Selected Enforcement Actions
SEC obtains settlement in first cherry-picking enforcement action brought under data initiative. The SEC has settled with an investment adviser and its principal in an administrative proceeding in which the SEC alleged the respondents engaged in a fraudulent “cherry-picking” scheme by disproportionately allocating appreciating trades to their own accounts while passing depreciating trades on to the accounts of their advisory clients. The SECfirst brought charges against the investment adviser and its principal in June 2015, in the first case employing the SEC’s data-driven initiative to detect cherry-picking schemes by conducting a statistical analysis of the respondents’ trades to determine if their profitability could be explained by coincidence or luck. Without admitting or denying the SEC’s charges, the respondents agreed to the entry of cease and desist orders and to pay US$418,141 in disgorgement, US$50,918.60 in prejudgment interest, and a US$300,000 civil penalty. The investment adviser’s principal also agreed to a censure order and associational bar. (10/16/2016) In the Matter of Welhouse & Associates, Inc., and Mark P. Welhouse, SEC Release No. 34-76175.
SEC pursues principals of investment adviser for failing to supervise its chief compliance officer. The SEC instituted settled administrative proceedings against the former principals of an investment adviser for violations of custody and compliance rules under the Investment Advisers Act stemming from their failure to supervise the adviser’s chief compliance officer (CCO). According to the SEC’s order, the co-owners of Professional Investment Management, Inc. (PIM), who also served as the former President and Vice President, appointed a long time employee as CCO of PIM. The CCO in turn misappropriated over US$840,000 in client assets, failed to perform annual compliance reviews from 2007 to 2013, failed to require PIM’s accountant to file Form ADV-E in connection with required surprise examinations, failed to cooperate with independent accountants in conducting surprise examinations, and failed to engage an accountant to conduct a surprise examination of PIM at all in 2012. The SEC found that PIM’s co-owners failed to provide the CCO with appropriate training and resources, failed to establish policies and procedures to prevent the misappropriation of client assets, failed to ensure that the CCO performed annual compliance reviews, and failed to ensure that the CCO facilitated the required annual surprise examinations of PIM. Without admitting or denying the allegations, PIM’s co-owners agreed to the entry of cease and desist orders, associational bars, and payment of civil monetary penalties in the amount of US$125,000 and US$75,000. (10/13/2015) In the Matter of James T. Budden and Alexander W. Budden, SEC Release No. IA-4225.
CEO settles with SEC over materially misstated periodic reports. The SEC reached a settlement with the chief executive officer of SecureAlert, Inc., in an administrative proceeding alleging that the CEO and SecureAlert violated the Securities Act and the Securities Exchange Act by filing materially misstated periodic reports with the SEC. Without admitting or denying the allegations, the CEO settled the charges by agreeing to the entry of a cease and desist order, an officer and director bar, and the payment of a US$232,500 civil penalty. (10/9/2015)In the Matter of David G. Derrick, Sr., SEC Release No. 33-9960.
Statements and Speeches
SEC investor advocate argues that securities regulators should reject NYSE’s proposal that would ease rules for smaller public companies. Reuters reportedthat Rick Fleming, the SEC’s investor advocate, is trying to get securities regulators to reject a proposal by the New York Stock Exchange (NYSE) that would allow smaller public companies to issue more shares to insiders without the approval of stockholder. Fleming commented that the NYSE plan would allow certain small companies to sidestep shareholder approval before issuing shares of less than 20 percent of their outstanding common stock to corporate insiders. Under the NYSE’s plan, instead of a shareholder vote, those deals would be reviewed by corporate audit committees. (10/16/2015) Fleming statement.
White discusses private fund risks. SEC Chair Mary Jo White delivered a speech explaining how the mandatory registration and disclosure requirements for private funds under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has provided the SEC with important data regarding the risks associated with private funds, both firm-specific risks and risks to the broader financial system. White noted that the emphasis on systemic risk by financial regulators, such as in the case of the Volcker Rule, has profoundly impacted the operation of private funds. White outlined measures taken by the SEC to assist funds in addressing operational risks, such as those associated with transitioning client accounts, cybersecurity, and market stress. (10/16/2015) White remarks.
White reports status of SEC’s investigation of ETPs’ impact on August market volatility. In her opening remarks at the Investor Advisory Committee meeting, SEC Chair Mary Jo White provided an update regarding the SEC’s analysis of exchange-traded products (ETPs) and their relation to the market volatility experienced on August 24, 2015. White indicated that the Commission is considering whether the operation of the limit-up limit-down mechanism requires adjustment before approving its use on a permanent basis and is reviewing comments regarding pricing issues in the listing and trading of ETPs.
(10/15/2015) White remarks.
Aguilar advises Investor Advisory Committee to examine ETFs. SEC Commissioner Luis A. Aguilar issued a statement to the Investor Advisory Committee outlining the questions he hopes it will consider as part of its examination of exchange-traded funds (ETFs). Among other things, Aguilar requested that the committee consider the conditions under which trading in ETFs should be halted, revisions to limit-up limit-down rules, the possibility of incentives for liquidity providers for ETFs, and alternative pricing methods for less-liquid ETFs. (10/15/2015) Aguilar remarks.
Aguilar addresses directors regarding the importance of corporate governance. In remarks delivered to the 12th Annual Boardroom Summit and Peer Exchange in New York, SEC Commissioner Luis A. Aguilar highlighted three important areas of corporate governance: effective engagement with shareholders, crisis and risk management as an element of company resiliency, and maintaining the relevancy of the board during changing times. Aguilar sought to reassure directors that they would not become the targets of SEC enforcement actions as long as they carry out their duties conscientiously. (10/14/2015) Aguilar remarks.
SEC Chief of Staff offers guidance to compliance professionals. In an address to the NRS 30th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference, SEC Chief of Staff Andrew J. Donohue outlined the SEC’s approach to promoting compliance and conducting compliance examinations. Donohue emphasized that the SEC will only pursue enforcement actions against compliance professionals in cases where their actions clearly call for sanction. (10/14/2015)Donahue remarks.
SEC issues private fund statistics report. The SEC Division of Investment Management’s Risk and Examinations Office made publicly available a report of private fund statistics from the fourth quarter of 2014, which was derived from data submitted by private fund advisers through Form ADV and Form PF. (10/16/2015) SEC press release.