May and June 2021 SEC Updates

1.            June 14, 2021, Commissioners Hester Peirce and Elad Roisman continued their attack on SEC Commissioner Gary Gensler by issuing their third public statement in connection with Chair Gensler’s regulatory agenda.  Key comments include:


•             The Agenda makes clear that the Chair’s recent directive to SEC staff to consider revisiting recent regulatory actions taken with respect to proxy voting advice businesses was not an isolated event, but just the opening salvo in an effort to reverse course on a series of recently completed rulemakings.;

•             The Agenda is missing some other important rulemakings, including rules to provide clarity for digital assets, allow companies to compensate gig workers with equity, and revisit proxy plumbing.

•             Perhaps the absence of these rules is attributable to the regrettable decision to spend our scarce resources to undo a number of rules the Commission just adopted.;

•             On the agenda are proposals to further amend…rules pertaining to the accredited investor definition. The agency has received no new information which would warrant opening up any of these rules for further changes at this time. We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules;

•             A change in administration naturally brings changes in policy, and the Agenda reflects that shift in the form of new rulemakings, but reopening large swathes of work that was just completed without new evidence to warrant reopening is not normal practice;

•             The inclusion of these rules in the Agenda undermines the Commission’s reputation as a steady regulatory hand.


2.            On June 11, 2021, the SEC announced the annual regulatory agenda by mapping out Gensler’s ambitions over the next year.  Notable highlights include the future proposed amendments to the custody rule, Form PF and ESG disclosures.


3.            On June 4, 2021, the SEC voted to remove William D. Duhnke III from his role as chairman of the Public Company Accounting Oversight Board that sets standards for audits of public companies and planned to replace the rest of the board in due course. Commissioners Hester Peirce and Elad Roisman said in a statement that Duhnke’s ousting established a “troubling precedent.” and


4.            On June 4, 2021, Peaks Capital, LLC (VII Peaks) and its co-owner, Gurprit Chandhoke, settled charges for breaching their fiduciary duty by engaging in transactions that benefitted themselves to the detriment of their client. The SEC also charged Michelle MacDonald, the Chief Financial Officer of the BDC, with causing VII Peaks’ violations.  According to the SEC’s order, VII Peaks and Chandhoke breached their fiduciary duty to VII Peaks Co-Optivist Income BDC II, Inc. (the BDC), a business development company, by engaging in transactions that were not disclosed to or approved by the Board of Directors of the BDC. First, the order finds that VII Peaks collected over $722,500 in due diligence fees for loans made by the BDC to various portfolio companies, even though the loan documentation said that the fees belonged to the BDC. The order finds that the arrangement created a material conflict of interest because VII Peaks and Chandhoke were incentivized to cause the BDC to make loans to portfolio companies in order to generate the fees for themselves. Second, the order finds that Chandhoke engaged in two transactions that benefitted himself financially and where his interests conflicted with the BDC’s.  According to the SEC’s order against MacDonald, MacDonald caused VII Peaks’ breach of its fiduciary duty to the BDC by causing the BDC to transfer the due diligence fees to VII Peaks despite knowing that the agreements identified the BDC as the recipient of the fees and not being aware of any obligation to transfer the fees to VII Peaks. The order also finds that MacDonald failed to disclose or seek approval from the BDC’s Board to have VII Peaks retain the fees.  VII Peaks agreed to pay disgorgement of $722,500, prejudgment interest of $123,199, and a civil penalty of $185,000, while Chandhoke agreed to an associational suspension, investment company prohibition, and penny stock suspension, all for a period of twelve-months, and to pay disgorgement of $87,500, prejudgment interest of $16,857, and a civil penalty of $90,000. Without admitting or denying the SEC’s findings, MacDonald agreed to a $20,000 penalty.  and


5.            On June 3, 2021, Emperor Investments, Inc., a robo-adviser, settled charges for making false and misleading statements on its website about its performance and using paid bloggers to solicit U.S. investors without adequate disclosure. According to the SEC’s order, from June 2018 until October 2019, Emperor operated a robo-adviser, an automated digital investment advisory program that was marketed to individuals through Emperor’s website and social media platforms. The SEC found that, throughout its operation, Emperor disseminated misleading marketing materials and performance data on its website, which was accessible to clients and prospective clients. For example, Emperor stated that it had outperformed the market for the past 11 years when, in fact, the claim was based on modeled returns and Emperor had been in operation for less than two years-during which time it underperformed the market. The SEC also found that Emperor paid bloggers, which were a significant source of Emperor’s new clients, for referrals without complying with cash solicitation disclosure and documentation requirements. In addition, the SEC found that Emperor failed to adopt or implement policies and procedures reasonably designed to prevent these securities law violations.  Emperor consented to pay a civil penalty of $25,000.


6.            On June 3, 2021, President Biden signed an Executive Order to further address the ongoing national emergency with respect to the threat posed by the military-industrial complex of the People’s Republic of China.   The Executive Order prohibits investing in certain Chinese companies that undermine the security or democratic values of the United States and our allies. The President’s Executive Order goes into effect in August 2021.


7.            On June 2, 2021, Centaurus Financial, Inc., a dually-registered investment adviser and broker-dealer, settled charges for its disclosure failures and misleading statements to clients regarding investment advice it gave about mutual funds and cash sweep money market funds.  The order finds that Centaurus made misleading statements and provided inadequate disclosures regarding its receipt of 12b-1 fees from client investments, and although Centaurus was eligible to self-report to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, Centaurus did not do so. The order also finds that Centaurus received revenue sharing from its investment in certain mutual funds and cash sweeps without fully and fairly disclosing the conflict of interest to its clients. According to the order, Centaurus 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. Finally, the order finds that Centaurus failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.  CFI consented to pay disgorgement of $907,377, prejudgment interest of $124,019, and a civil penalty of $250,000.


8.            June 1, 2021, Commissioners Hester Peirce and Elad Roisman issued their first public statement in connection with  Chair Gensler’s and the Division of Corporation Finance’s statements regarding the application of the proxy rules to proxy voting advice.  Key comments include: “We find it difficult, however, to imagine what has changed in the roughly ten months since the Commission last considered this issue that would call into question such recently adopted requirements.” And “We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation.”


9.            On May 27, 2021, the SEC  filed an action alleging that investment advisers LJM Funds Management Ltd. and LJM Partners Ltd. and their portfolio managers, Anthony Caine and Anish Parvataneni, fraudulently misled investors and the board of directors of a fund they advised about LJM’s risk management practices and the level of risk in LJM’s portfolios. The SEC separately settled related charges with LJM’s Chief Risk Officer, Arjuna Ariathurai. According to the SEC’s complaint, LJM adopted a short volatility trading strategy that carried risks that were remote but extreme. The complaint alleges that, in order to ease investor concerns about the potential for losses, LJM, Caine and Parvataneni made a series of misstatements to investors and the mutual fund’s board about LJM’s risk management practices, including false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns. The complaint further alleges that, beginning in late 2017, during a period of historically low volatility, LJM, Caine, and Parvataneni increased the level of risk in the portfolios in order to chase return targets, while falsely assuring investors that the portfolios’ risk profiles remained stable. According to the complaint, in February 2018, the markets suffered a large spike in volatility, resulting in catastrophic trading losses exceeding $1 billion, or more than 80% of the value of the funds LJM managed, over two trading days.


10.          On May 24, 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., and


11.          On May 19, 2021, the SEC charged BTIG, LLC with repeatedly violating the order-marking and locate provisions of Regulation SHO, which regulates the short-selling of securities. According to the SEC’s complaint, BTIG violated Rule 200(g) of Regulation SHO when it mismarked more than 90 sale orders from a hedge fund customer-representing total sales of more than $250 million-as “long” and “short exempt” when those orders should have been marked as “short.” According to the complaint, BTIG had independent gatekeeper responsibilities to ensure that the trades it executed were correctly marked. The SEC alleges that BTIG ignored facts indicating that the hedge fund’s representations that it owned the securities it was selling and that it would deliver them by the settlement date were false. In particular, the SEC alleges that BTIG was aware of prior compliance concerns regarding the hedge fund, the hedge fund’s net short position in the securities it was selling in its BTIG account, statements by hedge fund employees indicating that they did not expect to deliver the securities by the settlement date, the hedge fund’s failure to provide documentation showing that it owned the securities on the trade date, and the hedge fund’s repeated failure to deliver the securities by the settlement date. Despite these and other red flags, BTIG allegedly continued to mark the hedge fund’s orders as “long” and “short exempt” without taking reasonable steps to determine whether those order markings were correct. In addition, the SEC alleges that because BTIG failed to borrow or locate the shares before effecting what were, in reality, short sales, BTIG also violated Rule 203(b)(1) of Regulation SHO.  The matter is being litigated.


12.          On May 17, 2021, S&P Dow Jones Indices LLC settled charges for failures relating to a previously undisclosed quality control feature of one of its volatility-related indices, which led S&P DJI to publish and disseminate stale index values during a period of unprecedented volatility.  S&P DJI agreed to pay a $9 million penalty.


13.          On May 12, 2021, GWFS Equities Inc. (GWFS), a registered broker-dealer and affiliate of Great-West Life & Annuity Insurance Company, agreed to settle charges for violating the federal securities laws governing the filing of Suspicious Activity Reports (SARs). GWFS provides services to employer-sponsored retirement plans.   According to the SEC’s order, GWFS was aware of increasing attempts by external bad actors to gain access to the retirement accounts of individual plan participants. The order further finds that GWFS was aware that the bad actors attempted or gained access by, among other things, using improperly obtained personal identifying information of the plan participants, and that the bad actors frequently were in possession of electronic login information such as user names, email addresses, and passwords.  Broker-dealers are required to file SARs for certain transactions suspected to involve fraudulent activity or a lack of an apparent business purpose.  The order finds that GWFS failed to file approximately 130 SARs, including in cases when it had detected external bad actors gaining, or attempting to gain, access to the retirement accounts of participants in the employer-sponsored retirement plans it serviced.   GWFS agreed to a settlement that imposes a $1.5 million penalty.


14.          On May 12, 2021, a federal judge sanctioned Alex Oh, former Director of the Division of Enforcement, for misconduct by falsely accusing another attorney’s character without evidentiary support.  Ms. Oh resigned her position as Director of the Division of Enforcement after less than 6 days in serving as Director.


15.          On May 10, 2021, Peter DeCaprio, a former principal of defunct investment adviser Crow Point Partners, LLC, settled charges concerning conflicts of interest that were not disclosed to a mutual fund client advised by Crow Point, the EAS Crow Point Alternatives Fund (EAS Fund). According to the SEC’s order, at DeCaprio’s direction, Crow Point made a series of investments of the EAS Fund’s assets into a private fund available as an investment option on an investment adviser-sponsored investment platform. The order finds that over $8 million – or nearly 28% – of the EAS Fund’s net assets were invested in the private fund. The order also finds that from at least September 2015 through January 2017, Crow Point had material financial ties to the private fund adviser and the investment platform adviser that created incentives for Crow Point to make or maintain investments in the private fund and the investment platform.  As described in the order, the financial ties giving rise to the conflicts of interest included, for example, Crow Point’s serving as a sub-adviser to an affiliated unregistered fund of the private fund, and a mutual referral agreement between Crow Point and the investment platform adviser under which Crow Point and the investment platform adviser agreed to compensate one another for referring assets under management. The order finds that the ties created conflicts of interest that were not disclosed to Crow Point’s client, the EAS Fund.  DeCaprio agreed to a $75,000 civil penalty.