March 2021 SEC Updates

1. On March 24, 2021, Troy Marchand and Tyler Sadek, former principals of Foundry Capital Group, a state-registered investment adviser that managed a private fund, settled charges for making misrepresentations and omissions to fund investors about the status of fund holdings and projected revenue. The settlement with Marchand included charges related to misrepresentations and omissions to investors about fund due diligence and the process used to value fund holdings. The SEC also announced settled charges against Scott Wolfrum, an investment adviser and brokerage representative, for failing to disclose personal conflicts of interest when selling interests in the fund to his advisory clients. Sadek paid a $30,000 civil penalty. Wolfrum paid $161,479 in disgorgement and prejudgment interest, and a $75,000 civil penalty. See https://www.sec.gov/enforce/ia-5707-s, https://www.sec.gov/enforce/34-91401-s and https://www.sec.gov/enforce/33-10937-s
2. On March 23, 2021, Andrew White settled charges that he acted as an unregistered broker or dealer by selling the securities of 1 Global Capital LLC. The complaint alleged that White solicited investors to purchase 1 Global securities; advised investors about the merits of the investments; and received commissions of approximately $224,000 that were transaction-based compensation for his sales of 1 Global securities White consented to a bar. See https://www.sec.gov/litigation/admin/2021/34-91392.pdf
3. On March 22, 2021, World Tree Financial, LLC, previously SEC-registered investment adviser settled charges that through its principal Wesley Perkins, disproportionately allocated unfavorable trades to two large accounts owned by a single client, while allocating favorable trades to accounts owned by Perkins, his wife, and other World Tree clients. Accounts held by or associated with Perkins and his wife received ill-gotten gains of $354,232 during the course of the scheme. In addition to cherry-picking, World Tree and Perkins made material misrepresentations in World Tree’s Forms ADV, Part 2A. They misrepresented World Tree’s allocation practices by concealing their cherry-picking, and falsely claimed that World Tree’s principals and their families were prohibited from trading in the same securities as their clients. Wesley Perkins was also charged, but interestingly did not settle. See https://www.sec.gov/litigation/admin/2021/34-91379.pdf, https://www.sec.gov/litigation/admin/2021/34-91378.pdf and https://www.sec.gov/litigation/admin/2021/34-91404.pdf
4. On March 22, 2021, Isaiah Goodman, sole principal of Becoming Financial Advisory Services, a State of Minnesota Department of Commerce registered investment adviser, settled charges that Goodman stole approximately $2.25 million from at least 20 of his advisory clients. Goodman represented that he would invest his clients’ funds in securities. Instead, without his clients’ knowledge or authorization, Goodman misappropriated his clients’ money by spending their funds for his own personal and business expenses, including home renovation and building expenses, car payments, vacations, and other luxury items. Goodman agreed to a bar. https://www.sec.gov/litigation/admin/2021/ia-5700.pdf
5. On March 18, 2021, the staff of the Division of Investment Management issued a FAQ on the amended adviser marketing rule (rule 206(4)-1) stating that an adviser cannot choose to comply with some of the marketing rule requirements before the compliance date but not comply with others. Further, staff stated that an adviser may choose to comply with the amended marketing rule in its entirety any time starting on the effective date, May 4th, 2021. To clarify on this point the staff stated that an adviser may not cease complying with the previous advertising rule and instead comply with the amended marketing rule but still rely on the previous cash solicitation rule. For the FAQ, see https://www.sec.gov/investment/marketing-faq. For the adopting release for the amendments to rule 206(4)-1, see https://www.sec.gov/rules/final/2020/ia-5653.pdf.
6. On March 16, 2021, Joel Frank, former Chief Financial Officer for Och-Ziff agreed to a civil money penalty in the amount of $35,000. Beginning in 2007 and continuing through 2011, Och-Ziff entered into a series of relationships and investments in which bribes were paid through intermediaries and business partners to high ranking government officials in several nations on the African continent in order to win or retain business for Och-Ziff. Frank failed to fulfill his responsibilities regarding Och-Ziff’s internal accounting controls and its books and records. As a result, Och-Ziff inaccurately and unfairly reflected the dispositions of its assets in its books and records and failed to devise and maintain a sufficient system of internal accounting controls. https://www.sec.gov/litigation/admin/2021/34-91337.pdf
7. On March 15, 2021, Ettro Capital Management Corp., an investment advisor and real estate development firm, along with its founder and manager, Peter Ettro, settled charges that they made materially false and misleading statements in connection with an unregistered offer and sale of membership units in a real estate fund. The order finds that Ettro and ECM disseminated marketing materials to potential investors that materially misrepresented (1) the past performance of the fund, , including net return since inception, blended net return since inception, realized yield, and total return; (2) capital raised and assets under management; and (3) ECM’s investment management and real estate development experience. On June 8, 2017 and January 28, 2019, Respondents filed subsequent Forms D with the Commission, which claimed the Fund was relying on the safe harbor from registration provided by Rule 506(c) of Regulation D. Rule 506(c) permits general solicitation, but requires all sales to be made to accredited investors and the issuer to take reasonable steps to verify that all purchasers are accredited investors. Until November 2017, Respondents took no steps to verify investors were accredited. At least one investor in the Fund was non-accredited. Respondents did not file or cause to be filed a registration statement with the Commission for the Fund’s offering of membership units. ECM and Ettro consented to a penalty of $60,000. Peter Ettro also consented to a bar. See https://www.sec.gov/enforce/33-10932-s and https://www.sec.gov/litigation/admin/2021/33-10932.pdf
8. On March 12, 2021, Michael Murphy agreed to a final judgment. Murphy executed numerous securities transactions, including purchases of new issue municipal bonds, on behalf of RMR Asset Management Company (“RMR”). Murphy carried out these transactions at the direction of RMR, using RMR’s capital. In exchange, Murphy received transaction-based compensation from RMR. In its complaint, the Commission alleged that Murphy acted as a broker by regularly participating in securities transactions on behalf of RMR, using RMR’s capital, in exchange for transaction-based compensation. The Commission further alleged that Murphy violated Section 15(a) because he acted as a broker without registering with the Commission. The court also ordered Murphy to pay a civil penalty of $419,040. https://www.sec.gov/litigation/admin/2021/34-91310.pdf
9. On March 11, 2021, Glen Stewart, a partner in Wiser Investments, agreed to settle charges that Stewart offered and sold unregistered securities issued by the Wiser Partnership, acted as an unregistered broker and received transaction-based compensation. Stewart consented to a bar. https://www.sec.gov/litigation/admin/2021/34-91304.pdf
10. On March 10, 2021, Minish Hede, a former registered representative at Paulson Investment Company, agreed to settle charges that he sold promissory notes issued by Belize Infrastructure Fund I, LLC to customers of Paulson while knowing that Paulson had declined to approve the investment. Hede consented to a bar. See https://www.sec.gov/litigation/admin/2021/34-91289.pdf
11. On March 9, 2021, George Heckler agreed to operating a decade-long investment adviser fraud through private hedge funds whereby he conceal massive losses. According to the SEC’s complaint, Heckler transferred Conestoga’s poorly performing assets to those funds and then misrepresented the funds’ objectives and performance. The complaint alleges that Heckler falsely told investors that their funds were being used to engage in very short-term equity trading and that the investments were consistently generating positive returns. In truth, according to the complaint, a substantial amount of investors’ funds had not been invested at all or had been used to make Ponzi-like payments to prior investors. According to the complaint, Heckler raised at least $90 million in new investor capital of which over $32 million was used to repay or redeem prior investors. In addition, the Commission alleges that Heckler took over $1 million for his personal use, and the private funds suffered significant losses as a result of poor investments by Heckler. Heckler also allegedly concealed these losses from investors by providing them with false account statements showing fictitious gains. See https://www.sec.gov/news/press-release/2021-45 and https://www.sec.gov/litigation/complaints/2021/comp-pr2021-45.pdf
12. On March 3, 2021, the SEC’s Division of Examinations (DOE) announced its 2021 examination priorities, including a greater focus on climate-related risks. (Subsequently, on March 22, 2021, the SEC launched a new page on its website to bring together agency actions and the latest information about climate and environmental, social and governance (ESG) investing. See https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities ) DOE will also focus on conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty), and attendant risks relating to FinTech in its initiatives and examinations.

The following is an overview of DOE’s 2021 examination priorities:

• Compliance Programs – DOE will continue to review the compliance programs of registered investment advisers (RIAs), including whether those programs and their policies and procedures are reasonably designed, implemented, and maintained. RIAs are also increasingly offering investment strategies that focus on ESG factors. DOE will continue to focus on products in these areas that are widely available to investors including open-end funds and ETFs, as well as those offered to accredited investors such as qualified opportunity funds. DOE will review the consistency and adequacy of the disclosures RIAs provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.
• RIAs to Private Funds – DOE will continue to focus on advisers to private funds, and will assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest. DOE will also focus on advisers to private funds that have a higher concentration of structured products, such as collateralized loan obligations and mortgage backed securities, to assess whether the private funds are at a higher risk for holding non-performing loans and having loans with higher default risk than that disclosed to investors.
• Retail Investors, Including Seniors and Those Saving for Retirement, Through Reg. BI and Fiduciary Duty Compliance – DOE will focus on compliance with Regulation Best Interest, Form CRS, and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty. DOE will examine whether firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts that is sufficient to enable informed consent by retail investors. With respect to those investments heavily used by retail investors or those that may present elevated risks, DOE will continue to prioritize these products, including mutual funds, exchange-traded funds, municipal securities and other fixed income securities, variable annuities, private placements, and microcap securities.
• Information Security and Operational Resiliency – DOE will continue to review business continuity and disaster recovery plans of firms, but will shift its focus to whether such plans, particularly those of systemically important registrants, are accounting for the growing physical and other relevant risks associated with climate change. As climate-related events become more frequent and more intense, DOE will review whether firms are considering effective practices to help improve responses to large-scale events. DOE will also review whether registrants have taken appropriate measures to: safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; and manage operational risk as a result of dispersed employees in a work-from-home environment.
• Financial Technology (Fintech) and Innovation, Including Digital Assets – Among other areas, examinations will focus on evaluating whether registrants are operating consistently with their representations, whether firms are handling customer orders in accordance with their instructions, and review compliance around trade recommendations made in mobile applications. Examinations of market participants engaged with digital assets will continue to assess the following: whether investments are in the best interests of investors; portfolio management and trading practices; safety of client funds and assets; pricing and valuation; effectiveness of compliance programs and controls; and supervision of representatives’ outside business activities.
• The London Inter-Bank Offered Rate (LIBOR) Transition – DOE will continue to engage with registrants through examinations to assess their understanding of any exposure to LIBOR, their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate, in connection with registrants’ own financial matters and those of their clients and customers.
• The published priorities for FY 2021 are not exhaustive and will not be the only areas DOE focuses on in its examinations, risk alerts, and outreach. While the priorities primarily drive DOE’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered, and other risk factors. See https://www.sec.gov/news/press-release/2021-39 and https://www.sec.gov/files/2021-exam-priorities.pdf

13. On March 5, 2021, after awaiting from the White House an announcement regarding when the SEC’s Ad Rule, the new rule was published in the Federal Register thereby effectively “unfreezing” the proposed rule the White House froze on January 16, 2021. On May 4th, the Ad Rule is going to take effect and there will be a 18-month transition period between the effective date of the rule and the compliance date. The anticipated compliance date will be for November 4, 2022. See https://www.federalregister.gov/documents/2021/03/05/2020-28868/investment-adviser-marketing?utm_source=ALL+Contact+List&utm_campaign=bcea68df56-s-p-ocie-risk-alert_COPY_01&utm_medium=email&utm_term=0_d67232ec7d-bcea68df56-441613438&ct=t(s-p-ocie-risk-alert_COPY_01)
14. On March 5, 2021, Jocelyn Murphy agreed to settle charges in connection with the execution of securities transactions, (including purchases of new issue municipal bonds), on behalf of RMR Asset Management Company. Murphy carried out the transactions at the direction of RMR, using RMR’s capital. In exchange, Murphy received transaction-based compensation from RMR. In its complaint, the Commission alleged that Murphy acted as a broker by regularly participating in securities transactions on behalf of RMR, using RMR’s capital, in exchange for transaction-based compensation. The Commission also alleged that Murphy submitted false zip codes with her orders for new issue municipal bonds to increase the likelihood that her orders would be filled. The court ordered Murphy to: for a period of five (5) years, provide a copy of the complaint and final judgment in the action to any brokerage firm where she has or may open an account; and pay a civil penalty of $1,761,920. https://www.sec.gov/litigation/admin/2021/34-91270.pdf
15. On March 3, 2021, Kevin Graetz, formerly employed as a registered representative at Paulson Investment Company. The Commission’s complaint alleged that Graetz violated Section 15(a) of the Exchange Act by selling promissory notes issued by Belize Infrastucture Fund I, LLC to customers of the Broker-Dealer while knowing that the Broker-Dealer firm had declined to approve the investment. Graetz consented to a bar. See https://www.sec.gov/litigation/admin/2021/34-91246.pdf
16. On March 2, 2021, the SEC announced the institution of administrative proceedings against Gregory Sampson, a former investment adviser representative, to determine what remedial action against him, if any, is in the public interest following a criminal conviction. As described in the SEC’s order, the Division of Enforcement alleges that on September 23, 2020, the U.S. District Court for the District of Utah entered an Amended Judgment against Sampson following his conviction on one count each of money laundering and wire fraud. the Division of Enforcement alleges that Sampson pled guilty on both counts and stated that he had used manipulative and deceptive devices in connection with the offer and sale of a security and devised a scheme to defraud investors. The Division of Enforcement further alleges that at the time of his misconduct, Sampson was associated with a Utah registered investment advisory firm as a registered investment adviser representative. See https://www.sec.gov/enforce/ia-5694-s and https://www.sec.gov/litigation/admin/2021/ia-5694.pdf