Investment Advisers

Advisory Performance Fee Rule Limit Adjusted by the SEC

Published on: July 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued an order raising the threshold for determining whether an investment adviser can charge performance fees to clients. The increase is because of inflation. It also executes a Dodd-Frank Wall Street Reform and Consumer Protection Act requirement.

Under the Investment Adviser Act’s Rule 205-3, investment advisers are allowed to charge performance fees if the client meets certain criteria. Two tests with dollar amount threshold are among these requirements.

Per the SEC order, an investment adviser can charge performance fees if it is managing at least $1 million for the client, or if the latter’s net worth is over $2 million. Either test has to have been satisfied at the time that the advisory contract is entered. Prior to this order, since 1998 the thresholds have been $750,000 and $1.5 million, respectively.

Under the Dodd-Frank Act, the Commission was required to set forth an order to take into account inflation by July 21, 2011. The new order will go into effect on September 19, 2011
The SEC has proposed amendments to Rule 205-3, including:
• Using the PCE Index as the inflation index to calculate the inflation adjustment rates to this rule, which would be updated every five years.

• Excluding the value of that person’s main residence and debt that the property securities when determining if someone is a “qualified client”.

• Letting an investment adviser and its clients keep existing performance fee arrangements that were set up when they entered into the advisory contract.

Investment Adviser Fraud
Unfortunately, there are investors who end up losing money because of investment advisor fraud. Our securities fraud lawyers can help you determine whether you have a case.

SEC Issues Order Raising Performance Fee Rule Dollar Limit to Adjust for Inflation, SEC, July 12, 2011
Read the SEC Rule (PDF)

Read the SEC’s Final Rule on this Matter from 1998

Rules Under the Investment Advisers Act of 1940

More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011
Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011 Continue Reading ›

Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds

Published on: July 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Following SEC charges that they used material misrepresentations and omissions to misappropriate about $8.7 million from clients, family, and friends, Sam Otto Folin, Benchmark Asset Managers LLC and Harvest Managers, LLC have agreed to pay $11.6M in disgorgement, civil penalties, and prejudgment interests to settle the securities fraud allegations. By settling, however, they are not denying or admitting any misconduct.

The SEC claims that for about eight years (about ’02 – ’10) even though all three defendants sold securities in the two firms and in Safe Haven Portfolios LLC, with the promise to investors that money would go to private and public companies that possessed goals and intentions that were “socially responsible, part of these funds allegedly were diverted to pay past investors, Folin’s salary, and both firms’ expenses. Harvest and Benchmark also allegedly issued “notes” to friends, and family advisory clients that they said were safe and conservative, while promising guaranteed interest rates that were above market. They then misrepresented the notes’ value on statements.

The SEC also accuses Benchmark and Folin of forming Save Have in 2004 under the guise of offering investments to a number of portfolios. They had clients place their money in Safe Haven From ’06 – ’09. They also allegedly made Save Haven pay more than $1.7M to Harvest and Benchmark as supposed “development” expenses, which weren’t actually expenses related to Safe Haven (and were allegedly improperly amortized) and made the latter issue over $3.9 million in loans to the two investment advisory firms.

SEC Charges Philadelphia-Based Registered Investment Adviser With Fraud, Sec.gov, July 12, 2011
Recent Fraud Cases Show Investors Must Remain Vigilant, Forbes, July 13, 2011

More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011
Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million, Stockbroker Fraud Blog, November 10, 2010
SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients, Stockbroker Fraud Blog, October 15, 2010 Continue Reading ›

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work

Published on: July 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Ex-Texas State Securities Board Denise Voigt Crawford, giving oversight of nearly 12,000 investment advisers to the Financial Industry Regulatory Authority to cut costs is a bad idea and one for which investors will end up paying the price. FINRA is Wall Street’s self-funded regulator. Already charged with overseeing brokers, it is now pushing to take over the U.S. Securities and Exchange Commission’s role as adviser regulator.

Crawford says that having FINRA oversee the industry’s activities doesn’t make sense when FINRA is the industry. She also points out that since the SRO was established in 2007, it hasn’t been successful in protecting investors, while imposing fines that are usually a fraction of the damages they sustained from securities fraud and other misconduct. Last year, FINRA fined members just $43 million while the SEC imposed over $1 billion in penalties.

Also, according to U.S. Securities and Exchange Commission data, investors who received FINRA arbitration awards usually got under half of what they initially sought. In 2010, FINRA ordered that harmed investors get $6 million in restitution, while the SEC ordered that investors recover $1.82 billion. However, through May of this year, FINRA had already ordered that investors who sustained losses get recoup $9.8 million. The SRO believes that it is ideally suited to do the job for a number of reasons, including its technological capabilities and resources and the fact that most advisers are already affiliated with broker-dealers.

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees

Published on: May 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says it will raise the dollar thresholds that would need to be met before an investment adviser can charge a client a performance fee. The monetary thresholds are related to two tests under the 1940 Investment Advisers Act that let investment advisers charge performance-based fees to “qualified clients.”

Under the Act’s Rule 205-3, advisers can charge performance fees in certain circumstances: The investment adviser needs to be managing at least $750,000 for the client or the advisers must reasonably believe that the client’s net worth is over $1.5 million. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd says, “Sharing in performance is dangerous because the advisors can afford to take large risks with ‘other people’s money’ – risks that the investor may not be able to afford. A combined life savings of $750,000 is not a large sum for retirees, and what does it even mean to ‘reasonably believe’ someone has a net worth of $1.5 million?”

The SEC says that now it will issue an order to revise rule 205-3’s dollar amount tests to $1 million for assets under management and $2 million for net worth. It also proposed amendments to the rule, including:

• Excluding the individual’s primary residence when determining net worth.
• Providing a method to figure out future inflation adjustments of the dollar amount tests.
• Modifying the rule’s transition provisions to factor in account performance fee arrangements that were allowed when the client and the adviser entered into their contract.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has until July 21, 2011 to adjust for inflation the dollar amount tests under Rule 205-3 of this year and after every five years from then on. The act has also directed the SEC to adjust under 1933 Securities Act the net worth standard of an “accredited investor” so that it doesn’t include that individual’s primary residence.

Related Web Resources:
SEC Issues Notice of Plan to Adjust Adviser Performance Fee Dollar Thresholds, BNA Securities Law Daily, May 13, 2011
SEC Publishes Notice Regarding Inflation Indexing of Performance Fee Rule, SEC.gov, May 10, 2011
1940 Investment Advisers Act

More Blog Posts:
Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Fraud Blog, January 13, 2011 Continue Reading ›

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams

Published on: April 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission’s Office of Compliance Inspections and Examinations deputy director Norm Champ says that when preparing to be examined, investment advisers should look at recent SEC enforcement actions stemming from problems found during previous exams at other advisers. Champ made this suggestion last month at an American Law Institute-American Bar Association-organized investment adviser conference in New York. Champ says that his views were his own and that he wasn’t speaking for the SEC.

Two cases that he cited as ideal examples were SEC v. Venetis and In re AXA Rosenberg Group LLC. Champ said that three AXA Rosenberg entities ended up paying over $240 million over SEC administrative proceedings because of a key computing error in the Venetis case, which involved a multi-million dollar fraud scam over the sale of bogus promissory notes. Although senior management discovered the mistake, they decided not to tell the SEC. The commission suspected there was a problem when its examiners were prohibited from entering certain rooms.

Champ is suggesting that before an exam, investment advisers should figure out their risk areas and review compliance and control procedures. He says that the SEC chooses which advisers to examine based on complaints, tips, referrals, prior exam history, third party data (including information from regulators), commission filing data, affiliated business activity, firm size, disciplinary history, pay arrangements, and time between exams. Exam teams study the investment adviser’s control environment, engage with senior management, pay attention to interactions within the financial firm, and look at conflicts of interest, valuations, portfolio management, advertising, trade allocations, and custody of assets.

Our stockbroker fraud attorneys are dedicated to helping investors recoup their financial losses caused by investment adviser fraud.

Related Web Resources:
Securities and Exchange Commission

Office of Compliance Inspections and Examinations

More Blog Posts:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011 FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Institutional Investor Securities Blog, December 28, 2010 Continue Reading ›

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress

Published on: April 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Florida’s Office of Financial Regulation’s securities director Frank Widman says Congress should ignore calls for a new SRO to help the Securities and Exchange Commission oversee any investment advisers. Widmann spoke last month at the North American Securities Administrators Association’s public policy conference in DC.

Widmann, who previously served as NASAA president said that rather than set up a new SRO for IA’s, Congress should concentrate on making sure that state regulators and the SEC are fully funded so they are able to do their job. Widmann says that unlike the SEC, the federal regulator, and state securities regulators, SROs aren’t sovereign. Widmann says that giving SROs too much independence has proven problematic in the past.

As our stockbroker fraud law firm reported previously, SEC staff recently put out a report recommending that Congress either set up at least one SRO to oversee investment advisers, impose user fees on industry members to support Office of Compliance Inspections and Examination’s probes, or appoint the Financial Industry Regulatory Authority as the SRO for investment advisers. FINRA is already the SRO for broker-dealers.

Also at the NASAA Conference was SEC Commissioner Luis Aguilar, who said that the federal regulator was in the process of putting into place a system to gather and examine data from money market funds. He says funding limitations at the SEC have impeded the system’s implementation. Aguilar called on the financial services industry to “re-dedicate itself to basic principles,” including those of meaningful disclosure, fair dealing, integrity, and good business practices.

Related Web Resources:
NASAA Official Says Congress Should Ignore Calls to Create New SRO, BNA Securities Law Daily, March 29, 2011

Speech by SEC Commissioner Luis Aguilar, SEC, March 28, 2011
North American Securities Administrators Association

More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
SEC Staff Wants an SRO to Oversee Investment Advisers, Stockbroker Fraud Blog, January 31, 2011 Continue Reading ›

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO

Published on: April 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority CEO and Chairman Richard Ketchum says that if the SRO is chosen to regulate investment advisers, it will tailor its oversight to that industry. At a compliance conference run by the Financial Market Association and the Securities Industry last month, Ketchum said that advisers’ concerns that FINRA would not comprehend the IA model are “simply wrong.”

FINRA oversees some 4,560 brokerage firms. Ketchum says that the SRO would set up a separate affiliate that would supervise investment advisers, who would not be subject to the same rules as broker-dealers. He stressed the needs for more examinations to discourage securities fraud and check on compliance as two of the reasons why FINRA should become the regulatory agency over investment advisers.

Per a Securities and Exchange Commission study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency’s Office of Compliance Inspections and Examinations only examines about 9% of the investment adviser industry each year. On average, an adviser is examined by the SEC once every 11 years. The study offered recommendations:

• The creation of a new SRO for investment advisers
• Giving FINRA jurisdiction over investment advisers • Using user fees to fund the SEC’s exam program

Many investment advisers do not want FINRA to become their SRO and are pushing for lawmakers to increase SEC funding. Also opposing FINRA as the advisers’ SRO is the Investment Adviser Association, which alleges lack of accountability, transparency, and a bias toward the broker-dealer model.

Our investment fraud lawyers represent clients that have suffered financial losses because of investment adviser misconduct.

Related Web Resources:
FINRA: We Understand Investment Advisers, OnWallStreet, March 27, 2011
FINRA, if Empowered to Regulate Advisers, Will Tailor Oversight to Industry, Chair Says, BNA Broker/Dealer Compliance Report, March 30, 2011
FINRA

More Blog Posts:
SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011
SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court, Stockbroker Fraud Blog, March 7, 2011
FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Stockbroker Fraud Blog, September 19, 2010
FINRA CEO Ketchum’s Speech, FINRA, March 22, 2011 Continue Reading ›

SEC Staff Wants an SRO to Oversee Investment Advisers

Published on: January 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the members of the Securities and Exchange Commission’s Division of Investment Management recommended that Congress either set up at least one self-regulatory organization that oversees investment advisers, impose “user fees” to fund examinations by the Office of Compliance Inspections and Examinations, or make investment adviser oversight the Financial Industry Regulatory Authority’s responsibility. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 914, the SEC is supposed to assess itself and make recommendations for improvement.

Per the SEC’s report, there is at this time inadequate resources for examining the over 11,000 registered investment advisers-a number that will likely go down by 3,350 in July when Dodd Frank’s Section 410 goes into effect and advisers with assets under management valued at $100 million or less will have to register with the state where their main place of business is located. That said, the growth in the industry is such that by fiscal year 2021 there may be up to 13,908 registered advisors with a collective worth greater than $70 trillion.

However, while industry groups will likely endorse a more influential FINRA or a new SRO, investment advisers believe that self-regulation’s rules-based nature is not compatible with their business model and government oversight and regulation would be better for them. FINRA believes that an SRO will be able to “augment” government oversight. In the past, FINRA has expressed willingness to take on this role.

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers

Published on: January 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has adopted amendments to delay the expiration date of Rule 206(3)-3T under the 1940 Investment Advisers Act. The temporary rule, which was supposed to expire on December 31, 2010, will now stay in effect until December 31, 2012.

Rule 206(3)-3T gives investment advisers that are also broker-dealers who are registered with the SEC another way to satisfy the Advisers Act’s Section 206(3) requirements when they work in a principal capacity with certain advisory clients. Section 206(3) does not allow investment advisers to effect or take part in a transaction for a client while acting either as broker for a person besides the client or as principal for its own account unless the client has been informed of the role that the adviser is playing and has given his or her consent. The SEC says it is completing its study on broker-dealers and investment advisers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate, and it will deliver the report to Congress by January 21.

Under Rule 206(3)-3T, an adviser is allowed to comply with Section 206(3) of the Advisers Act by, among other things:

• Providing written prospective disclosure about principal trade conflicts.
• Getting revocable written consent from the client that prospectively gives the adviser the authority to enter into principal transactions.
• Making certain written or oral disclosures and getting the client’s consent prior to each principal transaction.
• Sending the client confirmation statements that disclose that the adviser notified the client that it could act in a principal capacity and it has the client’s consent.
• Giving the client an annual report that itemizes the principal transactions.

Related Web Resources:

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions, Stockbroker Fraud Blog, December 9, 2010

Financial Services Institute Wants FINRA to Serve as SRO for RIAs

Published on: January 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Services Institute wants the Financial Industry Regulatory Authority to be the main watchdog over registered investment advisers. FSI, which represents 126 broker-dealers’ interests, endorsed FINRA in a letter to the Securities and Exchange Commission. Many of the broker-dealers that FSI represents are also RIAs.

FSI believes that not only has FINRA shown the ability to “equitably” distribute enforcement, examination, technology, and surveillance resources, but also, that the latter is knowledgeable about “the overlapping nature” of the services and financial products that both investment advisers and broker-dealers may offer. Coordinated Capital Securities, Inc. and 2010 FSI chair and president Mari Buechner believes that having a regulatory structure that puts the same emphasis on examining broker-dealers, investment advisers, and their affiliated financial advisers will improve investor protection.

Currently, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is analyzing the need for improved oversight of investment advisers. Already, FINRA closely scrutinizes broker-dealers, while the SEC has acknowledged that insufficient resources prevents it from regularly inspecting over 11,000 registered advisers.