Three of the six actions filed this week by the Commission were against registered investment advisers. One involved the misappropriation of funds, another centered on the failure to disclose a related party transaction and a third was based on the use of misleading marketing materials. The agency also brought an action against a transfer agent for the sale of unregistered securities, one against a broker dealer for repeated net capital violations and a case against an issuer with inadequate internal controls where revenue recognition was improperly accelerated.
Compliance: A Risk Alert regarding its National Exam Program was issued by the SEC’s Office of Compliance Inspections and Examinations or OCIE. Drawing from its prior exam experience, OCIE identified five key areas of risk for investment advisers. Each point is highlighted by examples which should facilitate exam preparation and compliance for investment advisers. The areas identified are the compliance rule, regulatory filings, the custody rule, the requirement that there be a Code of Ethics and the books and records requirements (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive case and 5 administrative proceedings, excluding 12j and tag-along proceedings.
Net capital: In the Matter of JayPee International, Inc., Adm. Proc. File No. 3-17838 (Feb. 9, 2017) names as Respondents the firm, a registered broker-dealer which largely engages in proprietary trading, and Sorabh Arora, its President and COO. Over a two year period beginning March 2012 the firm had multiple violations of the net capital rule which were not reported to the Commission in a timely manner and inaccurate FOCUS reports. The violations resulted from, among other things, losses in the commodity markets, failing to properly handle capital transfers from the parent company and not taking the proper haircuts on certain short put options. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(a). As part of the resolution of the case the firm agreed to implement certain undertakings which include the appointment of an independent consultant. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. The firm will pay a penalty of $25,000 while Respondent Arora will pay $10,000.
Misleading marketing materials: In the Matter of Jeffrey Slocum & Associates, Adm. Proc. File No. 3-17833 (Feb. 8, 2017). Jeffrey Slocum & Associates was a registered investment adviser that provided consulting services to institutional investors. Its president and majority shareholder is Respondent Jeffrey Slocum. The Order centers on two key points. First, over a period of about three years, beginning in June 2011, the firm disseminated marketing materials to prospective clients that represented its employees did not accept gifts from business associates despite a provision in the Code of Ethics which permitted them under certain circumstances. The conflict was highlighted by the fact that certain employees accepted event tickets in violation of the Code resulting in no action by the firm. Second, the firm disseminated misleading advertising materials, in part because its compliance procedures were inadequate as were the firm’s books and records. The Order alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4). To resolve the proceeding the adviser consented to the entry of a cease and desist order based on each of the Sections cited in the order and a censure. The firm will also pay a penalty of $300,000. Mr. Scolum consented to the entry of a cease and desist order based on Sections 206(2) and 206(4). In addition, he will pay a penalty of $100,000.
Related party transactions: In the Matter of SLRA Inc., Adm. Proc. File No. 3-17826 (Feb. 7, 2017) is a proceeding which names as Respondents the investment advisor and its founder and principle. Over a two year period beginning in 2009 Mr. Landress sought additional compensation from the limited partners of two funds he created and which were managed by SLRA. The funds were sought following a decline in real estate values — the funds invested in securities in the form of real estate private equity secondary transactions – following the market crisis. The partners refused. On January 7, 2014 Mr. Landis, as the controlling member of SLRA and the general partner, directed the transfer of £16.25 million from the Funds’ accounts to SLRA. The partners were informed that the funds were for fees to an affiliate for services performed for the Funds from 2006 through 2013. The money was transferred to a personal account. Mr. Landress claimed the fees were allowed by the Funds’ operating documents and an oral agreement made in 2006 by him on behalf of the Funds. There was no disclosure of any oral agreement or this related party transaction and the conflicts. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. SLRA was censured. Mr. Landress was barred from the securities business and directed to pay a penalty of $1.25 million.
Unregistered securities: In the Matter of Olde Manmouth Stock Transfer Co., Inc., Adm. Proc. File No. 3-17827 (Feb. 7, 2017) is a proceeding which names as Respondents the registered transfer agent and Matthew J. Troster, its President. Between July 2007 and May 2009 the transfer agent processed more than 200 transfers of Spongtech Delivery Systems, Inc. shares after removing the restrict legends based on opinion letters that were facially deficient. Respondents engaged in similar misconduct in 2013 with respect to shares of Analytica Bio-Energy Corp. The Order alleges violations of Securities Act Section 5. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to the entry of a censure. The firm will pay disgorgement of $22,140, prejudgment interest and a penalty of $100,000. Mr. Troster will pay a penalty of $15,000.
Internal controls: In the Matter of Ixia, Adm. Proc. File No. 3858 (Feb. 3, 2017) names as Respondents Ixia, a maker and seller of software solutions, and Victor Alston, previously the firm’s vice president of applications. Beginning in October 2012 Mr. Alston sought to accelerate revenue recognition. He did this by splitting purchase orders. The firm bundled the sale of software, services and other items on purchase orders. Under GAAP revenue could not be recognized for the sale of the software and professional services because they were not valued. By splitting the purchase orders Mr. Alston sought to recognize the revenue prematurely and establish a value for the services. After Mr. Alston left the firm an investigation by the audit committee uncovered the misconduct. The firm self-reported to the Commission. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm undertook remedial efforts and cooperated with the staff’s investigation. The firm also agreed to certain undertakings. To resolve the case the firm consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay a penalty of $750,000. Mr. Alston consented to the entry of a cease and desist order based on each Section cited in the Order. He will pay a penalty of $100,000.
Misappropriation: SEC v. Connell, Civil Action No. 1:17-cv-00831 (S.D.N.Y. Filed Feb. 3, 2017) is an action against Barry Connell who was previously employed at a Commission registered investment adviser and broker-dealer. Over a period of about two years beginning in December 2015, Mr. Connell misappropriated about $5 million from advisory clients of the firm. He carried out his scheme by making numerous wire transfers and writing checks from the accounts to third parties for his benefit. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.
Remarks: Susan F. Axelrod, EVP, Regulatory Operations, FINRA, delivered remarks at the SIFMA Anti-Money Laundering and Financial Crimes Conference, New York City (Feb. 9, 2017). Her remarks focused on the identification of issues regarding AML compliance. Those include incorrectly settling the parameters on compliance programs, the inability to properly police suspicious activity, inadequate due diligence and programs which were not specifically tailored to the business (here).
Deficient order execution: The Securities and Futures Commission reprimanded and fined GMO-Z.com Forex HK Limited $1.6 million for deficiencies regarding its order execution and slippage handling procedures as well as failures in its electronic trading system. The deficiencies included inadequate procedures which permitted orders to be executed at the last tradable price rather than the next available price, failing to inform clients that under its policy client order execution would not be confirmed until the firm had hedged the position and the failure to disclose the fact that the system for the execution of client orders for leveraged foreign exchange contracts did not function properly which could impact execution.
Disclosure: The Market Misconduct Tribunal found that Mayer Holdings Limited and nine of its current and former senior officers failed to disclose inside information about the firm identified by its auditors as soon as practicable as required. The auditors informed the firm and its executives about the suspicious nature in which a subsidiary was sold, that the firm did not control projects in Vietnam it purchased and which appeared to be overvalued, and that two other subsidiaries had made substantial payments without security. The auditors resigned but did not disclose the issues. The MMT will hold a hearing in march to determine the orders to be imposed.