1. On February 28, 2024, the SEC announced that William Birdthistle, the Director of the Division of Investment Management, will depart the agency. Natasha Vij Greiner, currently the Deputy Director of the Division of Examinations, will be named Director of the Division of Investment Management upon Mr. Birdthistle’s departure.
2. On February 20, 2024, the SEC instituted administrative proceedings against UBS Financial Services Inc., a registered investment adviser and broker-dealer for failing to adopt and implement written policies and procedures reasonably designed to prevent unsuitable investments in volatility-linked-exchange-traded products (“ETPs”). Financial advisers in UBS’s discretionary Portfolio Management Program purchased and held one such ETP for their advisory clients for durations that were inconsistent with the purpose of the product, as described in its offering documents, and as described to UBS in a meeting with representatives of the issuer of that ETP. UBS failed to adopt and implement written policies and procedures that were reasonably designed to prevent the unsuitable use of a certain ETP as a buy-and-hold investment for its PMP advisory clients. UBS was ordered to pay disgorgement in the amount of $96,344, prejudgment interest of $15,930 and a civil money penalty in the amount of $8,000,000. https://www.sec.gov/files/litigation/admin/2024/34-99579.pdf
3. On February 20, 2024, the SEC instituted administrative proceedings against Andrew Komarow, a former registered representative and investment adviser for engaging in a “free-riding” securities trading scheme under which he made unfunded automated clearing house transfers of money totaling $6.9 million from multiple bank accounts to accounts at broker-dealers and engaged in speculative trading with the resulting credits before the transfers were cancelled for insufficient funds. Komarow’s free-riding scheme left the broker-dealers with losses that together totaled more than $3 million. Komarow was barred. https://www.sec.gov/files/litigation/admin/2024/34-99560.pdf
4. On February 16, 2024, the SEC instituted administrative proceedings against TIAA-CREF Individual & Institutional Services, LLC (“TC Services”), a dually registered broker-dealer and investment adviser for failing to comply with Regulation Best Interest (“Reg BI”) in connection with recommendations to retail brokerage customers to open a TIAA individual retirement account (“TIAA IRA”), which under Reg BI is an investment strategy involving securities. After opening a TIAA IRA, retail customers could invest in a pre-selected “core menu” of affiliated investments, including affiliated mutual funds and retirement annuities. Through the TIAA IRA’s optional “brokerage window,” customers could invest in a broader array of securities, including a variety of mutual funds (both affiliated and third-party), ETFs, stocks, and bonds. TIAA IRA customers investing in certain core menu funds paid higher mutual fund expenses than if they had invested in lower-cost share classes of those same funds that were available in the brokerage window. TC Services inaccurately disclosed that it only offered more expensive share classes of funds in the TIAA IRA, and failed to disclose that substantially equivalent, lower cost share classes of affiliated funds were available in the brokerage window. TC Services failed to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with its recommendations to open a TIAA IRA, including that investment minimums had been waived on affiliated funds available within the TIAA IRA. TC Services was ordered to pay disgorgement in the amount of $936,714, prejudgment interest of $103,424 and a civil money penalty in the amount of $1,250,000. https://www.sec.gov/files/litigation/admin/2024/34-99549.pdf
5. On February 15, 2024, the SEC instituted administrative proceedings against Van Eck Associates Corporation (“VEAC”), registered investment adviser. VEAC failed to disclose the launch of an exchange traded fund, the VanEck Social Sentiment ETF (“BUZZ ETF”). The BUZZ ETF markets itself as tracking an index that included stocks with “positive insights” based on social media and other data. VEAC obtained an exclusive license to use the BUZZ NextGen AI US Sentiment Leaders Index (“BUZZ Index”) in connection with the BUZZ ETF. The provider of the BUZZ Index (“Index Provider”) informed VEAC that it planned to retain a well-known and controversial social media influencer (the “Influencer”) to promote the BUZZ Index in connection with the launch of the BUZZ ETF. To incentivize the Influencer’s marketing and promotion efforts, the Index Provider, among other things, requested a change to the proposed licensing fee structure that would provide the Index Provider with a larger percentage of the fee when assets under management of the BUZZ ETF met certain thresholds. VEAC agreed to these requests. VEAC was ordered to pay a civil money penalty in the amount of $1,750,000. https://www.sec.gov/files/litigation/admin/2024/ic-35132.pdf
6. On February 15, 2024, the SEC instituted administrative proceedings against Rafael Vargas, the CEO of Empirex Capital, LLC (“Empirex”). Vargas and Empirex raised at least $6.6 million from at least 162 investors in the United States and abroad, by making repeated material misrepresentations and receiving compensation for making investment advisement decisions for those investors. The misrepresentations concerned Vargas’s and Empirex’s use of assets obtained from investors, the profitability of Empirex’s trading activities, Empirex’s assets under management, Vargas’s and Empirex’s qualifications to manage investors’ assets and their backgrounds, and the risks of investing with Empirex. Vargas misappropriated approximately $1.8 million and misled investors as to the profitability of their investments by making and facilitating Ponzi-like payments to the investors to mask Empirex’s failure to generate sufficient profits in trading investors’ assets. Vargas was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6558.pdf
7. On February 14, 2024, the SEC proposed a rule that would update the dollar threshold for a fund to qualify as a “qualifying venture capital fund” for purposes of the Investment Company Act of 1940 (Act). The rule would update the dollar threshold to $12 million aggregate capital contributions and uncalled committed capital, up from the current standard of $10 million. Qualifying venture capital funds are excluded from the Act’s definition of an “investment company.” The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 requires the Commission to index the dollar figure for this threshold to inflation once every five years. The proposed rule is designed to implement this statutory directive and would adjust the dollar amount to $12 million, based on the Personal Consumption Expenditures Chain-Type Price Index (PCE Index). The proposed rule also would establish a process for future inflation adjustments every five years.
8. On February 14, 2024, the SEC instituted administrative proceedings against Credit Suisse Securities (USA) LLC (“Credit Suisse”), a dually registered broker-dealer and investment adviser along with Sanford Katz, a registered representative and investment adviser of Credit Suisse. Katz purchased or held Class A mutual fund shares for advisory clients who were eligible to purchase or hold less expensive institutional share classes of the same mutual funds. The 12b-1 fees are paid out of the assets of the fund as a portion of its expense ratio. The 12b-1 fees were passed through to Credit Suisse, which in turn paid a portion of that amount to its investment adviser representatives, also referred to as Relationship Managers (“RMs”), including Katz. Thus, 12b-1 fees decreased the value of advisory clients’ investments in mutual funds and increased the compensation paid to Credit Suisse and its RMs. Katz’s practice of putting advisory clients in Class A shares when those clients were eligible for less expensive institutional share classes resulted in Credit Suisse collecting approximately $3.2 million in 12b-1 fees, approximately $1.1 million of which was paid to Katz. This practice was inconsistent with Katz’s fiduciary duty, his representations to clients, and his obligation to obtain best execution for his advisory clients. Credit Suisse’s disclosures did not adequately inform its advisory clients of the conflict of interest presented by its RMs’ share class selection practices and did not update or enhance its policies or procedures to address this issue. Credit Suisse was ordered to pay disgorgement in the amount of $2,099,624, prejudgment interest of $380,090 and a civil money penalty in the amount of $3,275,000. Katz was ordered to pay disgorgement in the amount of $1,124,858, prejudgment interest of $197,587 and a civil money penalty in the amount of $2,172,446. https://www.sec.gov/files/litigation/admin/2024/34-99541.pdf
9. On February 12, 2024, the SEC instituted administrative proceedings against Scott Wolfrum and Tyler Sadek whom failed to disclose conflicts of interest when recommending that his advisory clients invest in Foundry Mezzanine Opportunity Fund (“FMOF” or the “Fund”), a private fund that provides lending to and invests in small businesses. Wolfrum sold more than $20 million in interests in FMOF, almost all of which were recommended by Wolfrum and sold to his advisory clients. Wolfrum failed to disclose to his clients the conflicts of interest created by his and his family member’s financial interests in two of the Fund’s holdings and Wolfrum’s receipt of $140,125.00 in finder’s fees for facilitating two different investments by the Fund. Sadek, a principal of Foundry Capital Group, LLC, a registered investment adviser to the FMOF, reviewed, edited, and approved newsletters issued to the Fund’s investors and prospective investors that contained misleading statements and omissions. The newsletters contained misleading statements and omissions about the financial and operational condition of Fund holdings and expected annual interest from Fund holdings. Wolfrum was ordered to pay disgorgement in the amount of $140,125, prejudgment interest of $21,354 and a civil money penalty in the amount of $75,000. Sadek was ordered to pay a civil money penalty in the amount of $30,000. https://www.sec.gov/files/litigation/admin/2024/34-99513.pdf
10. On February 9, 2024, the SEC charged he Huntington Investment Company (“HIC”), a registered broker-dealer and investment adviser, together with Huntington Securities Inc. (HSI), a registered broker-dealer and municipal advisor, and Capstone Capital Markets LLC (Capstone), a registered broker-dealer. Huntington employees sent and received off-channel communications that related to HIC’s, HSI’s and Capstone’s broker-dealer businesses and with respect to HIC’s investment advisory business, off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. HIC, HSI and Capstone did not maintain or preserve the substantial majority of these written communications. HIC’s, HSI’s and Capstone’s failures were firm-wide and involved employees at various levels of authority. HIC, HSI and Capstone was ordered to pay a civil money penalty in the amount of $1,250,000. https://www.sec.gov/files/litigation/admin/2024/34-99504.pdf
11. On February 9, 2024, the SEC charged Oppenheimer & Co. Inc. (“Oppenheimer”), a registered broker-dealer and investment adviser. Oppenheimer, including at senior levels, failed to adhere to essential requirements and Oppenheimer’s own policies. By using their personal devices, employees communicated both internally and externally by personal text messages, and, in the case of at least one employee, WhatsApp (“off-channel communications”). Oppenheimer employees sent and received off channel communications that related to the business of the broker-dealer. Oppenheimer did not maintain or preserve the substantial majority of these written communications. Oppenheimer’s failure was firm-wide and involved employees at all levels of authority. Oppenheimer was ordered to pay a civil money penalty in the amount of $12,000,000. https://www.sec.gov/files/litigation/admin/2024/34-99503.pdf
12. On February 9, 2024, the SEC charged Guggenheim Securities LLC (Guggenheim Securities), a registered broker-dealer, together with Guggenheim Partners Investment Management LLC (GPIM), a registered investment adviser. Guggenheim Securities employees sent and received off-channel communications that related to the business of the broker-dealer, and GPIM employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given, as well as the placing and execution of orders to purchase and sell securities. Guggenheim Securities and GPIM did not maintain or preserve the substantial majority of these written communications. Guggenheim Securities and GPIM’s failure was firm-wide and involved employees at various levels of authority. Guggenheim Securities and GPIM was ordered to pay a civil money penalty in the amount of $15,000,000. https://www.sec.gov/files/litigation/admin/2024/34-99502.pdf
13. On February 9, 2024, the SEC charged Northwestern Mutual Investment Services LLC (NMIS), a registered broker-dealer and investment adviser, together with Northwestern Mutual Investment Management Co. LLC (NMIM), and Mason Street Advisors LLC (Mason Street) a registered investment adviser. NMIS, NMIMC and MSA personnel throughout the firms, including at senior levels, failed to adhere to essential requirements and the firms’ own policies. Using their personal devices, these personnel communicated both internally and externally by personal text messages (“off-channel communications”). NMIS personnel sent and received off-channel communications that related NMIS’s broker-dealer business, and NMIMC and MSA personnel sent and received off-channel communications that related to recommendations made or proposed to be made and advice given or proposed to be given. NMIS, NMIMC and MSA did not maintain or preserve the substantial majority of these written communications. NMIS, NMIMC and MSA’s failures were firm-wide and involved personnel at various levels of authority. NMIS, NMIMC and MSA was ordered to pay a civil money penalty in the amount of $16,500,000. https://www.sec.gov/files/litigation/admin/2024/34-99501.pdf
14. On February 9, 2024, the SEC charged Key Investment Services LLC (KIS), a registered broker-dealer and investment adviser, together with KeyBanc Capital Markets Inc. (KBCM), a registered broker-dealer. KIS and KBCM employees throughout the firms, including at senior levels, failed to adhere to essential requirements and the firms’ own policies. Using their personal devices, these employees communicated both internally and externally by personal text messages (“off-channel communications”). KIS and KBCM employees sent and received off-channel communications that related to the broker-dealer businesses operated by KIS and KBCM, and with respect to KIS’s investment advisory businesses related to recommendations made or proposed to be made and advice given or proposed to be given. KIS and KBCM did not maintain or preserve the substantial majority of these written communications. KIS and KBCM’s failures were firm-wide and involved employees at various levels of authority. KIS and KBCM were ordered to pay a civil money penalty in the amount of $10,000,000. https://www.sec.gov/files/litigation/admin/2024/34-99500.pdf
15. On February 9, 2024, the SEC charged Lincoln Financial Advisors Corporation (“LFA”), together with Lincoln Financial Securities Corporation (“LFS”), a registered broker-dealer and investment adviser. LFA and LFS employees throughout the firms, including at senior levels, failed to adhere to essential requirements and the firms’ own policies. Using their personal devices, these employees communicated both internally and externally by personal text messages (“off-channel communications”). LFA and LFS employees sent and received off-channel communications that related to the broker-dealer businesses operated by LFA and LFS and with respect to LFA’s and LFS’s investment advisory businesses related to recommendations made or proposed to be made and advice given or proposed to be given. LFA and LFS did not maintain or preserve the substantial majority of these written communications. LFA and LFS’ failures were firm-wide, and involved employees at various levels of authority. LFA and LFS was ordered to pay a civil money penalty in the amount of $8,500,000. https://www.sec.gov/files/litigation/admin/2024/34-99499.pdf
16. On February 9, 2024, the SEC charged Cambridge Investment Research Inc. (CIR), a registered broker-dealer, together with Cambridge Investment Research Advisors Inc. (“CIRA”), a registered investment adviser. Cambridge employees throughout the firms, including at senior levels, failed to adhere to essential requirements and the firms’ own policies. Using their personal devices, these employees communicated both internally and externally by personal text messages (“off-channel communications”). CIR employees sent and received off-channel communications that related to the business of the broker-dealer, and CIRA employees sent and received off-channel communications that related to recommendations made or proposed to be made and advice given or proposed to be given. CIR and CIRA did not maintain or preserve the substantial majority of these written communications. CIR and CIRA’s failures were firm-wide, and involved employees at various levels of authority. CIR and CIRA were ordered to pay a civil money penalty in the amount of $10,000,000. https://www.sec.gov/files/litigation/admin/2024/34-99498.pdf
17. On February 8, 2024, the SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the Commodity Futures Trading Commission (CFTC) as commodity pool operators or commodity trading advisers. The amendments, which the CFTC concurrently adopted, are designed to enhance the ability of the Financial Stability Oversight Council (FSOC) to monitor and assess systemic risk and to bolster the SEC’s oversight of private fund advisers and the agency’s investor protection efforts. The SEC and CFTC also agreed to a memorandum of understanding related to the sharing of Form PF data. The amendments to Form PF will enhance how large hedge fund advisers report investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio liquidity, and financing and investor liquidity to provide better insight into the operations and strategies of these funds and their advisers and improve data quality and comparability. https://www.sec.gov/news/press-release/2024-17
18. On February 6, 2024, the SEC issued a new FAQ clarifying requirements regarding gross and net performance obligations for IRR for private fund advisers. The FAQ addressed two key areas as discussed below.
The first key area addresses the prohibition that an advertisement includes gross performance unless net is also shown “(i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and (ii) calculated over the same time period, and using the same type of return and methodology, as the gross performance.” A common practice for private fund managers when showing an IRR is to present a fund’s Gross IRR using investment level cash flows, and a Net IRR using fund level cash flows. The investment level Gross IRR starts at the time of investment which would not capture any impact of a fund’s subscription line. Net IRR at the fund level starts with the fund’s first capital call and includes the impact of a fund’s subscription line. This distinction matters because the start date of those Gross and Net IRRs will be different, particularly when a fund utilizes a subscription line of credit to assist with the purchase of investments, delaying the need to call capital from investors.
The position expressed in the FAQ states “…presenting Gross IRR that is calculated without the impact of fund-level subscription facilities compared only to Net IRR that is calculated with the impact of fund-level subscription facilities would violate the marketing rule.” The FAQ goes on to state, “In the staff’s view, if an adviser chooses to exclude the impact of such subscription facilities from the fund’s Gross IRR, it cannot then include them in the Net IRR that is presented to comply with section (d)(1) of the marketing rule.” The solution offered in the FAQ is that when an investment level Gross IRR (without sub line) is shown, an investment level Net IRR (without sub line) also be shown with equal prominence. This would be the baseline needed to comply with the written text of the Marketing Rule and the FAQ. The practical implications of this may be that advertisement still includes some level of Fund Level Net IRR (with the impact of the subscription line). An adviser may wish to further include with equal prominence Fund Level Gross IRR. The result would be four sets of returns with and without the impact of subscription line both gross and net.
Based on the above, the FAQ starts to align with the recently released Private Fund Advisers Rule for Quarterly Statements. The Quarterly Statement Rule requires investors to receive Fund Level Gross and Net returns both with and without the impact of the subscription line of credit. The main distinction advisers will need to navigate is that while the Marketing Rule does not dictate the method used to calculate a Gross and Net IRR — provided it is shown at a minimum without the impact of the subscription line of credit — the Private Fund Adviser Rule does prescribe methodologies required to calculate returns. The practical challenge will be in the operational alignment needed to comply with both rules.
The second key area is around the practice of only showing a Fund Level Net IRR that includes the impact of a subscription line.
The FAQ states “without including either (i) comparable performance (e.g., Net IRR without the impact of fund-level subscription facilities) or (ii) appropriate disclosures describing the impact of such subscription facilities on the net performance shown … the staff believes that presenting only Net IRR that includes the impact of fund-level subscription facilities could mislead investors by suggesting that the fund’s advertised performance is similar to the performance that the investor has achieved from its investment in the fund alone.”
Those private fund advisers that attempted to keep advertisements simple with the inclusion of only a Fund Level Net IRR with the impact of a subscription will now find that further work is required. The most straightforward approach would be to also include the corresponding Net IRR without the impact of a subscription line. For those advisers that wish to include disclosure, assurance that those disclosures provide sufficient detail to meet the “appropriate” description of the impact for the fund will need to be considered. This FAQ reinforces SEC staff views on providing a complete picture of the performance earned for a particular strategy when subscription lines are used.
19. On February 6, 2024, the SEC instituted administrative proceedings against Brijesh Goel. Goel, an employee of Goldman Sachs. Goel was a dually-registered investment adviser and broker-dealer and was a member of the investment bank’s financing group and its structured finance group. Goel committed unlawful insider trading in the securities of three issuers while employed by the investment bank. Goel was barred. https://www.sec.gov/files/litigation/admin/2024/34-99478.pdf
20. On February 5, 2024, the SEC instituted administrative proceedings against Gregory Sampson, an investment adviser representative associated with two registered investment advisers,. Samson pled guilty and admitted to using manipulative and deceptive devices in connection with the offer and sale of a security. Sampson also devised a scheme to defraud investors and obtain money and property by means of materially false and fraudulent pretenses, representations and promises, and omissions of material fact. Samson was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6541.pdf
21. On February 2, 2024, the SEC instituted administrative proceedings against David Bodner. Bodner participated in a series of conflicted transactions involving the investment advisory activities of an enterprise known as “Beechwood,” as well as the closely related investment advisory firm known as Platinum Partners (“Platinum”). Bodner was a principal of Platinum and held, through entities he owned and/or controlled, substantial ownership interests in Platinum’s management entities, as well as interests in the private funds managed by Platinum and certain portfolio companies in which those funds invested. Bodner also played a role in Beechwood’s investment process. Bodner did not take steps to ensure that Beechwood disclosed Bodner’s ownership interests and role to Beechwood’s advisory clients. Bodner also participated in certain transactions by which Beechwood clients provided liquidity to Platinum funds and related fund portfolio companies and helped those entities avoid defaults on existing loans issued by Beechwood clients. Bodner knew that some of those transactions involved using Beechwood clients’ own funds to service the debt owed to them. Bodner did not take steps to ensure that Beechwood disclosed to its clients the purpose of and source of funds used for these transactions. Bodner was ordered to pay disgorgement in the amount of $2,066,006, prejudgment interest of $208,459 and a civil money penalty in the amount of $180,000. https://www.sec.gov/files/litigation/admin/2024/ia-6540.pdf
22. On February 1, 2024, the SEC instituted administrative proceedings against Jason Schwarz. Schwarz acted as an unregistered investment adviser, purporting to advise Alpine Capital, LLC (“Alpine Capital”) on investment in securities for compensation. Schwarz was barred. https://www.sec.gov/files/litigation/admin/2024/ia-6539.pdf