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SEC Prosecutes De-Registered Adviser for Prior Compliance Failures

The SEC fined a deregistered investment adviser and barred its former principal for multiple compliance failures involving double dipping, Form ADV disclosures, fee rebates, and misrepresentations.  The respondents recommended that clients invest in private funds in which the principal held ownership and managerial interests.  Although the SEC acknowledges that clients knew about the conflict, the firm failed to list and describe the conflicts on Form ADV.  The SEC also charges the firm with multiple compliance program failures including inadequate policies and procedures and failing to conduct annual testing of the compliance program.

OUR TAKE: There is no such thing as declaring regulatory bankruptcy: the SEC’s long arm won’t let a firm engage in wrongdoing and then simply de-register to avoid consequences.    Compli-pros should also note that disclosure alone will not always cure significant conflicts of interest, such as fee double dipping for advisory services along with underlying products. 


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.


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.