May 2020 SEC Updates

  1. On May 29, 2020, the SEC settled charges against an investment adviser for inadequate disclosure of its mutual fund share class selection practices. At times the adviser held for advisory clients mutual fund share classes that charged fees pursuant to Rule 12b-1 instead of lower-cost share classes of the same funds that were available to the clients. The investment adviser representatives, as registered representatives of an affiliated broker-dealer, received 12b-1 fees in connection with these investments, but the adviser did not adequately disclose this conflict of interest in its Form ADV brochures or otherwise.
  2. On May 26, 2020, Ares Management, a private equity firm and registered investment adviser, agreed to pay one million dollars to settle charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.  The SEC found that the compliance policies failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board while that employee continued to participate in trading decisions regarding the portfolio company.  According to the order, Ares obtained potential material nonpublic information about the company, including through Ares’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt, and interest payments.
  3. On May 22, 2020, the SEC settled announced that it has filed an emergency action and obtained a temporary restraining order and asset freeze against a California-registered investment adviser and his entities to halt an ongoing Ponzi scheme targeting senior citizens.
  4. On May 21, 2020, the SEC released the agenda for the May 27 meeting of the Asset Management Advisory Committee (AMAC).  AMAC was formed to provide the Commission with diverse perspectives on asset management and related advice and recommendations. The meeting will include a discussion of matters relating to AMAC’s subcommittees and to COVID-19 and the asset management industry. The meeting will be webcast live on and will be archived on the website for later viewing.
  5. On May 22, 2020, the SEC settled charges against an investment adviser who failed to timely distribute annual audited financial statements prepared in accordance with GAAP to the investors in the largest private fund that it advised in each fiscal year from 2014 through 2018, or even to retain an auditor for the years after 2015, resulting in violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, commonly referred to as the “custody rule.
  6. May 15, 2020,  Morningstar Credit Ratings violated Exchange Act Rule 17g-5(c)(8)(i), a conflict of interest rule, by issuing or maintaining credit ratings where Morningstar employees who participated in determining or monitoring the credit ratings also participated in the sales or marketing of a product or service of Morningstar. Asset-backed securities analysts at Morningstar, often encouraged and directed by Morningstar’s then-director of business development for ABS, identified and contacted prospective clients to arrange marketing calls and marketing meetings, offered to provide indicative ratings to potential clients, and had follow-up communications and interactions with prospective clients, all for the purpose of persuading potential clients to hire Morningstar to rate ABS. For example, an ABS analyst at Morningstar wrote a commentary specifically aimed at a particular issuer and sent it to the issuer with the purpose of persuading the issuer to become a client of Morningstar. In certain instances, ABS analysts at Morningstar made multiple solicitations to prospective clients over the course of months. These activities were undertaken with the knowledge of other senior Morningstar managers.
  7. On May 12, 2020, the SEC obtained the appointment of a receiver over an investment adviser, a general partner and several funds managed by the adviser. The SEC alleges that the investment adviser improperly recognized revenue in order to fraudulently inflate net asset values and performance for several funds it managed, resulting in the funds always reporting positive returns.  The investment adviser allegedly distributed promotional materials to current and prospective investors that included the inflated asset values and false performance results.  The adviser and general partner to the funds also allegedly distributed monthly account statements to investors falsely representing monthly returns and investment balances based on the inflated asset values.  The complaint further alleges that the funds paid inflated management fees to investment adviser and inflated performance fees to the general partner.
  8. On May 12, 2020, the SEC announced that Morgan Stanley Smith Barney LLC (MSSB) has agreed to settle charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.  MSSB has agreed to pay a $5 million penalty that will be distributed to harmed investors.  Wrap fee programs offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.  According to the SEC’s order, MSSB marketed its wrap fee accounts as offering clients professional investment advice, trade execution, and other services within a “transparent” fee structure.  From at least October 2012 until June 2017, some of MSSB’s marketing and client communications gave the impression that wrap fee clients were not likely to incur additional trade execution costs.  During that period, however, the order finds that some MSSB managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in MSSB clients paying additional transaction fees that were not visible to them.  As a result of MSSB’s conduct, the order finds that certain MSSB clients were unable to assess the value of the services received in exchange for the wrap fee paid to MSSB.
  9. On May 12, 2020, the SEC settled an action against several low-level accounting and operations individuals who worked for an investment adviser for falsifying a variety of documents that were requested by and provided to SEC Commission staff. Specifically, the individual falsified multiple records of the investment adviser to conceal the fraud or other misconduct from SEC Commission staff during an examination and a related ensuing enforcement investigation. For example, in response to documents requested by the Commission’s examination staff, Respondent altered investor accreditation documents and client balance sheets to make several unaccredited investors appear to be accredited investors. and
  10. On May 6, 2020, the SEC settled charges against registered broker-dealer Bloomberg Tradebook for making material misrepresentations and omitting material facts about how the firm handled certain customer trade orders.
  11. On May 1, 2020, the SEC settled an action against an individual who misrepresented the profitability and historical performance results of various options-trading strategies that she marketed and sold primarily to retail investors through various subscription services. Specifically, the individual included misleading and inflated performance results in her marketing materials, and the materials were also replete with false and misleading retiree testimonials.