Not long after we released our recent alert titled SEC Continues Focus on Conflicts Disclosures in Enforcement Actions Totaling $106 Million in Fines and Disgorgement, the SEC entered into another consent order (the “Order”) with an internet-based registered investment adviser (“Robo Adviser”) that sanctioned the adviser for failing to provide full and fair disclosure regarding conflicts of interest relating to proprietary products, and for failing to consider tax consequences associated with trades made within an automated advisory program.[i] This Order serves as another example of the SEC’s continuing focus on the importance of firms identifying, and then accurately disclosing, actual or potential conflicts of interest and how those conflicts could impact clients.
The Investment Advisers Act of 1940, as amended (the “Advisers Act”), generally prohibits SEC‑registered investment advisers (“RIAs”) from entering into an advisory contract that charges a performance fee to a client who is not a “qualified client” under Rule 205-3(d)(1) under the Advisers Act. Effective Monday, August 16, 2021 (the “Effective Date”), an inflation adjustment has raised two of the thresholds for determining whether a client is a “qualified client” by $100,000.
The SEC recently entered into four consent orders (collectively, the “Orders” and each, an “Order”) with registered investment advisers (“RIAs” and each, an “RIA”) that sanctioned the RIAs for failures to provide full and fair disclosure regarding conflicts of interest. Notably, the Orders highlight the RIAs’ various efforts to correct disclosure issues, and the SEC’s ultimate position that each additional disclosure was still inadequate. These Orders again demonstrate the SEC’s continuing focus on ensuring firms provide full and fair disclosure of conflicts of interest, and the difficulty for practitioners in pegging what the SEC will deem a complete and accurate disclosure.
On June 23, 2021, the U.S. Securities and Exchange Commission (the “Commission”) entered an administrative order (the “Order”) that, among other things, fined a broker-dealer (“BD”) $208,912 for alleged violations of Rule 21F-17(a), which relates to individuals reporting possible securities laws violations to the Commission (a.k.a., whistleblowers).
Practice Tip: While the Order was entered against a broker-dealer, Rule 21F-17(a) applies to all entities subject to the Commission’s jurisdiction (e.g., public companies, broker-dealers, and investment managers). Indeed, the Commission has previously sanctioned public companies and investment advisers for violations of Rule 21F-17(a).
Read more here for both a summary of the Order’s findings, and take-aways for legal and compliance practitioners who support firms that are subject to the Commission’s jurisdiction.
In recent weeks, we have observed significant new developments in securities regulation related to two enforcement actions by the Commission and an unexpected (and, to our knowledge, unprecedented) new rule adopted by a state securities regulator. First, the Commission has published enforcement actions against registered investment advisers (“RIAs”), involving: (a) failure to make conflicts-related disclosures about payment of forgivable recruitment loans/bonuses; and (b) failure to comply with Rule 206(4)-3 (the “Solicitation Rule”) when using social media influencers acting as referral sources. Second, the Tennessee Securities Division has fundamentally changed the process for issuers and broker-dealers attempting to shield themselves from civil liability arising from unregistered, non-exempt securities offerings through rescission offers.