviser of Falsely Inflating AUM to Register

The SEC instituted enforcement proceedings against an adviser that it accuses of falsely claiming SEC registration eligibility.  The SEC alleges that the adviser initially registered by claiming that it had over $500 Million in assets under management and a year later changed its ADV to claim eligibility as a mid-sized adviser ($25-$100 Million AUM) domiciled in New York and/or Wyoming.  However, the SEC maintains that the adviser never had any clients or assets under management.  The SEC further accuses the adviser of soliciting clients using the false ADVs.

OUR TAKE: SEC registration has become a qualifying criterion for larger clients who feel more secure with an SEC-regulated firm that has more than $100 Million in AUM.  Consequently, firms may feel the pressure to stretch their numbers to qualify, which could result in a painful enforcement action.  There is no shortcut to success.

 

Adviser’s Form ADV Inflated Assets to Claim SEC Registration Eligibility

An investment adviser was fined and barred from the industry for falsely claiming SEC registration eligibility, along with several other Advisers Act violations.  The SEC asserts that the respondent filed multiple Form ADVs claiming over $100 Million in AUM and SEC registration eligibility even though the firm had only $4 Million in AUM. The SEC also charges the firm with misappropriating client assets, failing to comply with the custody and recordkeeping rules, and charging excessive fees.

OUR TAKE: Whether to register with the SEC or the relevant state is not a discretionary decision.  Either you have $100 Million in AUM or you don’t.  Lying on a Form ADV about SEC registration eligibility will result in a public enforcement action, censure and fines.

 

Form ADV FAQs Impact Cross-Border Investment Managers

The SEC’s Division of Investment Management has released additional Form ADV FAQs that affect cross-border investment managers.  The staff advises that non-U.S. investment funds, including UCITs or their equivalent, should be classified as “pooled investment vehicles” when describing assets.  Also, a non-resident GP or managing agent of a relying adviser must file Form ADV-NR.  The FAQs also broadly define “borrowings” for purposes of whether an adviser engages in borrowing transactions on behalf of clients, explain social media disclosure, and clarify that the new Form supersedes SEC no-action relief with respect to relying advisers.

OUR TAKE: The SEC continues to take an extra-territorial regulatory approach to any cross-border adviser that must register in the U.S.

https://www.sec.gov/investment/im-info-2017-04.pdf

The Friday List: 10 Most Significant Form ADV Changes

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Last August, the SEC again re-vamped Form ADV to add significantly more disclosure.  Firms with a 12/31 fiscal year have until next year to implement the changes.  However, many firms have begun the process as they prepare this year’s annual update.  To assist your planning, here are the 10 most significant Form ADV changes:

 

10 Most Significant Form ADV Changes

 

  1. Separately Managed Accounts.  The new Form ADV requires significant reporting on separately managed account assets including reporting by asset type and related derivative transactions.
  2. Umbrella Registration.  The new filing rules allow affiliated advisers to use a single ADV, but the registrant must complete a detailed schedule for each relying adviser
  3. Social Media.  Every registrant must include websites and social media addresses.
  4. Offices.  An adviser with multiple offices must list its largest 25 offices (used to be 5).
  5. Outside CCO.  If a firm retains a Chief Compliance Officer paid by a third party, the new Form requires the registrant to name the CCO and his/her employer.
  6. Assets Under Management.  The new Form ADV requires more detailed reporting of regulatory assets under management by client type.
  7. Wrap Programs.  Registrants must include more detailed information about the wrap programs in which they participate.
  8. Referral Payments.  The new rules require more disclosure about compensation paid, or received for, referrals including amounts paid by, or to, employees.
  9. Bad Actors.  The bad actor disclosure (DRP) requires information about all relying advisers.
  10. Auditors.  New Form ADV requires information about the auditors to private funds.