40 Act Blog

SEC Proposes Swap Recordkeeping and Reporting Rules

The SEC proposed the last set of rules for swaps as required by the Dodd-Frank Act. The proposed rules cover recordkeeping, reporting, and notification requirements for security-based swap dealers and major security-based swap participants and would establish additional recordkeeping requirements for broker-dealers to account for their security-based swap activities.

Cybersecurity Risk Alert Posted by the SEC

OCIE issued a Risk Alert providing additional information concerning its initiative to assess cybersecurity preparedness in the securities industry. The Risk Alert provides a sample list of requests for information that OCIE may use in conducting examinations of registered entities regarding cybersecurity matters. Some of the questions track information outlined in the “Framework for Improving Critical Infrastructure Cybersecurity,” released on February 12, 2014 by the National Institute of Standards and Technology.

The list of requests is divided in the following sections:

* Identification or Risks of Cybersecurity Governance
* Protection of Firm Networks and Information
* Risks Associated with Remote Customer Access and Fund Transfer Requests
* Risks Associated with Vendors and Other Third Parties
* Detection of Unauthorized Activity
* Other

Click here to access the alert.

Hawaiian Adviser Fraudulently Raises Assets through a Web Site

The SEC brought an enforcement action against Keiko Kawamura of Honolulu, Hawaii for fraudulently raising assets from subscribers to a web site and investors in a hedge fund she allegedly managed. The SEC found that she engaged in two separate fraudulent schemes in connection with the purchase and sale of securities, made material misrepresentations and omissions in connection with money she raised directly from investors, and made material misrepresentations and omissions in connection with a website she operated to provide investment advice.

From December 2011 through June 2012, Kawamura offered and sold interests in a self-described hedge fund. The SEC stated that Kawamura told investors that she would pool their funds in a single brokerage account in which Kawamura would invest in stocks and options. Kawamura told investors that she would be compensated by receiving 20% of any profits achieved in the account. In total, Kawamura raised approximately $200,000 from at least seven investors.

Contrary to Kawamura’s representations to investors that she would invest all of the funds she raised in stocks and options, the SEC found that she misappropriated much of the hedge fund’s money to pay for her living expenses and for luxury vacations to Miami and London. Of the approximately $55,000 Kawamura did invest, she pooled the money in one brokerage account and lost it all in highly risky options trades.

The SEC stated that Kawamura also posted screenshots of portions of a brokerage account statement on her Twitter account, which many of her investors followed, that suggested that she was obtaining incredible returns in her own brokerage accounts. In fact, the SEC found that the screenshots reflected particular returns on unusually successful trades and/or trading days from her boyfriend’s brokerage account and were not indicative of the performance of the trading in her account.

In August 2012, Kawamura started a website called kawamurafinancial.com. Kawamura promoted her website primarily through social media, including Twitter and Facebook. Kawamura used the website to provide investment advice to members who paid a monthly fee of between $94.95 and $174.95. The subscription fee varied based on the level of access granted to Kawamura’s website. All subscribers received access to, among other things, a locked Twitter account that Kawamura used to provide recommendations on when to sell or purchase particular stocks and options.

The SEC stated that Kawamura’s website contained numerous material misrepresentations and omissions that she acknowledges were intended to attract subscribers. Kawamura claimed on the site that she had “been in the Investment banking industry for nearly a decade, specializing in Wealth Management for a major Financial Institution.”

According to the SEC, Kawamura also falsely claimed on her site that “Her Personal IRA account is up almost 800% YTD (2012).” In fact, as Kawamura knew at the time she created her website, she lost all of the money in her personal IRA brokerage account over a period of about two months in 2012.

The SEC found that Kawamura also provided all subscribers to her website with access to one-on-one advice over Skype’s instant message service in which she would provide specific recommendations regarding stocks and options to the subscriber. Subscribers that paid $174.95 a month were also provided access to Kawamura’s trades in “real-time.” Kawamura received nearly $50,000 from approximately 70 subscribers to her website.

Click here to access the enforcement action.

 

Transamerica Financial Advisors Failed to Give Advisory Fee Discounts Even After a Warning from OCIE

The SEC brought an enforcement action against Transamerica Financial Advisors, Inc. (“TFA”), a registered investment adviser and broker-dealer, for failing to apply advisory fee discounts to certain retail clients in several of its advisory fee programs. The programs involved were the Advantage Program, Capital Program, and Sterling Program. TFA offered clients in these programs breakpoint discounts that reduce the total advisory fee as the clients’ assets in the programs increase. In various Form ADV Part 2 filings and in account opening documents, TFA represented that clients may request that TFA aggregate the values of certain related accounts to achieve these discounts. In addition, TFA’s policies and procedures required that clients receive the savings from breakpoint discounts. Despite these disclosures, from January 2009 to June 30, 2013, TFA failed, in certain instances, to apply the breakpoint discounts despite client requests for aggregation. TFA also failed to adopt and implement adequate policies and procedures to ensure that its clients’ fees were calculated as represented.

SEC Commissioner Aguilar Speaks on Issues Confronting the Mutual Fund Industry

SEC Commissioner Luis Aguilar spoke at a Mutual Funds Directors Forum event in Washington, D.C., about mutual fund industry issues. He began by reviewing the history of the SEC’s regulation of mutual funds. During that discussion, he spoke about recent developments at the SEC including several enforcement actions involving mutual funds.

SEC Chairman White Speaks About Her Agency’s All-Encompassing Enforcement Efforts

SEC Chairman Mary Jo White spoke at the SIFMA Compliance & Legal Society Annual Seminar in Orlando, Florida, about the SEC’s “all-encompassing enforcement” efforts. The three prongs of these efforts are the use of criminal, civil and regulatory tools to enforce the securities laws. Her speech focused on the criminal prong.

SEC’s Division of Investment Management Issues Guidance Update on Testimonial Rule and Social Media

The SEC’s Division of Investment Management issued guidance, including a list of Q&As, on the testimonial rule and social media in its March 2014 IM Guidance Update. The Guidance Update focuses on an investment adviser’s use of social media and its publication of advertisements that feature public commentary about the adviser that appears on independent, third-party social media sites. It is designed to assist advisers in applying Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) thereunder to their use of social media.

Investment Management Director Champ Speaks at ICI Mutual Funds Conference

Norm Champ, the Director of the SEC’s Division of Investment Management, spoke at the ICI’s 2014 Mutual Funds and Investment Management Conference in Orlando, Florida about a variety of topics.

Private Fund Adviser Found to Have Mislead Investors in Connection with Fund Purchases of Pre-IPO Stock

Frank Mazzola, Felix Investments, LLC, a brokerage firm, and Felix Advisors, LLC, an investment adviser, settled fraud charges that were brought by the SEC in a matter involving the purchase shares of Facebook and other technology companies prior to their initial public offerings.

SEC Issues No-Action Letter Addressing Non-Shareholder Approval of a Sub-Advisory Contract

The SEC granted no-action relief under Section 15(a) of the 1940 Act to RS Global Natural Resources Fund, SailingStone Capital Partners LLC (SailingStone) and RS Investment Management Co. LLC. (Adviser) permitting the Adviser to enter into an interim sub-advisory agreement with SailingStone that had not been approved by the vote of a majority of the outstanding voting securities of the Fund.