by T. GormanPosted on Posted in SECActions

The drinks were consumed; the food disappeared; and Super Bowl Sunday came to a close. Hope everyone enjoyed it!

The Commission continued to focus on traditional areas in the days leading up to the big game such as manipulation while bringing two new cases centered on crypto. The rate at which new cases are being filed, however, seems to be slowing, although it is early to make that determination.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 3 new civil injunctive actions and no new administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Offering fraud: SEC v. Dalius, Civil Action No. 2:18-cv-08487 (C.D. Ca.) is a previously filed action which named as defendants Eric J. Dalus and a number of entities he controlled, collectively known as Saivian LLC. Beginning in October 2015 Defendant Dalus operated a program under which investors were convinced to pay a fee of $125 every 30 days in return for a guarantee that they would get 20% of their retail shopping purchases returned every 28 days if their receipts were turned in. The program was supposedly funded by monetizing the point of sale receipt data turned in by investors. In fact, the operation was a Ponzi scheme. The action was settled as to Mr. Dalius and his firms, but Ryan Morgan Evans, a top scheme operator continues to litigate. The settlement required the entry of permanent injunctions and the payment, on a joint-and-several basis, of disgorgement in the amount of $20,080,784.41, prejudgment interest of $909,215.59 and imposed a penalty on each Defednant of $1.5 million. See Lit. Rel;. No. 25636 (February 7, 2023).

Crypto – offering fraud: SEC v. Gexcrypto Corp., Civil Action No. 2:23-cv-00191 (D. Nev. Filed February 6, 2023) is an action which names as Defendants Gexcrypto and Emiliano S. Ryn. Defendant Ryn founded the company, supposedly a crypto trading platform with a concierge service. Over a period of less than one year, Defendant Ryn defrauded 26 investors out of over $800,000. He claimed to be a successful Filipino entrepreneur in the crypto space. One part of the scheme centered on GexCrypto, a trading platform that was about to launch. The money to create the claimed trading venue came from an ICO of another coin. Investors were also recruited to invest in the mining operation. None of the promises materialized. When investors sought returns what they got was more false statements. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Defendants resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the compliant. In addition, they agreed to pay, on a joint-and-several basis, disgorgement of $825,994.37, prejudgment interest of $187,567.87 and a penalty of $1 million. Defendants also agreed to be enjoined from purchasing or selling any security except for their personal account. See Lit. Rel. No. 25634 (February 7, 2023).

Crypto: SEC v. Payward Ventures, Inc., Civil Action No. 23-cv-588 (N.D. Ca. Filed February 9, 2023) is an action which names as defendants Payward Ventures and Payward Trading LTD. Defendants are collectively known as “Kraken.” The firm operated what is called a Staking Program. The program required that investors turn over their crypto assets and allow them to be tied to a blockchain. The firm then used the assets as a marketing tool in order to lure additional investors. The investor obtained benefits from letting their assets be pooled such as advertising and better rates of return than they could achieve individually. Indeed, the Kraken Stating Program touted its better rates of return. At one point the program had over $45 million from U.S. investors, among others. The complaint alleges violations of Securities Act Sections 5(a) and (c). To resolve the proceedings, Defendants consented to the entry of permanent injunctions based on the Sections cited in the complaint and permanently enjoins them from participating in any staking programs.

Misappropriation: SEC v. Coleman, Civil Action No. 23-cv-459 (E.D. Pa. Filed February 6, 2023). Defendant Joshua W. Coleman formed Vesta Advisors in April 2018. Over a two-year period following the formation of the advisory, he served as an adviser representative. Defendant also held the position of Chief Compliance Officer and was responsible for the compliance program and its implementation. Over a four-year period, beginning in December 2018, Defendant Coleman executed a two-step scheme to defraud the advisory of over $200 million in illicit loan proceeds. The initial part of the scheme focused on cumulatively pledging over $160 million in client assets as collateral for personal loans. But, the clients did not consent to the loans; the clients had no knowledge of the loans. Ultimately one loan defaulted. About $20 million in pledged client assets were seized. Defendant Coleman targeted two private lenders in crafting a scheme to repay the lost funds. Defendant misrepresented the use of the loan proceeds and misrepresented the proposed use of the proceeds. Ultimately, he defaulted on the loans. The losses totaled over $50 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4). Defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the entry of an officer/director bar and a penny stock bar. In addition, Defendant Coleman will pay disgorgement and a penalty as determined by the Court in the future.

Division of Examinations Alert

The Division of Examinations has revamped and updated its exam priorities, according to its 2023 Exam Priorities (here). Consistent with its typical approach the Division plans to focus on a blend of topics and issues in its examinations. Those include points from last year as well as new items and wrinkles.

In the category of new and notable are three recently added rules: 1) The Marketing Rule for Advisors; 2) The Derivatives Rule for Investment Companies; and 3) The IC Valuation Rule. The focus here will be on compliance. The key question is how the firm and its professionals have implemented the new rule and assessed compliance. In addition, Exams will consider the trend of RIAs to private funds and evaluate the use of standards of conduct such as Reg BI, fiduciary conduct and Form CRS.

Finally, in conducting exams of RIAs, the Division will focus on the operations of the advisory and its compliance systems. For mutual funds and ETFs, Exams will evaluate firm operations and compliance programs. Overall the Division of Examinations, when executing its 2023 Exam Program, will build on its traditional approach. The Division will also add current business factors and evaluate the manner in which new rules are adopted and implemented to assess the operations of the business and its delivery of services to investors.

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by T. GormanPosted on Posted in SECActions

The Division of Examinations has revamped and updated its exam priorities according to its most recent release, 2023 Exam Priorities (here). Consistent with its typical approach the Division plans to focus on a blend of topics and issues in its examinations. Those include points from last year as well as new points and wrinkles. For 2023, the Exams program for investment advisors and companies will center on a range of topics from new rules to RIAs moving to private funds, standards of conduct and ESG

The New and Notable: Three rules fall into this category: 1) The Marketing Rule for Advisors; 2) The Derivatives Rule for Investment Companies; and 3) The IC Valuation Rule. The focus here will be on compliance. The key question is how the firm and its professionals have implemented the new rule and assessed compliance.

Marketing Rule, Advisors Act Rule 206(4)(1): The provision represents a significant change. The Division of Examinations plans to focus on the way in which the rule has been adopted and implemented. This means, for example, that Exams will assess not just if the advisory has a penned rule update for marketing, but if and how the RIA has complied with the substance of the new marketing directive. Thus, Exams will focus on an assessment of the reasonable basis for underlying performance advertising, testimonials, endorsements and third-party ratings. The compliance date for the rule is November 4, 2022.

Derivatives Rule, Investment Company Act Rule 18f-4: The section applies to investment companies and advisors, closed end funds, and business development companies but not mutual funds. The focus for Exams will center on the manner of adoption. Stated differently, the question will center on how the rule requirements are being implemented — though the adoption of a derivatives risk management program, board oversight and if disclosures – or some other method.

Investment Company Act: Fair Valuation, Rule 2a-5: The focus for Exams will be on implementation: How the fund and board are exercising their oversight obligations with the new rule in determining fair value and if the record keeping requirements are being met. Exams will determine if the adjustments made to valuation methodologies, compliance policies, procedures and oversight as well as record keeping and reporting are sufficient.

RIAs to Private Funds: This trend represents a significant change in the business. Presently, about 35% of RIAs manage private funds with gross asserts of $21 trillion. Exams plans to initially focus on five key points: 1) conflicts of interest; 2) the calculation and allocation of fees and expenses; 3) compliance with the marketing rule discussed above; 4) compliance with the provisions for using alternative data and with Advisers Act Section 205(A)(regarding certain compensation); and compliance with Advisers Act Rule 206(4)-2 (custody rule).

A second facet of the exam will evaluate the transition to, and operation of, the new private fund. Specifically, the Division will evaluate risk items such as: 1) the amount of leverage the new private fund has; 2) if the new fund is managed side-by-side with BDCs; 3) the use of affiliated companies and advisory personnel to provide services; 4) the impact on funds with hard-to-value assets such as crypto and real estate; 5) if the fund sponsors a SPAC; and 6) if the fund is involved in an adviser led restructuring or related transaction.

Standards of conduct: Consistent with prior years, Exams plans to evaluate key standards of conduct viewed through the lens of firm operations. Those include Regulation BI, fiduciary duties and Form CRS.

Reg BI and fiduciary duties: This is a traditional area of focus for Exams. Here the Division will consider four points: 1) investment advice and recommendations; 2) disclosure to investors and its completeness; 3) the process used to evaluate best interest recommendations; and 4) factors drawn from the investor’s investment profile. The Division will also consider if express or implied conflicts are such that an RIA can obtained informed consent to a conflict.

Overall, the Division plans to consider a variety of factors and conduct to evaluate the operations of the firm. Thus the Division will seek to determine and understand the firm’s business model and various economic incentives and operations. The compensation, revenue, and benefits of the business will also be considered as appropriate as well as how the firm deals with conflicts and client relations.

Factors drawn from the overall operation of the business will be used to consider questions regarding complex products, the costs and liquidity of products, the use of proprietary products, unconventional strategies and microcap securities. Overall, these factors can impact compliance with the operative standards.

Form CSR: ESG products and their offering at the advisory will also be evaluated. Exams believes that RIAs are competing for raising investor demand for these products. Accordingly, the Division will evaluate the offerings in this area and if the products are appropriately labeled.

Investment Advisers and Companies

>RIA: Exam’s approach to RIAs will continue to be its manner of operation as in past years. The Division will analyze current market factors, the firm’s operations and its compliance program in the context of its on-going business. Fees and expenses, and the way in which the firm tries to maximize revenue and profit ,will also be considered. A key focus will be firm’s that have not been previously examined.

ICs, Mutual Funds and ETFs: These are traditional areas of focus for Exams. The Division will thus evaluate compliance programs, governance practices, disclosures and the accuracy of reporting to the Commission. The Division will also evaluate the Board process, the fees charged and the method used to evaluate them as well as the impact of a weaker performance on fees.

>Overview: Overall the Division of Examinations, when executing its 2023 Exam Program, will build on its traditional approach in conducting its program. The Division will build on that approach by adding current business factors and evaluating the manner in which new rules are adopted and implemented to assess the operations of the business and its delivery of services to investors.

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