After Failing to Permit OCIE Exams, Commission Files Action
It is axiomatic that a registered investment adviser has a duty to maintain certain records. Equally fundamental is the fact that when the Commission’s Office of Inspections and Examinations or OCIE calls, the advisory firm has an obligation to produce the requested records and permit inspection. What happens, however, when the adviser does not have clients and, apparently, records to produce – even if they are required to be maintained? This is the apparent difficulty an advisory was confronted with when presented with two requests for inspection, one from the Commission’s LA office and a second from the Miami office. SEC v. E*Hedge Securities, Inc., Civil Action No. 1:20 -cv-22311 (S.D. Fla. Filed June 3, 2020).
E*Hedge, controlled by Defendant Devon Parks, is an Exempt Reporting Adviser with the Commission. Its Form ADV, executed by Mr. Parks, states that the firm is a multi-state, internet investment adviser based in Las Vegas. In registering with the Commission as an investment adviser the firm relied on two exemptions. One is under Rule 203A-2(d) while the second is under Subsection 2(e) of the same rule. The former focuses on firms that are “required by the laws of 15 or more States to register as an investment adviser . . .” The latter applies to advisers that provide investment advice “to all clients exclusively through an interactive website . . .”
E*Hedge registered under Rule 203A in early 2017. By 2019 the firm claimed to provide a platform for public offerings and private placements. By the next year – March 2020 – the business model apparently shifted. At that point E*Hedge began offering products and treatments related to COVID-19. The firm registered a website named “Covid19invest.com.”
Over a two-month period in late 2017 the Commission’s exam staff from the LA Regional Office attempted to obtain materials for an exam. No documents were produced. No exam was conducted.
By early 2020 the Commission’s exam staff from the Miami Office – an amendment to the firm’s filings claimed it was now based in Miami – sought to secure documents and conduct an exam. The staff received a series of excuses and requests for extensions. No records were produced, although those sought were required to be kept. No exam was conducted.
In the end, the Commission learned that E*Hedge does not have any clients; it does not provide c investment advice through an interactive website. Although the firm continues to hold itself out as an internet adviser, the firm is not eligible to register under the provisions of the Rule.
The complaint alleges violations of Advisers Act Section 204(a) and 203(a). The case is pending. See Lit. Rel. No. 24825 (June 3, 2020).