by T. GormanPosted on Posted in SECActions

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).

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by T. GormanPosted on Posted in SECActions

The question of whether and how to disclose the payment of 12b-1 and similar fees in connection with the acquisition of mutual fund shares has been at the center of a number of Commission actions. It was the central question in the Share Class Selection Initiative which focused on disclosure failures tied to 12b-1 fees. That program was one of the most successful cooperation initiatives conducted by the Division of Enforcement. Additional cases have been brought and resolved on the question. Advisers continue to be named in actions. The most recent of these cases is In the Matter of Oxbow Advisors, LLC, Adm. Proc. File No. 3-19817 (May 29, 2020).

Oxbow is a Commission registered investment adviser. At various points in time, beginning in January 2014 and continuing through 2019, the firm failed to properly disclose the 12b-1 fees. Oxbow advised clients to hold mutual fund share classes that charged 12b-1 fees despite the fact that lower-cost share classes of the same funds were available – many funds will permit clients to exchange shares that carried the fees without charge.

At the beginning of the period, Oxbow disclosed in Form ADV Part 2A, Item 12 that a registered representative of an affiliated broker dealer “may . . . receive a portion of the distribution and Rule 12b-1 fees from the issuers of a limited number of mutual funds . . .” More recently, in March 2017 Oxbow amended its brochure to add disclosure stating that its investment adviser representatives of an affiliated broker-dealer might receive distribution fees and 12b-1 fees which “may create a conflict of interest by giving the Oxbow Supervised Person an incentive to recommend investment or insurance products based on compensation received by the Supervised Person, rather than on the client’s needs.”

The disclosure made by Oxbow is inadequate, the Commission concluded. As an investment adviser, Oxbow owed its clients full and fair disclosure. Here the disclosure made did not provide sufficient detail on the conflict. In addition, the firm failed to maintain policies and procedures to properly implement its disclosure obligations. The firm’s failures violated Advisers Act Sections 206(2) and 206(4).

To resolve the proceedings Respondent agreed to comply with certain undertakings tied to the compliance issues, to the entry of a cease and desist order based on the sections cited in the order and to a censure. The firm also agreed to pay disgorgement in the amount of $200,000, prejudgment interest of $31,958.25 and a penalty of $90,000.

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