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Broker/Custodian Should Have Filed SARs to Report Advisers Act Violations

A large custodian/clearing firm agreed to pay $2.8 Million to settle charges that it failed to file Suspicious Activity Reports about the conduct of dozens of terminated advisors that the SEC claims violated the Advisers Act.  The SEC asserts that the Bank Secrecy Act required the custodian/clearing firm to file SARs when it suspected that advisers using its platform engaged in questionable fund transfers, charged excessive management fees, operated a cherry-picking scheme, or logged in as the client.  According to the SEC, such unlawful activities fall within the SAR rules because they had no lawful business purpose or facilitated criminal activity.

OUR TAKE: The SEC is leveraging the Bank Secrecy Act, adopted to combat money laundering, to require broker/custodians to police advisers on their platforms for violations of the Advisers Act.  It’s a novel legal theory to further the regulator’s enforcement goal of requiring large securities markets participants to serve in a gatekeeping role for the industry

Lawyer Charged with Preparing Misleading Registration Statement

The SEC has sued a lawyer for aiding and abetting securities fraud by preparing a registration statement that failed to disclose that the principal was a convicted felon that controlled the issuer.  According to the SEC, the principal instructed the lawyer that he should not be named as an officer or director of the issuer because of his prior conviction.  Nevertheless, according to the SEC, the lawyer knew that the principal fully controlled the issuer and failed to include such disclosure in the Form S-1.  The SEC also charges that the lawyer knew or was severely reckless in not knowing that the three persons listed as officers and directors had not agreed to serve.

OUR TAKE: The SEC will hold gatekeepers, including lawyers, accountable for their bad clients.  This case goes further than prior enforcement cases by prosecuting a lawyer for reckless conduct rather than knowingly furthering a specific fraud.


Fund Administrator Liable for Miscalculating Fund NAV

The SEC fined and censured a fund administrator for causing a money market fund’s violations of the Investment Company Act.  The SEC asserts that the administrator used a flawed valuation methodology that resulted in violations of Rule 2a-7.  The fund was used as a vehicle to invest securities lending collateral for the benefit of affiliated mutual funds.  Because the fund failed Rule 2a-7, the investments by the registered funds violated the affiliated transaction rules.

OUR TAKE: As was the case with another recent case against a fund administrator, the SEC will broadly interpret the securities laws to hold non-registrant service providers accountable as gatekeepers of the securities markets.