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.
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.
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.
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.