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SEC Fines Adviser for Paying Solicitors without Full Disclosure


The SEC censured and fined an investment adviser for paying solicitors without complying with the solicitation rule (206(4)-3).  The adviser had networking relationships with over 300 banks whereby the adviser paid the banks a substantial portion of the advisory fees received from clients referred to the adviser.  The SEC asserts that the adviser did not comply with the solicitation rule, which requires separate disclosure about the solicitation relationship, the specific terms, and the compensation received.  The adviser erroneously relied on a 1991 no-action letter, which stated that a bank need not register as investment adviser.  The no-action letter did not hold that bank solicitors were exempt from the solicitation rule.

We had predicted that the SEC would bring cases alleging violations of the solicitation rule.  The rule is intended to fully disclose the potential conflict of interest when a trusted adviser refers the client to an adviser that has provided a financial incentive.   A solicitor need not be registered as an adviser under state or federal law to come within the rule. 

Robo-Adviser Charged with Multiple Compliance Breakdowns



The SEC censured and fined a robo-adviser for several compliance violations related to client account management and marketing.  The SEC alleges that software programming errors caused the respondent’s failure to execute tax loss harvesting without violating the wash sale rules, contrary to marketing materials.  The SEC also asserts that the firm retweeted client testimonials and other positive tweets made by those with an economic interest including employees, investors, and paid tweeters.  Additionally, the SEC maintains that the firm failed to provide the necessary disclosure to clients about payments to bloggers to refer the clients to the respondent.  The SEC charges the firm with failing to implement a reasonable compliance program in addition to violations of the antifraud rules and the recordkeeping rules.

 We think robo-advisers provide innovative services to under-served retail clients.  Regardless, as registered investment advisers, robos must conform to the heavily-regulated environment in which they operate.  Some of these alleged violations could have been easily avoided with an industry-standard compliance program.  We recommend reviewing the SEC’s previously issued regulatory compliance guidance to robo-advisers

SEC Warns Advisers about Solicitation Rule Violations


The staff of the SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a risk alert about widespread noncompliance with the solicitation rule (206(4)-3).  Reviewing examination deficiency letters for the last 3 years, the staff found that firms frequently failed to (i) ensure that third party solicitors provided or obtained adequate client disclosure statements; (ii) execute required agreements with third party solicitors; and (iii) conduct adequate due diligence to determine whether solicitors complied with agreements.  The staff also expressed concern about conflicts of interests whereby advisers received client referrals in exchange for recommending service providers.  The staff encourages advisers to “review their practices, policies, and procedures.”

This heightened review of solicitation rule compliance is consistent with OCIE’s broader concerns about adviser marketing practices.  The SEC has increased scrutiny in related areas such as the use of backtested performance, testimonials, and revenue sharing.  Also, last year, OCIE issued a comprehensive Risk Alert admonishing advisers to review their marketing and advertising compliance procedures.

Broker Guilty of Bribing Public Plan Official

A broker charged with bribing a public plan official to secure brokerage business pled guilty to criminal securities fraud charges and was barred from the industry.  The SEC charges that the broker spent nearly $20,000 on hotels, meals and concert tickets and then concealed the name of the public plan official on expense reports.  The SEC argues that the bribes resulted in over $1 Billion in fixed income trading for her firm and significant commissions paid to the broker.  The SEC also asserts that she knew the public plan official violated his disclosure obligations.

OUR TAKE: The payor of illegal solicitation payments will incur as much legal wrath as the recipient.  It is unlikely that the commissions received will compensate her for the fines, criminal penalties and industry bar.


New FINRA Rules Facilitate Public Plan Solicitation and Distribution Activities

The SEC has approved new FINRA rules allowing Capital Acquisition Brokers to engage in distribution and solicitation activities for registered investment advisers consistent with the anti-pay-to-play rules.  Rule 206(4)-5 of the Advisers Act restricts advisers from engaging solicitors for certain government entities.  The new rules allow advisers to retain CABs consistent with previously adopted FINRA rules governing distribution and solicitation activities.  CABs are limited purpose FINRA member firms that are subject to less regulation but must limit their activities to investment banking-type activities such as advising companies on capital raising and acting as a placement agent.

OUR TAKE: These rules allow government plan solicitors to continue their activities on behalf of RIAs by submitting to the lighter CAB regulatory regime.   These rules represent a loosening of the rules that appeared very restrictive in the wake of Rule 206(4)-5’s adoption.


CEO Hid Solicitation Payments and Then Lied to Clients and the SEC



The CEO of an investment adviser admitted wrongdoing and agreed to pay over $575,000 and an industry bar for paying undisclosed solicitation fees.  The CEO also faces criminal charges for misleading SEC enforcement investigators, thereby obstructing proceedings of a federal agency.  The respondent admitted to paying a lawyer-friend a referral fee without disclosure to the referred client as required by Rule 206(4)-3 of the Advisers Act.  The pair conspired to conceal the payments through sham legal invoices.  Upon hearing rumors of securities enforcement, the respondent sent false emails to clients claiming that the SEC had cleared the firm of any wrongdoing.  The CEO’s firm agreed to pay disgorgement but avoided more damaging penalties because it discovered the conduct, disciplined the CEO, and reported the conduct to the SEC.  The lawyer-solicitor was also fined and barred from the industry.

OUR TAKE: Failure to disclose the solicitation payments would have resulted in a disgorgement penalty and enhanced disclosure.  Lying to clients and the SEC triggered the criminal prosecution and the increased fines and industry bar.


SEC Sues Former State Pension Official for Accepting Kickbacks to Steer Commission Business


The SEC commenced enforcement proceedings against a public plan’s former Fixed Income Director and two brokers for a kickback scheme whereby the public official steered brokerage business in exchange for personal gifts.  The U.S. Attorney’s Office also announced parallel criminal charges.  The SEC alleges the brokers bribed the public official with combined gifts totaling more than $180,000 over a 2-year period, which gifts included jewelry, tickets, trips, restaurants, cocaine, and prostitutes.  The SEC also asserts that the 3 respondents conspired to hide the gifts from reporting and disclosure.  The SEC charges that the public official breached his fiduciary duty to the public plan and thereby violated the securities laws.  The SEC’s Enforcement Director expressed the SEC’s position on public corruption: “This action demonstrates that the SEC will not tolerate public officials who abuse public pension funds to satisfy their own greedy and wanton desires.”

OUR TAKE: The SEC is expanding its regulatory jurisdiction by pursuing public corruption cases.  Although the public official’s alleged conduct certainly violated the plan’s policies and state (and federal) laws, the SEC employs a broad application of the fiduciary duty to assert that the conduct amounted to fraud in the purchase or sale of a security.  The SEC may use this same legal theory to enforce the DoL’s fiduciary rule.