United States: A Compilation Of Enforcement And Non-Enforcement Actions - 30 September 2014


  • Cost of Proposed User Fees by Registered Investment Advisers Further Discussed
  • SEC Valuation Guidance for All Funds
  • Update on Insider Trading in Mutual Fund Shares


  • Failure to Disclose Conflict of Interest to Clients Results in SEC Enforcement Proceeding Against Registered Investment Adviser
  • Adviser's Non Compliance With SEC Subpoena Settled by Court


Cost of Proposed User Fees by Registered Investment Advisers Further Discussed

As most of our readers are aware, there has been a proposal advocated by various parties, including certain members of Congress, that a funding source to pay for the increase of SEC examinations over registered investment advisers be provided by imposing user fees on registered advisers. You probably wonder, if such proposals are placed into law, what the typical adviser would have to pay for its portion of the user fees.

According to a recent study authorized by Congress, the typical SEC examination of an investment adviser costs about $27,000 and the estimated annual cost for registered advisers for the user-fee funded examinations would be about $310 million. However, it is estimated that a majority of the 32,000 registered advisers may not have to pay any user fee due to the manner in which user-fees would be levied per registrant. It is assumed that the SEC would levy an annual user fee on those advisers with a higher than average amount of assets under management.

The study helps to put some numbers behind the costs of the increased number of examinations and possible user fee costs for the registrants. More information about the consultant's study results may be found online.

SEC Valuation Guidance for All Funds

Tucked away in the SEC adopting release for the new money market rules is valuation guidance for all registered investment companies and business development companies (referred to herein as "funds").

Use of Amortized Cost Valuation

Key Take Away: When a fund uses amortized cost valuation, the guidance requires the fund to actively monitor both market and issuer-specific developments that may indicate that the market-based fair value of a portfolio security has changed, resulting in the use of amortized cost valuation no longer being appropriate.

The SEC generally believes that a fund may only use the amortized cost method to value a portfolio security with a remaining maturity of 60 days or less when it can reasonably conclude, at each time it makes a valuation determination, that the amortized cost value of the portfolio security is approximately the same as the fair value of the security as determined without the use of amortized cost valuation. Existing credit, liquidity, or interest rate conditions in the relevant markets and issuer specific circumstances at each such time should be taken into account in making such an evaluation.

Accordingly, it would not be appropriate for a fund to use amortized cost to value a debt security with a remaining maturity of 60 days or less and thereafter not continue to review whether amortized cost continues to be approximately fair value until, for example, there is a significant change in interest rates or credit deterioration. Instead, the SEC believes the fund should evaluate the amortized cost each time it calculates its net asset value or otherwise values its portfolio securities.

A fund's policies and procedures should be designed to ensure that the fund's adviser is actively monitoring both market and issuer-specific developments that may indicate that the market-based fair value of a portfolio security has changed, and therefore the use of amortized cost valuation for that security may no longer be appropriate.

Other Valuation Matters

Key Take Away: When a fund holds securities that do not have readily available market quotations because they are not actively traded in the secondary markets, such securities are generally valued based upon "mark-to-model" or "matrix pricing" estimates.

In matrix pricing, portfolio asset values are derived from a range of different inputs, with varying weights attached to each input, such as pricing of new issues, yield curve information, spread information, and yields or prices of securities of comparable quality, coupon, maturity, and type. A fund might also consider evaluated prices from third-party pricing services, which may take into account these inputs as well as prices quoted from dealers that make markets in these instruments and financial models.

Fair Value for Thinly Traded Securities

Key Take Away: This portion of the guidance makes it clear that thinly traded securities need to be fair valued by taking into account market conditions existing at the time of valuation because the fair value of a security is the amount that a fund might reasonably expect to receive for the security upon its current sale. So, for example, a fund holding debt securities generally should not fair value these securities at par or amortized cost based on the expectation that the fund will hold those securities until maturity, if the fund could not reasonably expect to receive approximately that value upon the current sale of those securities under current market conditions.

The SEC acknowledged that matrix pricing and similar pricing methods involve estimates and judgments, which might introduce some "noise" into portfolio security prices, and therefore into a fund's NAV per share when rounded to one basis point. However, the SEC continues to believe that market-based prices of portfolio securities provide meaningful information, and does not believe that amortized cost generally provides better or more accurate values of securities that do not frequently trade or that may or may not be held to maturity given a fund's statutory obligation to investors to satisfy redemptions within seven days (and a fund's disclosure commitment to generally satisfy redemptions much sooner).

The SEC has concerns about the use of the amortized cost method in valuing portfolio securities because its use may result in overvaluation or undervaluation in comparison to the actual markets. For this reason, there is a preference embodied in the Investment Company Act that funds value portfolio securities taking into account current market information. This ties to fair value for thinly traded securities because as a general principle, the fair value of a security is the amount that a fund might reasonably expect to receive for the security upon its current sale. So, fair value by its very nature requires taking into account market conditions existing at that time.

Use of Pricing Services

Key Take Away: This part of the guidance makes it clear that a board of directors needs to take special care when it approves the use of a pricing service because the board has a non-delegable responsibility to determine whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value. So, in approving a pricing service, a board should consider, among other things, the following:

  • The inputs, methods, models, and assumptions used by the pricing service to determine its evaluated prices.
  • How the inputs, methods, models, and assumptions used by the pricing service are affected (if at all) as market conditions change.
  • The quality of the evaluated prices provided by the pricing service.
  • The extent to which the pricing service determines its evaluated prices as close as possible to the time as of which the fund calculates its net asset value.
  • Whether the board has a good faith basis for believing that the pricing service's pricing methodologies produce evaluated prices that reflect what the fund could reasonably expect to obtain for the securities in a current sale under current market conditions.

As noted above, many funds use evaluated prices provided by third-party pricing services to assist them in determining the fair values of their portfolio securities. With regard to such pricing services, the SEC noted that the evaluated prices provided by pricing services are not, by themselves, readily available market quotations or fair values. So, reliance on a pricing service must be done with care.

Care must be taken because a fund's board of directors has a non-delegable responsibility to determine whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund's portfolio security. In this regard, directors are required to satisfy themselves that all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered, and to continuously review the appropriateness of the method used in valuing each issue of security in a fund's portfolio.

Update on Insider Trading in Mutual Fund Shares

As we reported in 2013, the U.S. Court of Appeals for the Seventh Circuit left open the possibility that insider trading prohibitions may apply to trading in mutual fund shares, and remanded the case to the district court to determine whether the insider's alleged conduct properly fit under the misappropriation theory of insider trading. Now the district court has weighed in and declined to extend the misappropriation theory to the insider trading claim in the case because the theory was never raised with the court. (Securities and Exchange Commission v. Bauer, U.S. District Court, E.D. Wisconsin, Aug. 29, 2014) This result should allow mutual fund chief compliance officers to breathe a little sigh of relief.

The court noted in dismissing the allegations and counts that there is no authority to extend the misappropriation theory to a corporate insider trading mutual fund shares, and that it was not aware of any authority extending the misappropriation theory to a situation where the insider was a corporate insider at all times. Expressing further doubt about the application of insider trading theories to mutual funds, the court stated that no court has addressed whether insider trading theories apply to mutual fund redemptions, and that the SEC has never brought a claim under Section 10(b) in the mutual fund context.

Key Take Away: The SEC remains focused on insider trading.

While the SEC may not be inclined to bring another insider trading case related to trading in mutual fund shares in the near future, the SEC will not hesitate to bring an insider trading case related to trades by insiders related to portfolio securities. So, be extra vigilant in developing and adhering to insider trading policies.
Items like a fund freezing redemptions and selling off portfolio securities at discounted prices to generate cash are most likely material to investors, and care should be taken to disclose such material information to shareholders on a timely basis.


Failure to Disclose Conflict of Interest to Clients Results in SEC Enforcement Proceeding Against Registered Investment Adviser

The SEC has made it abundantly clear to registered investment advisers that failure to disclose conflicts of interest to clients will continue to be a basis for SEC enforcement action. A recent example is In the Matter of the Robare Group, Ltd., Mark L. Robare, and Jack L. Jones Jr. (Investment Advisers Act Release No 3907, Sept. 2, 2014). In this enforcement matter, the SEC alleges that the investment adviser failed to inform clients during the period of 2005 through 2011, that it was receiving compensation from a broker-dealer for client assets that were invested in certain mutual funds sponsored by the broker-dealer.

The Robare Group, Ltd., located in Houston, Texas reportedly has about 350 separately managed client accounts with about $150 million of assets under management. The advisory firm primarily services retail clients and utilizes the broker-dealer for, among other things, executive and custody services for its clients. A significant amount of client assets that are invested in mutual funds are invested, via discretionary authority by the adviser, in funds offered on the broker-dealer's platform.

The SEC, in the complaint, alleges that the adviser and two of its limited partners, Messrs. Robare and Jones, violated the "anti-fraud" provisions under Sections 206(1) and (2) and 207 of the Advisers Act in failing to disclose the conflict of interests to the adviser's clients. The SEC is asking the court to order the respondents to cease and desist from further violations of the anti-fraud provisions under the Advisers Act.

Adviser's Non Compliance With SEC Subpoena Settled by Court

The SEC's subpoena powers under the Investment Advisers Act of 1940 were recently affirmed by a court over the objections of the owner and operator of a SEC registered investment advisory firm (see SEC v. Stilwell, 2014 BL252718, S.D.N.Y., 1:14-mc-257 (ALC), 9/11/14).

The owner and operator of the advisory firm objected to the issuance of the SEC's subpoena which required his testimony about, among other things, allegedly false statements made by his firm in connection with certain investment funds under its management. Because a member of the SEC's staff told the owner that the SEC would be initiating enforcement proceedings in the matter, the owner objected to the subpoena because the SEC did not need his testimony and the subpoena served no "legitimate investigatory purpose."

The SEC argued to the court that it had reached only "tentative conclusions" whether or not to proceed with enforcement proceedings against the advisory firm and needed additional evidence via the owner's testimony to make a "final" enforcement decision. The court agreed with the SEC and ruled that the SEC showed that its subpoena was not issued for wrongful purposes. According to the court, the owner failed to refute the presumption that the subpoena was issued for appropriate purposes.

Although the SEC's subpoena authority generally is unquestioned, it is likely, as a result of this matter where a U.S. court was required to weigh in on the SEC's subpoena authority, there will be a directive sent out by the SEC to staff, to keep their comments to themselves as to whether enforcement proceedings will be brought prior to the completion of the SEC's investigation and gathering of evidence.

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.