Home » SEC

Tag: SEC

A Review of My 2019 Predictions

Every year, I offer my predictions on what will happen in the investment management regulatory world.  (I will publish my 2020 predictions next Friday.)  For 2019, I went 4-4-2 (ties for predictions that were mostly correct).  Last year, I went 8-2, which suggested I needed to stretch a bit more this year.  Over the last 5 years, I have gone 26-19-5 (4-6 in 2017, 4-3-3 in 2016 and 6-4 in 2015).  Below are the predictions I made in early January and how they turned out:

A Review of My 2019 Predictions

The SEC will propose a comprehensive adviser marketing/advertising ruleThe SEC proposed a comprehensive new investment adviser advertising rule in November.  The SEC has proposed broadening the definition of “advertising” and requiring standardized performance.  (1-0)

The SEC will re-propose the broker best interest standard.  I predicted that the SEC would propose a best interest standard short of an adviser fiduciary standard.  The SEC went one step further by actually adopting a heightened Regulation Best Interest that is not quite a fiduciary standard.  (2-0)

The Enforcement Division will bring several significant cases alleging violations of the solicitor rule.  There were several solicitation cases alleging violative facts such as failure to deliver proper disclosures.  (3-0)

The SEC will liberalize the private offering rules.  After publishing a broad concept release in June, the SEC’s December proposal would expand the definition of “accredited investor.”  (4-0)

OCIE will examine at least 20% of advisers.  OCIE examined only 15% of advisers this year. Even if you annualize results because federal workers were furloughed a month, they didn’t get to 20%.  It still remains an OCIE goal (4-1).

The SEC will bring significant cases against independent fund directors.  I am unaware of any significant cases against independent fund directors this year, other than the usual glut of hopeless 36(b) cases.  Regardless, there is some industry concern that the SEC will begin to scrutinize directors who approve questionable revenue sharing practices.  (4-2)

The SEC will allege securities fraud in secondary market private equity transactions.  There have been cases alleging secondary market fraud, but those cases have not been widespread in the PE market. With the surge in secondary market transactions this year, this prediction may be a year early.  We’ll call it a push. (4-2-1)

The SEC will approve a registered crypto fund.  It didn’t happen, although most of the industry remains hopeful.  The Division of Trading and Markets did allow a pilot program to test the use of a distributed ledger system for securities settlement.  Baby steps.  (4-3-1)

The Supreme Court will decide that digital tokens are not securities and that an ICO is not a securities offering.  This didn’t specifically happen, but, perhaps more surprising, the SEC’s Division of Corporation Finance allowed an initial coin offering without registration on the grounds that the underlying digital tokens were not securities.  If the SEC will concede this point, the issue may not reach the high court.  I am taking a tie on this one.  (4-3-2).

The SEC will expand the whistleblower program.  Despite recommending changes in 2018, the SEC never took action to expand the program in 2019.  Maybe, this comes up again next year.  (4-4-2)

SEC Warns Fund Industry about Inaccurate Performance and Fee Disclosures


The SEC Division of Investment Management’s Disclosure Review and Accounting Office has warned the fund industry to improve its fee and performance disclosure.  In its most recent release, the DRAO highlighted “several issues” including failures to verify the accuracy of performance and fee information.  In particular, the DRAO cites multiple funds that have failed to reflect the effect of sales loads in their average annual returns table, showing negative performance as positive performance, and transposing the performance of different fund classes and benchmarks.  The DRAO also faults fund-of-funds for failing to show the expenses of underlying acquired funds.  Funds also routinely make arithmetic errors and fail to properly use XBRL tags.  The DRAO “encourage[s] funds to closely review their performance and fee disclosures prior to providing them to investors.”

Over the years, many fund firms have delegated the preparation of registration statements to low-cost service providers that may not have the necessary knowledge, staffing and/or systems to prepare correct filings.  When hiring a vendor (administrator, lawyer, auditor), make sure that the firm has the experience and the resources to do your job right.  The cheapest is never the best and could cost you in the long run with a rescission or enforcement order.

SEC Adopts ETF Rule to Replace Exemptive Orders

The SEC has adopted a new rule (6c-11) that will allow the creation and distribution of exchange-traded funds without having to obtain specific exemptive relief from several provisions of the Investment Company Act.  The rule applies to open-end funds that provide daily portfolio transparency and includes conditions common to most ETF exemptive orders concerning holdings, disclosure, and pricing.  The SEC will rescind individualized exemptive orders for funds that can rely on the new rule.  The SEC has issued more than 300 ETF exemptive orders since 1992, allowing for the launch of approximately 2,000 ETFs with over $3.3 Trillion in assets.  The rule becomes effective 60 days after publication.

If this rule were the only legacy of the Clayton/Blass SEC, we would consider it a success.  This rule is long overdue and should level the playing field for smaller ETF sponsors burdened with the expense of obtaining exemptive relief.

Exempt Reporting Adviser Barred and Fined Over $1.1 Million

The principal of an exempt reporting adviser was barred from the industry and agreed to pay over $1.1 Million in disgorgement and penalties for conflicted transactions and misrepresentations.  The SEC charges that the respondent caused a fund he managed to purchase a portfolio company from an affiliated fund in violation of the purchasing fund’s debt and concentration limits.  The SEC asserts that the respondent intentionally misled investors by undervaluing the portfolio company in financial statements and disclosure documents.  The SEC also claims that the respondent misled investors about underlying investments and charging undisclosed monitoring fees.  The SEC also fined the firm’s CFO/CCO.  The SEC cites violations of the anti-fraud rules under the Advisers Act (206(4)-8), the Securities Act (17(a)(1) and 17(a)(3)), and the Exchange Act (10b-5).

An exempt reporting adviser is still subject to several provisions of the Advisers Act, including its fiduciary and anti-fraud rules.  We recommend that ERAs implement a legitimate compliance program to avoid a firm-ending regulatory action like this one.

SEC Bars and Fines State-Registered Adviser for Options Cherry-Picking Scheme


The SEC barred a state-registered adviser from the industry and assessed over $400,000 in fines, disgorgement and interest for allocating options trades that benefited himself and his wife to the detriment of clients.  The adviser utilized an omnibus trading account at a third party broker-dealer to allocate profitable trades to his personal accounts and unprofitable trades to clients.  According to the SEC, during the relevant 7-month period, the personal accounts had a net positive 45.2% one-day return, but the client accounts had a net negative 45.0% one-day return, a statistically significant difference that could not be explained by random chance.  The SEC accused the adviser of securities fraud under the Securities Act (Rule 10b-5) and the Advisers Act (Section 206).

OUR TAKE: If you operate a state-registered (or unregistered) adviser, don’t assume the SEC doesn’t have the regulatory means to uncover and prosecute wrongdoing.  The feds still have jurisdiction over the securities markets and any person providing investment advice.

The Friday List: 10 Things We Learned During the Spring 2019 Investment Management Conferences

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. 

As we approach the summer months, the spring 2019 conference season draws to a close.  CCS professionals attended most of the major industry conferences and compared notes.  As we talked, we saw some major themes from all of the conferences.  We thought our clients and friends might benefit from our meta-observations. 

10 Things We Learned During the Spring 2019 Investment Management Conferences

  1. Everybody is afraid of a cyber-breach.  Every conference we attended included sessions about cyber threats and cybersecurity counter-measures.
  2. Private equity is trying to rationalize operations.  Now that PE has become part of the institutional investing landscape, GPs are searching for ways to build scale. 
  3. Compliance officers don’t have the resources to get everything done.  Boards, investors, and the regulators continue to put more work on the CCO’s desk, but senior management doesn’t always meet the increased workload with more resources. 
  4. Technology is the future.  Many firms are racing to replace all aspects of middle and back office operations with technology solutions that enhance and replace human resources. 
  5. Everybody wants ESG.  The term “ESG” was likely used by more people at more conferences than any other term.    
  6. Nobody knows exactly how non-transparent ETFs will affect the product lineup.  Some say they’re a fad.  Some say they’re a complement to existing products.  Some say they don’t make sense.  Some say they will replace all other forms of ETFs.
  7. The hot new asset classes include private credit, cryptocurrency, and cannabis.  Private credit leads with the most products, but people are really excited about cryptocurrency.
  8. The industry is consolidating.  Almost everybody predicts massive industry consolidation as the bigs absorb the smalls, and private equity provides the liquidity.
  9. Nobody knows where the fiduciary rule is going.  Even the SEC has been less than clear about its next step especially with the DoL and the states jumping in (again).
  10. The SEC is in good hands.  We saw many speeches by many SEC leaders.  Despite the political chaos in Washington, the SEC continues to operate with a steady hand through a dedicated staff.  They provided insight on priorities and rulemaking and explained their rationale on enforcement decisions.

SEC’s Blass Announces Plans to Modernize Adviser Marketing Rules

The SEC’s Investment Management Division Director, Dalia Blass, anticipates that the Division will soon recommend changes to the adviser marketing and solicitation rules.  In her annual speech to the Investment Company Institute membership, Ms. Blass also announced initiatives for a summary shareholder report, updates to the valuation guidance, modernization of the offering rules for business development companies and closed-end funds, and changes to the rules for funds’ use of derivatives.  Additionally, Ms. Blass wants the Division to finalize the proposed ETF and fund-of-funds rules.  She has also asked the staff to begin an outreach to small and mid-sized fund sponsors about regulatory barriers.  She announced that the Division is considering the formation of an asset management advisory committee to solicit diverse viewpoints on critical issues.

We applaud the reinvigorated Investment Management Division for tackling some of the thornier problems that have faced the industry for many years.  For instance, the marketing rules haven’t changed for decades despite revolutionary change in the financial services industry. 

Self-Reporting ICO Forced to Offer Rescission to All Investors

The sponsor of an initial coin offering agreed to offer full rescission of proceeds raised in order to settle SEC charges that the firm engaged in an unregistered securities offering.  The sponsor raised $12.7 Million by issuing digital tokens in exchange for Ether as part of its efforts to raise funds to further develop its internet security product.  The tokens would serve as currency for a peer-to-peer network that would allow participants to access additional bandwidth in the event of a cyber-attack.  As part of its marketing, principals suggested that the value of the tokens should rise as the network expanded.  The SEC maintains that this “reasonable expectation of a future profit” satisfied the Howey test and that, therefore, the tokens were “securities” and the offering constituted an unregistered securities offering.  The SEC did not impose a civil penalty because the firm self-reported. 

We don’t think that the SEC has a slam-dunk case that ICOs are securities offerings.  In fact, some courts have opined that the SEC must specifically prove that each ICO is in fact a securities offering.  Until the courts offer some specific guidance, ICO sponsors should observe the securities laws to avoid a crippling enforcement action. 

The Friday List: Effects of the Government Shutdown on the Investment Management Industry

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. 

As the partial federal government shutdown continues, the investment management industry is beginning to feel the effects of reduced SEC operations.   The people most affected are those furloughed SEC employees who lose compensation every day the shutdown continues.  However, the entire industry has been affected.  Below is our list of the top 10 effects of the partial federal government shutdown. 

Effects of the Government Shutdown

  1. New product approvals.  New products including registration statements must await approval until the furloughed workers return.
  2. Exams.  The OCIE staff has delayed ongoing exams until the shutdown ends.  It is unclear whether the shutdown will reduce the total number of exams. 
  3. Enforcement litigation.  While the SEC continues to conduct market surveillance, ongoing litigation that is not time-sensitive will be delayed.
  4. Regulatory information.  The SEC is not posting regulatory information or interpretations on its website during the shutdown
  5. Exemptive applications/No Action Letters.  Requested exemptive applications and no-action letters seeking relief from the black letter rules cannot go forward without SEC staff.
  6. New rules.  The SEC is not reviewing potential new rule initiatives or comments to current proposals. 
  7. Travel.  Many of our clients and colleagues have delayed travel to discuss new initiatives or to attend meetings. 
  8. Service providers.  With asset managers unable to launch new products, service providers such as lawyers and fund administrators must wait for their clients to go forward. 
  9. Conferences.  It is unclear whether SEC officials will attend this winter’s industry conferences where they traditionally provide some guidance.  Even if they do attend, any guidance will necessarily depend on how long the shutdown continues. 
  10. Industry outreach.  The SEC will likely delay industry outreach to management, compliance professionals and boards.