The following brief updates exemplify trends and areas of current focus of relevant regulatory authorities: 

SEC Investigation of Distribution Payments Leads to Enforcement Action 

On September 2, 2014, the SEC filed an order instituting administrative proceedings against The Robare Group (“Robare”), a Houston-based investment advisory firm, on the basis of allegations that Robare violated Sections 206(1) and 206(2) under the Advisers Act by recommending investments in particular mutual funds to clients without disclosing a material conflict of interest with respect to those funds. According to the order, Robare entered into an agreement with a brokerage firm that paid Robare a percentage of all assets invested by Robare’s clients in certain unaffiliated mutual funds offered on the broker’s platform (the “Funds”). The order alleges that Robare failed to disclose its compensation arrangement with respect to the Funds in its Form ADV for the period from 2005 until 2011. The order further alleges that, although Robare began disclosing the existence of the agreement in its Form ADV beginning in December 2011, and continued to make revisions to its disclosures in subsequent years, the disclosures falsely stated that Robare did not receive any economic benefit from a non-client as a result of its investment advice. In its press release, the SEC stated that this action is part of a recent enforcement initiative by its Asset Management Unit focused on undisclosed compensation arrangements between brokers and investment advisers. 

Money Market Fund Reform Compliance Dates

As discussed in our previous Alert, on July 23, 2014, the SEC adopted significant new reforms for money market funds (the “Final Rule”). The Final Rule was published in the Federal Register on August 14, 2014, with an effective date of October 14, 2014. The publication of the Final Rule triggers the following compliance dates: July 14, 2015, for new Form N–CSR; April 14, 2016, for the diversification, stress testing, disclosure, Form PF, Form N–MFP, and clarifying amendments; and October 14, 2016, for amendments related to floating NAV and liquidity fees and gates.

SEC Proposes Extension of Temporary Rule Regarding Principal Trades with Certain Advisory Clients

The SEC has issued a proposed rule that would extend the sunset date for temporary rule 206(3)-3T under the Advisers Act from December 31, 2014, to December 31, 2016. Rule 206(3)-3T permits investment advisers that are dually registered as broker-dealers to engage in principal transactions with certain of their advisory clients, provided that various conditions set forth in the Rule are met. Rule 206(3)-3T became necessary to continue to permit broker-dealers to sell certain securities held in the proprietary accounts of the broker-dealer firms to their advisory clients following Financial Planning Association v. SEC, a 2007 decision of the United States Court of Appeals for the D.C. Circuit that vacated Rule 202(a)(11)-1 under the Advisers Act. Under Rule 202(a)(11)-1, fee-based brokerage accounts were not considered to be advisory accounts and thus were not subject to Advisers Act rules, including Section 206(3) restrictions on principal trading.