SEC Continues to Focus on Investment Advisers

The retail investor focus of the Commission’s Enforcement Program is generating increasing numbers of actions involving investment advisers. While the number of these actions was increasing prior to the time Chairman Clayton assumed office, the trend in not only continuing but appears to be increasing. Two recent actions involving investment advisers are:

In the Matter of Cushing Asset Management, L.P., Adm. Proc. File No. 3-18767 (Sept. 14, 218) which names as a Respondent the firm, a registered investment adviser since June 2004. The adviser has about $3.5 billion in assets under management.

In late December 2012 the adviser decided to sell 1,565,786 units of a master limited partnership (the “Securities”) on behalf of a hedge fund client on December 20, 2012. On that date the units, which were thinly traded, would become unrestricted. The adviser also determined that on the sale date it would purchase the same number of unrestricted units for closed and open ended funds it advised (collectively “Registered Funds”).

To avoid the prospect of a prohibited cross-trade the adviser consulted legal counsel. Counsel, in privileged advise, advised Respondent. Instructions were then given to the traders orally. The traders did not seek clarification of the instructions. They also failed to follow the instructions in material respects.

Subsequently, on December 20, 2018 the adviser placed a sell order for the Securities. The order was placed with Broker A. At about the same time the adviser placed a buy order with Broker B for the same number of units of the Securities. Broker B was instructed to allocate the units to the Registered Funds. The buy order was executed almost instantaneously for a total of $33.5 million. Since the Securities still had restrictive legends, the transaction took over a week to clear. The clients incurred brokerage fees of about $125,000. The trade represented over 40% of the trading volume for the Securities that day. As a result the adviser caused the hedge fund to sell securities to the Registered Funds in violation of section 17(a)(1) of the Investment Company Act. That section prohibits an affiliated person of a registered investment company from selling any security to such a registered firm unless an exemption has been granted by the Commission.

To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the section cited in the Order. Respondent will also pay a penalty of $100,000.

In the Matter of Capital Analysts, LLC, Adm. Proc. File No. 3-18765 (Sept. 14, 2018). The firm has been a registered investment adviser since 2012. It has approximately $4.75 billion in assets under management in a wholly-owned subsidiary of Lincoln Investment Capital Holdings, LLC.

The adviser breached its obligations in two key respects during the period:

  • First, from April 2013 through March 2016, the adviser purchased mutual fund shares with 12b-1 fees rather than the lower cost shares available. At the time its affiliated broker dealer received fees based on the transactions. The adviser failed to adequately disclose the conflict of interest in its Form ADV and to obtain best execution.
  • Second, from April 2013 through March 2017 the firm failed to disclose that it obtained compensation from a third-party broker and the related conflicts. The broker shared with the adviser fees it was paid on the transactions related to clearing. Those fees totaled $691,125.

Finally, the firm failed to adopt and implement written compliance polices and procedures reasonably designed to prevent violations of the Advisers Act. The Order alleges violations of Advisers Act sections 206(2), 206(4) and 207.

In determining to accept the offer of Respondent the Commission considered the adviser’s remedial acts.

To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. Respondent will pay disgorgement of $936,181 and prejudgment interest of $113,692. This is tied to the 12b-1 fees. This amount shall be deposited into a distribution fund. In addition, Respondent shall pay disgorgement of $691,125 along with prejudgment interest of $79,351 and a penalty of $300,000.

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