United States: A Compilation Of Enforcement And Non-Enforcement Actions - 29 August 2014


  • SEC Proposes Extension of Principal Trade Rule for Registered Advisers/Broker-Dealers
  • Use of Form PF Data Described by SEC
  • Persons Registered as Municipal Advisers Face SEC Examination Program
  • "Pay-to-Play" for Investment Advisers: The SEC's First Prosecution
  • Improving Prospectus Disclosure
  • Alternative Investment Strategies


  • Another Conflict of Interest Enforcement Action Taken by the SEC Against a Registered Adviser


SEC Proposes Extension of Principal Trade Rule for Registered Advisers/Broker-Dealers

The SEC has proposed extending to December 31, 2016, the sunset date for the expiration of Rule 206(3)-3T (the "Rule") under the Investment Advisers Act of 1940 (the "Advisers Act"). The Rule allows SEC-registered investment advisers who are also SEC-registered broker-dealers to sell securities on a principal basis to their clients without violating the "anti-fraud" provisions under the Advisers Act.

The Rule was first enacted under the Advisers Act by the SEC in 2007, and extended in each of 2009, 2010 and 2012. The Rule permits principal trading with clients by such registrants without having to obtain, in advance, the client's consent to each transaction. An advance client consent is otherwise required under the rules of the Advisers Act. The SEC believes that, absent the Rule, such advisers would place their clients in a position where they would not be able to have full access to possible investment opportunities. Without the Rule, such advisers would also have to implement substantial policies and procedures in order to comply with the client consent per transaction requirement.

The SEC is now asking the public to comment generally on the proposed Rule extension and specifically to consider, among other things, whether the two-year extension is sufficient, whether the Rule should be extended at all, and, if not extended, what regulatory relief, if any, should be provided for advisers who are also registered as broker-dealers from the client consent requirement.

The consensus among SEC observers is that the public comment period will end with little opposition to the proposal to extend the Rule for another two-year period. The SEC is likely to extend the Rule as it currently provides but, in the meantime, continue with its ongoing "bigger-picture" review, as required under Section 913 of the Dodd-Frank Act, to conduct a study and provide a report to Congress concerning the obligations of broker-dealers and investment advisers. It is likely that the SEC's subsequent report to Congress will include the application of the Rule and how it should fit within the overall regulatory scheme.

Use of Form PF Data Described by SEC

Registered investment advisers who manage private funds with at least $150 million in regulatory assets are required to file Form PF with the SEC on a periodic basis. Information obtained on the Form PF is designed to provide the SEC and the public a fair idea of the systematic risks taken on by the adviser through its management of the private funds. Private funds are those funds managed by the adviser that rely on certain exceptions to the definition of an investment company in order to avoid registration under that act. So what does the SEC do with the information it receives on the filed Form PFs?

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC in its second annual report to Congress reported on its use of the data obtained from the filed Form PFs. The report describes the SEC's Office of Compliance Inspections and Examinations' ("OCIE") use of the data in its examinations of the advisers who submit the filed report. The staff reportedly reviews the filed Form PFs before it goes on an examination of the private fund adviser, looking for inconsistencies among the filed Form PF, the adviser's Form ADV and actual business practices. In addition, the SEC reports that its Enforcement Division Asset Management Unit uses the information collected on Form PFs to conduct its Aberrational Performance Inquiry ("API"). The API program provides the SEC the ability to identify private fund performance that is outside of the norm and becomes a focus of possible enforcement action. Already, the information collected from the API program has led to several recent enforcement actions against advisers who manage private funds.

Persons Registered as Municipal Advisers Face SEC Examination Program

The SEC recently announced that its Office of Compliance Inspections and Examinations ("OCIE") will shortly commence an examination program of registered municipal advisers. The examination program will be phased in over the next few years. The focus of the examinations will be certain risk areas, including the municipal adviser's compliance with its fiduciary duty to clients, maintenance of the required books and records and overall fair dealing with clients. Because the regulatory scheme for municipal advisers is new and most of the regulations governing same are still in the development phase, the OCIE staff will use the examination program, in part, to assist registrants on getting up-to-speed on the regulatory requirements.

Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required those persons who are municipal advisers, unless exempt, to register as municipal advisers with the SEC and the Municipal Securities Rulemaking Board ("MSRB"). Registration phase in of municipal advisers commenced July 1 and is to be concluded by October 31, 2014.

The OCIE's examination program will reportedly be conducted in phases; engagement of the registrants (currently taking place), the examination program, and informing registrants of SEC policy. An annual outreach program will be conducted by the SEC to provide registrants with an overview of best practices compliance programs to address the regulatory requirements for municipal advisers. It is expected that the Financial Industrial Regulatory Authority (FINRA) will examine those registered municipal advisers who are also registered broker-dealers and members of FINRA. The SEC will examine those municipal advisers that are not members of FINRA.

Part of the difficulty for newly registered municipal advisers is that many of them have not been part of an SEC examination program in the past and that the regulations have not been finalized and in some cases, not even in the proposal stage. The MSRB's proposed Rule G-42 to establish core duties including the adviser's fiduciary obligations to its clients, is currently out for public comment (ended August 25, 2014).

What will be necessary for the SEC while conducting its examination program is to provide patience with a largely new regulatory class that will not have a final set of regulations starting out.

"Pay-to-Play" for Investment Advisers: The SEC's First Prosecution

On June 20, 2014, the Securities and Exchange Commission ("SEC") brought and settled its first case under the "pay-to-play" rules for investment advisers. The SEC charged TL Ventures Inc. with violating the "pay-to-play" rules by continuing to receive advisory fees from the pension plans of the city of Philadelphia and state of Pennsylvania after a covered associate made campaign contributions to a candidate for mayor of Philadelphia and the governor of Pennsylvania. TL Ventures Inc. agreed to settle the charges by paying nearly $300,000 in disgorgement, prejudgment interest and civil money penalties. TL Ventures Inc. received illicit advisory fees from two public pension funds: (i) Pennsylvania's state retirement system and (ii) Philadelphia's pension plan, both, within two years of making the disqualifying contributions. The continuing relationship violated "pay-to-play" rules because the mayor of Philadelphia appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Similarly, the governor of Pennsylvania appoints six of the eleven-member board of Pennsylvania's state retirement system. Thus, both the mayor and governor, who received campaign contributions from a covered associate of TL Ventures Inc., could influence the hiring of investment advisers for each pension plan.

On July 1, 2010, the SEC adopted Rule 206(4)-5 (the "Rule"), promulgated under Section 206(4) of the Investment Advisers Act of 1940. The Rule addresses "pay-to-play" violations involving campaign contributions made by advisers or their covered associates to government officials who have the ability to influence the selection of registered investment advisers who in turn manage government assets. The Rule does not require a showing of quid pro quo or actual intent to influence elected officials or candidates and prohibits an investment adviser from (i) providing advisory services for compensation to a government client for two years after the adviser or covered associate makes a contribution to certain elected officials or candidates who would have influence over an entity that hires the investment adviser; (ii) providing direct or indirect payments to any third party that solicits government entities for advisory services unless the third party itself is a registered broker-dealer or investment adviser subject to "pay-to-play" restrictions; and (iii) soliciting or coordinating contributions to political parties where the adviser is providing or seeking to provide advisory services to government entities controlled by the individual to whom the adviser directed the contribution.

As stated above, the Rule covers contributions made by either the investment adviser or any covered associate. Under the Rule, covered associates are deemed to be officers and employees of the adviser who have a direct economic stake in the adviser's relationship with the government client. Covered associates are defined to include, among others: (i) any general partner, managing member or executive officer; (ii) any employee who solicits a government entity for the investment adviser; and (iii) any political action committee controlled by the investment adviser or by any of its covered associates. Furthermore, executive officers include: (i) the president; (ii) any vice president in charge of a principal business unit, division or function; (iii) any other officer of the investment adviser who performs a policy-making function; or (iv) any other person who performs similar policy-making functions for the investment adviser.

Improving Prospectus Disclosure

The staff of the SEC's Division of Investment Management issued guidance urging mutual funds to be more succinct, avoid technical language and use plain English in the Summary Section of fund prospectuses.

In its guidance, the staff observed that, although disclosure by funds is often clear and concise, a significant number of Summary Sections remain "complex, technical, and duplicative." Some are also quite long, reaching 10 or 20 pages instead of the intended three to four pages. The staff said that the information on principal investment strategies and risks in the Summary Section does need to be an actual summary of key information and not a mere repetition of detailed information available elsewhere.

The SEC highlighted the following disclosure items:

  • Summarize the Principal Investment Strategies and Risks: Form N-1A provides that the principal investment strategies and risks, required by Item 4 in the Summary Section, should be based on the information given in response to Item 9 of the Form, and should be a summary of that information. Instead of a concise summary, however, the staff often observes in Item 4 of the Summary Section long, complex and detailed descriptions of principal investment strategies and risks that are dense, are not user-friendly, and do not appear to be summaries of the information in Item 9 later in the prospectus.
  • Plain English Requirements: Form N-1A provides that the Summary Section must be provided in plain English under Rule 421(d) under the Securities Act. In addition, the prospectus, in its entirety, is subject to the requirement that the information be presented in a clear, concise, and understandable manner. Notwithstanding these requirements, the staff continues to observe the use of technical terms that are not explained in plain English. Funds also often use unnecessary defined terms, long, compound sentences, and long, dense paragraphs that the staff believes might be difficult for investors to read.
  • Summary Section Must Only Include Required or Permitted Information: Form N-1A provides that the Summary Section of the prospectus "may not include disclosure other than that required or permitted by [Items 2 through 8]." A fund may, however, include information elsewhere in the prospectus or in the Statement of Additional Information (SAI) that is not otherwise required by Form N-1A. The staff closely scrutinizes the disclosure in the Summary Section, and when information is included that is not required or permitted, comments that the information should be moved out of the Summary Section.
  • Inclusion of Non-Principal Strategies and Risks in the Prospectus: As noted above, Form N-1A requires a fund to disclose its principal investment strategies and risks in its prospectus. The Form provides that a fund should describe any investment strategies and risks that are not principal in the SAI. Form N-1A, however, also provides that a fund may include (except in the Summary Section) information in the prospectus that is not otherwise required. Many funds include in their prospectus additional information related to strategies and risks that are not principal. In the view of the staff, however, funds that include this additional information often do not clearly indicate which of the strategies and risks are principal and which are not principal.
  • Avoid Cross-References: Form N-1A provides that, in responding to the required information in the prospectus, funds should avoid cross-references to the SAI or shareholder reports. The Form further provides that "[c]ross references within the prospectus are most useful when their use assists investors in understanding the information presented and does not add complexity to the prospectus." The staff frequently observes funds with numerous cross-references in the Summary Section, which the staff believes can add complexity that should be avoided.

At the next annual update, Funds should review their prospectus disclosure to determine if any enhancements are advisable with regard to this guidance.

Alternative Investment Strategies

Funds that use alternative investment strategies should be aware of the SEC focus on their use in mutual funds and should evaluate their policies and procedures regarding, among other things, asset segregation and liquidity determination. Additional information regarding SEC statements on alternative investment strategies is found below.

Even for funds that do not use alternative investment strategies, the SEC's sweep examination regarding alternative investments has revealed that the SEC is very focused on the quality of board minutes and ensuring that the board minutes report key determinations related to compliance with the Investment Company Act. So, all funds should evaluate the quality of their minutes.

In a public address, SEC Investment Management Director Norm Champ spoke about the growing use of alternative investment strategies employed by open-end mutual funds. He talked about the potential benefits and the risks associated with these funds and related developments at the SEC. Champ emphasized the importance of monitoring and managing the risks that arise in connection with alternative mutual funds.

Champ suggested that alternative mutual fund managers consider a number of issues in connection with the development of robust valuation policies and procedures, including the requirement to monitor for circumstances that might necessitate the use of fair value prices. He noted that managers also might wish to address the methodology by which the fund determines fair value, the process for price overrides, and assurance that controls are in place to review, monitor, and approve all overrides in a timely manner. In addition, he stated that the policies and procedures also should address the prompt notification to, and review and approval by, persons not directly involved in portfolio management to mitigate any conflicts of interest.

In the area of liquidity, Champ said that significant holdings of securities that are fair-valued by alternative mutual funds might raise concerns about the liquidity of the holdings, including the process for testing and monitoring liquidity to comply with the Investment Company Act liquidity limitation. The staff believes that funds should consider setting criteria for assessing the liquidity of a security and consider including the criteria in written policies and procedures for registered fund compliance programs.


Another Conflict of Interest Enforcement Action Taken by the SEC Against a Registered Adviser

The president of a registered investment advisory firm, Jason D. Huntley, agreed to, among other things, a five-year bar from association with any investment adviser, broker, dealer, municipal securities dealer or transfer agent, for violations of the "anti-fraud" provisions under the Investment Advisers Act of 1940.

The violations cited by the SEC against Huntley were in the form of failing to disclose certain conflicts of interest to clients as the president of an advisory firm registered under the Advisers Act. On one such occasion, Huntley failed to inform investors in his managed private fund that fund assets were being used to provide loans to one or more of his related entities. On another occasion, Huntley failed to inform his clients that he would receive a finder's fee in connection with introducing the adviser of another fund to representatives of a publicly traded special purpose acquisition company. Although Huntley asked the investors to provide written consent to the transaction, as required, he omitted the fact that he would personally gain from the transaction through the receipt of a finder's fee for arranging the transaction.

In order to settle the SEC enforcement action, Huntley, without admitting or denying the charges, agreed to the five-year bar, the issuance of a cease-and-desist order, the prohibition of serving or acting as an employee, officer or director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or for an affiliated person of any of such entities, and pay a civil penalty of $100,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.