Archive for October, 2012

SEC releases information on adviser registrations post Dodd-Frank

Friday, October 19th, 2012

The SEC released information about the movement of investment advisers since the adoption of Dodd-Frank. Currently there are 11,002 SEC registered investment advisers with $5.7 trillion in assets under management.  AUM is up 13% despite there being 15% less advisers thanks to the Switch.

Private fund advisers: The SEC claims that there have been 1,504 registrations of private fund advisers (those that manage private funds such as hedge funds) since Dodd-Frank was adopted.

Mid-sized advisers (the “Switch”):  Unless eligible for an exemption, advisers managing less than $100 million in assets were to withdraw from SEC registration by June 28.  To date, more than 2,300 mid-sized advisers have transitioned to state registration.  293 advisers received notification that they may not be eligible to remain SEC registered.  These advisers have until December 17, 2012 to withdraw their SEC registration, or inform the SEC that they should remain eligible.  After that date, the SEC may terminate registrations.


SEC charges adviser with false statements regarding assets under managment

Tuesday, October 16th, 2012

In another case of advisers getting in trouble for inflating assets under management, the SEC announced it obtained a court order against an investment firm and its president for making false statements in a report to the SEC and refusing to allow the SEC’s staff to review the firm’s books and records.

The SEC alleges that Jupiter Group Capital Advisors LLC and Rick Cho falsely reported that the advisory firm managed $153 million in 38 investor accounts. The statements were made on Jupiter Group’s Form ADV. When SEC staff sought to conduct an examination of Jupiter Group after the filing was made, Cho initially failed to respond and then later claimed that the filing referred to estimated future assets and stated that Jupiter Group has no client accounts.

The SEC alleges that Jupiter Group did not manage $25 million or more of client assets for any reporting period, and therefore was not eligible for SEC registration. In addition, from December 2010 to the present, Jupiter Group and Cho have refused to submit to an examination.

Member Summit 2012 video

Friday, October 12th, 2012

For those of you who haven’t seen it yet, check out the Member Summit 2012 video highlights reel. In just a few short minutes, the video really captures the energy and significance of what Member Summit is all about.

Keep an eye out–we’ll will also be featuring in a “Best of Member Summit” email campaign and other communication to clients, prospects and partners.

Critics Assail SEC Proposal on Reg D Advertising

Tuesday, October 9th, 2012

Over the last several months, the SEC proposal to end advertising restrictions on private placements has come under fire from critics who say that the Commission must either terminate the controversial plan or risk a lawsuit.

The proposal, which was mandated under the Jumpstart Our Business Startups Act, would allow issuers of private securities sold under Rule 506 of Regulation D to solicit investors publicly, as long as all investors are qualified as “accredited investors.”

State regulators as well as investor advocates have stated they are concerned that the Commission’s proposal does not specify procedures to verify that investors are accredited, and instead simply requires that issuers have a “reasonable basis” for believing investors are accredited.  Specifically, Heath Abshure, Arkansas’ Securities Commissioner and President of the North American Securities Administrators Association Inc., provided in a comment letter that the lack of specific guidance on verification procedures “will lead to serious consequences — namely, litigation.”  Mr. Abshure further stated “in the absence of clarity in the rules, each state regulator will have to make an independent determination whether an issuer has taken reasonable steps to verify an investor’s status.”

Significantly, prior to proposing the rule and asking for comment in August, the Commission had planned to approve an interim rule that would have removed the advertising prohibition immediately.  The Commission backtracked from that idea after state regulators, investor advocates and the Investment Company Institute demanded that they be provided an opportunity to see the proposal and comment.  On the other side of the controversy, hedge funds and other issuers who support the Commission’s proposal say that it is time to end the prohibition.

Crackdown on misstating assets under management

Monday, October 8th, 2012

Investment News has reported that Massachusetts filed what might be the among the first actions for inaccurately reporting assets under management. Regulators there claimed CCR Wealth Management LLC of Westborough, MA, overstated its assets for several years prior to June, when it filed to switch to state oversight as a midsize adviser.  The state is seeking to deny registration to CCR.  Prior to the Switch, the firm had been registered with the SEC, showing assets under management of ”precisely $25 million” for a number of years, despite changes in the number of clients, said Brian McNiff, a spokesman for the Massachusetts Securities Division. When the division sought details on the firm’s assets, CCR replied that it had included brokerage accounts in its assets under management number, the state said in its complaint.  CCR’s most recent ADV form, filed in July, reports just $7 million in assets under management.

Traditionally, it is the SEC that has taken such actions against investment advisers that are claiming excess assets as being under management in order to maintain SEC registration.  Where the adviser has used good faith in mistakenly determining assets under management the typical relief sought by the SEC is for the adviser to drop to state registration or be properly engaged by clients in order to claim the assets.  Where the SEC feels that an adviser is exaggerating assets under management deliberately, they have sought enforcement actions for misleading clients.


SEC Expands National Exam Program Risk-Based Examinations

Monday, October 8th, 2012

Earlier this year, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) introduced its revamped National Exam Program (“NEP”).  OCIE’s stated mission through the NEP is to protect investors, ensure market integrity and support responsible capital formation through risk-focused examinations.  One of the primary initiatives of the NEP is to conduct risk-based examinations or “Presence Exams” of investment advisers to private funds having recently registered with the SEC.  Senior management personnel of certain private fund advisers have already started to receive introductory letters from the SEC regarding these Presence Exams.

The exams are set to take place over the next two years and will involve three phases: Engagement; Examination; and Reporting.  The Engagement Phase involves a nationwide outreach to inform newly registered firms about their obligations under the Advisers Act and related rules.  During the Examination Phase, the NEP plans to review one or more of what they deem to be high-risk areas of private fund advisers including, but not limited to, marketing, portfolio management, conflicts of interest, safety of client assets and valuation.  Similar to other types of SEC examinations, NEP may issue a deficiency letter to the adviser or refer the matter to its Enforcement Division depending upon the results received during this phase.  Moreover, upon completion of the Examination Phase, the NEP plans to report any observations to OCIE and potentially the public in what has been termed the Reporting Phase.

Although it is too early to fully understand the impact of these Presence Exams on advisers, the initiative demonstrates an effort by the SEC to have touch points with, and conduct risk-based assessments of, newly registered private fund advisers.

Former SEC Inspector General Kotz Accused of Conflicts of Interest in Recent Report

Monday, October 8th, 2012

According to multiple news sources, including the Wall Street Journal, former SEC Inspector General David Kotz may have had ethical lapses during several investigations.

The report was written by the U.S. Postal Service Office of Inspector General at the request of the SEC, and found the following:

  • Mr. Kotz had a “personal relationship” with Dr. Gaytri Kachroo, a lawyer for victims of Allen Stanford’s Ponzi scheme.  The report found Mr. Kotz violated ethics rules by opening an investigation into the receiver for the failed firm upon request from Dr. Kachroo.
  • Mr. Kotz is a “very good friend” of Harry Markopolos, who warned the SEC repeatedly that Bernard Madoff was running a fraud. Mr. Kotz excoriated the SEC for not uncovering Mr. Madoff’s fraud in an August 2009 report. It is unclear when the two became friends.
  • Mr. Kotz had an inappropriate personal relationship with an unnamed SEC employee that featured “flirtatious communications” during an investigation into an SEC office reorganization project. Although there is no evidence that Mr. Kotz interfered in this review, the report found he should have recused himself from the investigation.

Cerulli report shows grim prognosis for wirehouses

Monday, October 8th, 2012

RIABiz is reporting on a recent Cerulli Associates report, which shows an increasingly grim future for wirehouses.

According to the article, Cerulli predicts that Merrill Lynch, UBS, Morgan Stanley and Wells Fargo will see their market share decrease another 7% over the next three years.  This comes as a result of the firms “chopping their own advisory workforces”.  The Cerulli report directly contradicts a report issued by Financial Research Corp., which believes that wirehouses are changing courses and using their scale to leverage “average” advisors.

According to Cerulli, the decrease in the number of wirehouse representatives is coming from two sources: (1) advisors leaving because they were fired due to the firms “jettisoning advisors who are typically low producers, having written them off as stagnant and complacent”; or (2) advisors being recruited by RIAs or other firms.  The Cerulli report doesn’t break down the number of advisors that fit into each exit channel.

Some additional statistics from the article (based on the Cerulli report):

  • Wirehouses have a 41.1% market share, but are expected to lose share more quickly than any other group of advisors. By year-end 2014, wirehouses are predicted to drop to a 34.2% market share.
  • As of year-end 2011, the remaining market share was as follows: regional broker-dealers 15.8%, IBDs 14.1%, RIAs 12.2%, dually registered RIAs 7.9%, banks 5.2% and insurance 3.7%.
  • Cerulli projects that by year-end 2014, regional broker-dealers’ share will grow to 19.3%, RIAs’ to 14.4%, dually registered advisors’ to 10.3% and insurance’s to 4%. IBDs’ share is projected to fall to 12.6% and banks’ to 5.1%.


No end in sight to wirehouse waning: Cerulli

Thursday, October 4th, 2012

Investment News reported today that the decline in wirehouses’ market share of assets in the advisory industry has been declining dramatically since the financial crisis – a trend expected to accelerate over the next three years.

From the end of 2007 to the end of last year, the asset share of the four wirehouses — Bank of America Merrill Lynch, Morgan Stanley Wealth Management, UBS Wealth Management and Wells Fargo Advisors — fell to a combined 41.1%, from 47.8%, according to Cerulli data. And the research firm is expecting those firms to lose another 6.9 points of share by the end of 2014, leaving them with an estimated 34.2% of the market.

According to the report, the wirehouse drive to become more profitable with a smaller work force of advisors, coupled with enormous improvements in custodial platforms over the last several years, and wealth management service platforms being offered by firms such as Dynasty Financial Partners LLC and HighTower Advisors LLC, all add to the momentum of large wirehouse advisers making the leap to independence.