April 2021 SEC Updates

  1. On April 28, 2021, after less than 6 days, Alex Oh resigned her position as Director of the Division of Enforcement for “personal reasons”. https://www.sec.gov/news/press-release/2021-75 and https://www.sec.gov/news/press-release/2021-69 and https://www.bnnbloomberg.ca/sec-enforcement-chief-alex-oh-resigns-just-days-after-taking-job-1.1596627
  2. On April 23, 2021, Andrew Franzone, former owner of a race car team, and investment adviser FF Fund Management, LLC, settled charges that he fraudulently raised and misappropriated tens of millions of dollars from the sale of limited partnership interests in a private fund. Franzone defrauded investors by making misrepresentations regarding the fund’s strategy and investments, failing to eliminate or disclose conflicts of interest, misappropriating fund assets, and falsely representing the fund would be audited annually. Franzone diverted substantial fund assets to an entity he owned and invested the fund’s remaining assets mainly in highly illiquid private companies and real estate ventures. The complaint also alleges that Franzone’s management of the fund was subject to numerous conflicts that he did not eliminate or disclose, and that he misused fund assets. For example, Franzone took personal loans from the founders of at least two companies in which the fund invested, pledged fund assets to secure other loans for his own personal benefit, and misappropriated fund assets for personal uses, including the purchase of a garage to store his private race car collection. Finally, the complaint alleges that Franzone and FFM removed a critical safeguard for investors by failing to have the fund audited on an annual basis despite representations they would do so. https://www.sec.gov/news/press-release/2021-71-0
  3. On April 27, 2021, Gary Gensler was sworn in as member of the SEC. https://www.sec.gov/news/press-release/2021-65
  4. On April 19, 2021, Jaime Westenbarger, a registered representative and investment adviser representative associated with several SEC-registered broker-dealers and investment advisers, agreed to be permanently barred. Westenbarger previously settled charges with the Administrator of the Corporations, Securities & Commercial Licensing Bureau of the Michigan Department of Licensing and Regulatory Affairs. The Michigan Order found that Westenbarger offered two investors an investment in a “corporate note” for $200,000 and that he accepted a check from these two investors in that amount to be invested in the corporate note. The Michigan Order also found that Westenbarger offered a “short term CD” investment to another Michigan investor for $60,000 and that he accepted a check from that investor in that same amount to invest in the short term CD. The Michigan Order further found that, in each case, rather than investing the funds as represented, Westenbarger used the funds to pay for personal expenses. https://www.sec.gov/litigation/admin/2021/34-91613.pdf
  5. On April 19, 2021, Martin Silver, CPA, agreed to settle charges that he engaged in a scheme to defraud clients of International Investment Group, LLC (“IIG”), a New York-based former registered investment adviser. Specifically, Silver concealed losses in the portfolio of its flagship hedge fund by overstating the value of certain defaulted trade finance loans and by replacing defaulted loans with fake loans. In addition, the complaint alleged that IIG engaged in a pattern of selling overvalued and/or fake trade finance loans to other investment advisory clients in order to generate liquidity to meet various payment obligations of the fund, including redemption requests from earlier investors. Silver consented to a bar. https://www.sec.gov/litigation/admin/2021/ia-5723.pdf
  6. On April 19, 2021, Christopher Hibbard, formerly of Merrill Lynch, agreed to be permanently barred. Hibbard admitted that he made, or caused to be made, at least 65 Automated Clearing House (“ACH”) or other wire transfers from the brokerage account of an individual in the total amount of approximately $1,226,995, and that he misappropriated and used a substantial portion of the individual’s money for his own personal use. Furthermore, Hibbard admitted that he presented the individual with fraudulent brokerage statements on a regular basis to lull the individual into believing that the account contained as much as $4 million. Respondent also admitted that between January 10, 2011 and December 20, 2017, he initiated more than 300 unauthorized ACH transfers from client accounts under his management to an American Express account he controlled, and that he caused the transfers to be made without the knowledge, permission, or other authorization of the account holder(s), thereby misappropriating and embezzling more than $3 million in client monies and using the funds for personal expenditures. Furthermore, Hibbard admitted that to effectuate his scheme to defraud, he engaged in unauthorized trading and liquidation of clients’ investments, made unauthorized withdrawals from client annuity accounts, and committed acts of forgery. https://www.sec.gov/litigation/admin/2021/34-91591.pdf
  7. On April 15, 2021, Mason Investment Advisory Services, Inc., a registered investment adviser agreed to settle charges in connection with its mutual fund share class selection practices and the receipt of fees by its affiliated broker-dealer, Mason Securities, Inc. pursuant to Rule 12b-1 under the Investment Company Act of 1940. At times during the period from February 1, 2014, through September 30, 2016, MIAS purchased, recommended, or held for certain advisory clients mutual fund share classes that charged 12b-1 fees instead of lower cost share classes of the same funds that were available to the clients. MIAS’s affiliate, MSI, received 12b-1 fee revenue in connection with these investments, a small portion of which was then paid to certain of MIAS’s investment adviser representatives (“IARs”), in their capacities as registered representatives of MSI. MIAS did not adequately disclose this conflict of interest in its Forms ADV or otherwise. MIAS also breached its duty to seek best execution, by causing certain advisory clients to purchase mutual fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions were available to the clients. MIAS advised certain clients to purchase or hold mutual fund share classes that charged 12b-1 fees when lower-cost share classes of those same funds were available to those clients. MIAS’s affiliate, MSI, and certain IARs, in their capacities as registered representatives of MSI, received 12b-1 fees that they would not have collected had such advisory clients been invested in the available lower-cost share classes. Mason agreed to disgorgement of $694,593.75 and prejudgment interest of $130,464.03. https://www.sec.gov/litigation/admin/2021/ia-5719.pdf
  8. On April 13, 2021, the Department of Labor (“DOL”) issued a set of Frequently Asked Questions (“FAQs”) on the DOL’s new class exemption for the provision of investment advice, known as Prohibited Transaction Exemption (“PTE”) 2020-02. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption and https://www.federalregister.gov/documents/2020/12/18/2020-27825/prohibited-transaction-exemption-2020-02-improving-investment-advice-for-workers-and-retirees
  9. On April 9, 2021, the Division of Examinations issued a Risk Alert on its review of ESG investing to highlight observations from recent exams. Examinations of firms claiming to engage in ESG investing will focus on, among other matters, the following:

• Portfolio management. Examinations will include a review of the firm’s policies, procedures, and practices related to ESG and its use of ESG-related terminology; due diligence and other processes for selecting, investing in, and monitoring investments in view of the firm’s disclosed ESG investing approaches; and whether proxy voting decision-making processes are consistent with ESG disclosures and marketing materials.
• Performance advertising and marketing. Examinations will include a review of the firm’s regulatory filings; websites; reports to sponsors of global ESG frameworks, to the extent the firm has communicated to clients and potential clients a commitment to follow such frameworks; client presentations; and responses to due diligence questionnaires, requests for proposals, and client/investor-facing documents, including marketing materials.
• Compliance programs. Examinations will include a review of the firm’s written policies and procedures and their implementation, compliance oversight, and review of ESG investing practices and disclosures.

Staff observations during examinations included instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks. The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that was weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials. Below is additional information regarding these observations.

• Portfolio management practices were inconsistent with disclosures about ESG approaches.
• Controls were inadequate to maintain, monitor, and update clients’ ESG-related investing guidelines, mandates, and restrictions.
• Proxy voting may have been inconsistent with advisers’ stated approaches.
• Unsubstantiated or otherwise potentially misleading claims regarding ESG approaches.
• Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices.
• Compliance programs did not adequately address relevant ESG issues.

Below are a sample of practices the staff observed.

• Disclosures that were clear, precise and tailored to firms’ specific approaches to ESG investing, and which aligned with the firms’ actual practices. More specifically, the staff observed:

o Simple and clear disclosures regarding the firms’ approaches to ESG investing, such as where advisers prominently stated, among other communications, that for separately managed client accounts, their ESG investing approach involved relying on unaffiliated advisers to conduct the underlying ESG analysis and allocating client assets among ESG-oriented mutual funds managed by those unaffiliated advisers. The staff also noted clear disclosures in client-facing materials where clients were offered choices among standardized portfolios focused on particular ESG issues, or alternatively, customized separately managed accounts designed to accommodate particular client preferences. ESG factors that could be considered alongside many other factors. For example, the staff observed that firms could still satisfy the requirements of certain global ESG frameworks while making investments that appeared to be inconsistent with ESG investing. Clear and prominent disclosures regarding such practices served to notify clients and investors that adherence to certain global ESG frameworks did not necessarily alter long-standing and seemingly contrary investment strategies.

o Explanations regarding how investments were evaluated using goals established under global ESG frameworks. The staff observed, for example, investment statements posted on adviser websites, client presentations, and annual reports detailing how firms approached the U.N.-sponsored Principles for Responsible Investment or Sustainable Development Goals, including quantitative information on the local impacts of investments.

• Policies and procedures that addressed ESG investing and covered key aspects of the firms’ relevant practices. In particular, the staff noted detailed investment policies and procedures that addressed ESG investing, including specific documentation to be completed at various stages of the investment process (e.g., research, due diligence, selection, and monitoring). The staff observed that these types of detailed, comprehensive investment policies and procedures resulted in contemporaneous documentation of the ESG factors considered in specific investment decisions. Furthermore, where multiple ESG investing approaches were employed at the same time, specific written procedures, due diligence documentation, and separate specialized personnel provided additional rigor to the portfolio management process.

• Compliance personnel that are knowledgeable about the firms’ specific ESG-related practices. The staff observed that, where compliance personnel were integrated into firms’ ESG-related processes and more knowledgeable about firms’ ESG approaches and practices, firms were more likely to avoid materially misleading claims in their ESG-related marketing materials and other client/investor-facing documents. The compliance personnel in these firms appeared to: provide more meaningful reviews of firms’ public disclosures and marketing materials; test the adequacy and specificity of existing ESG-related policies and procedures, if any (or assess whether enhanced or separate ESG-related policies and procedures were necessary); evaluate whether firms’ portfolio management processes aligned with their stated ESG investing approaches; and test the adequacy of documentation of ESG-related investment decisions and adherence to clients’ investment preferences

  1. On April 8, 2021, Don Warner Reinhard agreed to be permanently barred. Reinhard and a co-defendant raised approximately $4.1 million from about 20 investors—primarily former professional football players who were plaintiffs in concussion-related litigation—through the sale of interests in two private investment funds. The complaint alleged that Reinhard mispresented the funds’ investment focus and failed to disclose to investors that he was previously subject to an anti-fraud injunction in a case brought by the Commission, had been barred by Commission administrative order from being affiliated with an investment adviser, and had a federal felony conviction for mortgage, tax, and bankruptcy fraud. https://www.sec.gov/litigation/admin/2021/ia-5715.pdf
  2. On April 5, 2021, EHedge Securities Inc. and Devon Parks settled charges that beginning at least as early as April 14, 2020, EHedge Securities failed to produce books and records to the Commission’s Office of Compliance Inspections and Examination staff in the course of an examination. Further, E*Hedge did not meet the requirements to be registered with the Commission as an investment adviser under the Internet Adviser exemption of Advisers Act Rule 203A-2(e), and was not otherwise qualified for registration with the Commission under Section 203A of the Advisers Act or the Rules thereunder. https://www.sec.gov/litigation/admin/2021/ia-5713.pdf