August 2020 SEC Updates

  1. On August 27, 2020, Aldo Marchena was barred from association with an investment adviser and broker-dealer.  In connection with that plea, Aldo Marchena admitted that between October 2016 and January 2017, he stole more than $1 million from a client. To conceal this fraud, Marchena created and provided to his client fake account statements that purported to show the client’s investments increasing in value over time. In fact, however, Marchena misappropriated the client’s funds for, among other things, his personal use.
  2. On August 26, 2020, the SEC modernized the  Accredited Investor definition by adopting amendments to the in the Commission’s rules.  The amendments to the accredited investor definition add new categories of qualifying natural persons and entities and make certain other modifications to the existing definition.  The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets.   The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.  The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify. Also, the SEC modernized the definition of “qualified institutional buyer” in Rule 144A under the Securities Act of 1933.  The amendments to the qualified institutional buyer definition similarly expand the list of eligible entities under that definition.
  3. On August 26, 2020, the SEC filed an emergency action against Coral Gables Asset Management and its owner in connection with an alleged fraudulent offering.  According to the SEC’s complaint, Coral Gables and its owner solicited investors for a private fund they managed by misrepresenting the fund’s past performance, the amount of assets they were managing, and the owner’s experience as a portfolio manager. For example, the complaint alleges that one document the owner provided to investors and potential investors showed 37 months of positive monthly performance even though, in reality, in approximately 26 months during the specified timeframe the Fund had negative performance. The complaint further alleges that adviser and its owner falsified brokerage records and investor account statements and created and sent fake audit opinions to investors and third parties. As alleged, within hours of receiving a request from the SEC to preserve documents, the owner destroyed evidence related to his fraudulent conduct. According to the complaint, the owner misappropriated investor funds for personal use, including a luxury vehicle and travel.
  4. On August 20, 2020, NPB Financial Group, LLC, a dually-registered investment adviser and broker-dealer, settled an enforcement action arising out of its mutual fund share class selection practices and receipt of 12b-1 fees.  The SEC’s order finds that from January 2014 through March 2019, NPB purchased, recommended, or held for advisory clients mutual fund share classes that charged 12b-1 fees, including when lower-cost share classes of the same funds were available to the clients. According to the order, NPB and its associated persons received 12b-1 fees in connection with these investments, but NPB did not disclose this practice or the conflict of interest. The order also finds that NPB breached its duty to seek best execution by causing certain advisory clients to invest in fund shares that charged 12b-1 fees when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions, and that NPB failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.  NPB agreed to disgorgement of $532,519 and a civil penalty of $425,000.
  5. In August 2020, Marc Berger was named as Deputy Director of Enforcement and Richard Best was named director of SEC’s New York Regional Office. Caroline Crenshaw and Hester Peirce were sworn-in as SEC Commissioners. Enforcement Co-Director Steven Peikin to depart.
  6. On August 13, 2020, SCF Investment Advisors, Inc. (“SCF”) settled a enforcement action that it selected mutual funds and cash sweep money market funds for clients that provided undisclosed revenue to the firm’s affiliated broker-dealer and were more expensive than other available options for the same funds.  The SEC order finds that SCF purchased, recommended, or held certain mutual fund share classes for its advisory clients that charged 12b-1 fees, which were received by SCF’s affiliated broker-dealer, SCF Securities, Inc. (SCFS), instead of lower-cost share classes of the same funds that were available to clients.  Second, the order finds that SCF purchased or recommended for advisory clients certain money market funds for which SCFS received revenue sharing payments from its clearing broker, without disclosing receipt of this compensation to clients.  The order finds that as a result, some SCF clients received lower performance on these investments than they would have otherwise received.  As stated in the order, SCF failed to disclose these practices or related conflicts of interest to its clients.  The order finds that SCF failed to adopt and implement policies and procedures designed to prevent violations of federal securities laws regarding its mutual fund and money market sweep fund share class selection practices, and that SCF violated its duty to seek best execution.  The order also finds that SCF did not self-report to the SEC pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, even though it was eligible to do so.  SCF will disgorge $544,446 of allegedly ill-gotten gains plus prejudgment interest of $22,746, and will pay a $200,000 civil penalty.
  7. On August 12, 2020, the Office of Compliance Inspections and Examinations issued a Risk Alert on select COVID-19 compliance risks and considerations for investment advisers and broker-dealers.  OCIE has identified a number of COVID-19-related issues, risks, and practices relevant to SEC-registered investment advisers and broker-dealers (collectively, “Firms”). Additionally, market volatility related to COVID-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention. The purpose of the Risk Alert is to share some of these observations with Firms, investors, and the public generally. OCIE’s observations and recommendations fall broadly into the following six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information.
  8. On August 10, 2020, the SEC charged Interactive Brokers with repeatedly failing to file suspicious activity reports.  The firm will pay a total of $38 million in penalties to settle with regulators.
  9. On August 7, 2020, Rialto Capital Management settled an enforcement action in connection with failure to adequately disclose and allocated certain costs and expenses relating to its performance of “third party tasks” for two real estate private equity funds. Third party tasks for these Funds include asset-level due diligence, accounting, valuation, and other similar services that are typically performed for funds by outside professionals but may be performed in-house by the adviser to the fund (“Third Party Tasks”). A primary selling point of the Funds was Rialto’s ability to perform Third Party Tasks in-house. According to the Funds’ operating documents, Rialto is entitled to be reimbursed for the costs and expenses of providing Third Party Tasks to the Funds. From 2012 through 2017, Rialto misallocated to Fund I and Fund II costs and expenses related to its performance of Third Party Tasks that should have been allocated to related co-investment vehicles Rialto also managed. This resulted in Rialto charging the Funds approximately $3 million more than their pro rata share of costs and expenses for Third Party Tasks that should have been paid by the co-investment vehicles. Rialto fully remediated the Funds. The Funds are organized as limited partnerships and each has its own advisory committee composed of certain limited partners in each Fund (“Advisory Committee”). Rialto represented to the Advisory Committees that Rialto “[was] able to obtain information” supporting that costs and expenses Rialto charged to the Funds for providing Third Party Tasks were “at or below market rates.” In 2012, Rialto conducted a market rate analysis, however, between 2013 to 2017, Rialto’s disclosures to the Advisory Committees did not state that Rialto failed to obtain any updated information or perform any analysis supporting its claim that Rialto’s costs were at or below market rates.  From 2012 to 2017, the cost allocation methodology Rialto used to calculate Third Party Tasks increased general overhead expenses. Rialto did not fully disclose this increase to the Advisory Committees. In addition, Rialto failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.  Rialto agreed to pay a civil money penalty in the amount of $350,000.
  10. On August 5, 2020,  the SEC filed settled charges against affiliated registered investment advisers WBI Investments Inc. and Millington Securities Inc. for making material misrepresentations to clients about compensation Millington received in an institutional payment for order flow arrangement for routing client orders to certain brokerage firms for execution.  As part of the settlement, WBI and Millington agreed to pay a combined total of $1 million in penalties.