IN THIS ISSUE:

SEC Releases Update to 2018 Agenda of Regulatory Priorities

The SEC Enforcement Division’s Initiatives Regarding Retail Investor Protection and Cybersecurity

ENFORCEMENT ACTIONS: F-Squared Investment, Inc.’s AlphaSector Strategy– the Importance of Sub-Adviser Due Diligence

Cryptocurrencies and Initial Coin Offerings: A Public Statement by Chairman SEC Chairman Jay Clayton

SEC Releases Update to 2018 Agenda of Regulatory Priorities

The SEC released its updated Agency Rule List for fall 2017. The updated Agency Rule List provides the SEC’s regulatory priorities for 2018 and beyond. The Agency Rule List is broken down into three categories: (i) Proposed Rule Stage; (ii) Final Rule Stage; and (iii) Long-Term Actions. Following are items of note to advisers from the updated Agency Rule List.

Personalized Investment Advice Standard of Conduct, i.e. the fiduciary rule, now appears in the Proposed Rule Stage List, when previously this had been included in the Long-Term Actions List. This appears to evidence the intent of the SEC to move forward soon with issuance of a fiduciary rule applicable to investment advisers and broker/dealers.

Amendments to the marketing rules under the Advisers Act have been added to the Long-Term Actions List. This agenda item is described as follows: “The Division is considering recommending that the Commission propose amendments to rule 206(4)-1 and 206(4)-3 under the Investment Advisers Act of 1940 to enhance marketing communications and practices by investment advisers.”

Expansion of the definition of accredited investor has been added to the Long-Term Actions List. This agenda item is described as follows: “The Division is considering recommending that the Commission propose amendments to expand the definition of accredited investor under Regulation D of the Securities Act of 1933.”

The rulemaking regarding adviser business continuity plans and transition plans, as well as third-party examinations, have been removed from the Regulatory Priorities Agenda.

See the agenda listings here.

The SEC Enforcement Division’s Initiatives Regarding Retail Investor Protection and Cybersecurity

Speech by Stephanie Avakian, Co-Director, Division of Enforcement • Read the Transcript here.

On October 26, 2017 Stephanie Avakian, co-director, SEC Division of Enforcement delivered a speech to the Securities Enforcement Forum regarding the Enforcement Division’s initiatives targeting retail investor protection and cybersecurity. In this speech Avakian detailed the recently created Retail Strategy Task Force (RSTF) and Cyber Unit.

Avakian provided the RSTF will not have a dedicated staff and will not generally be responsible for conducting investigations. The RTSF will develop ideas and strategies and apply and analyze the results of those ideas to identify problem areas. Regarding issues of misconduct involving retail investors, identified misconduct includes charging inadequately disclosed fees and recommending and trading in wholly unsuitable strategies and products. Avakian provides additional examples of identified problems.

• Abuses in wrap-fee accounts, including failing to disclose the additional costs of “trading away” or trading through unaffiliated brokers, and purchasing alternative products that generate an additional fee.
• Investors buying and holding products such as inverse ETFs for long-term investment. These can be highly volatile products generally intended as a hedge against exposure to downward moving markets, and that face a long-term risk of losing their principal. The SEC is increasingly seeing retail investors holding these products long-term, including in retirement accounts.
• Problems in the sale of structured products to retail investors, including a failure to fully and clearly disclose fees, mark-ups and other factors that can negatively affect returns.

In regards to the Cyber Unit the SEC determined to aggregate the experience and focus relating to cybersecurity issues in a single unit. Avakian described the various areas where the SEC Division of Enforcement sees the potential for enforcement in cyber-related misconduct. One area relates to cases where cyber-related misconduct is used to gain some sort of unlawful market advantage. Another area of enforcement interest includes cases involving failure by registered entities to take appropriate steps to safeguard information or ensure system integrity. 

ENFORCEMENT ACTIONS:
F-Squared Investment, Inc.’s AlphaSector Strategy – the Importance of Sub-Adviser Due Diligence

On December 8, 2017, two settled administrative proceedings were published by the SEC Division of Enforcement relating to F-Squared Investments, Inc.’s materially inflated hypothetical and back-tested performance track record for its AlphaSector strategy. The two settled proceedings are (i) In the Matter of Horter Investment Management, LLC and (ii) In the Matter of Ameriprise Financial Services, Inc. (Advisers). The Advisers distributed to their clients the materially inflated/incorrect data and materials received from F-Squared Investments related to the AlphaSector strategy. In so doing the Advisers violated Section 206(2) of the Advisers Act, which prohibits any investment adviser from engaging in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client. In addition, the Advisers violated Section 206(4) and Rule 206(4)-1(a)(5) under the Advisers Act by circulating and publishing advertisements that contain untrue statements of material fact or were otherwise false or misleading. Furthermore, the Advisers violated Section 206(4) and Rule 206(4)-7 under the Advisers Act by failing to adopt and implement written policies and procedures reasonable designed to prevent violations of the Advisers Act.

The settled administrative proceedings highlight the responsibilities of investment advisers when utilizing third-party managers/sub-advisers. Investment advisers must ensure they have the proper policies, procedures and personnel in place to execute initial and ongoing due diligence and monitoring of utilized third-party managers/sub-advisers. In settlement of its proceeding Horter agreed to pay disgorgement of $482,595, prejudgment interest of $46,209 and a civil money penalty in the amount of $250,000. In settlement of its proceeding Ameriprise agreed to pay disgorgement of $6.3 million, prejudgment interest of $700,000 and a civil monetary penalty in the amount of $1.75 million.

PDF: In the Matter of Horter Investment Management, LLC
PDF: In the Matter of Ameriprise Financial Services, Inc.

Cryptocurrencies and Initial Coin Offerings: Public Statement by Chairman SEC Chairman Jay Clayton

On December 11, 2017, SEC Chairman Jay Clayton issued a public statement regarding cryptocurrencies and initial coin offerings. Chairman Clayton’s statement provides his general views on the cryptocurrency and ICO markets and is directed primarily to “Main Street” investors and “Market Professionals.”

Market Professionals are instructed to read closely previous SEC reports and enforcement actions regarding the status of tokens as securities. Tokens and offerings that incorporate features and marketing efforts that encompass the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under United States law. Chairman Clayton provides where the application of expertise and judgment is expected, he believes gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities.

Read the full statement here.

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