More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
The SEC Tuesday sanctioned two investment advisory firms for impeding examinations conducted by SEC staff, with one RIA firm charged with "aspirational AUM," for inflating its AUM tenfold, from $2.6 million to $26 million, to qualify for SEC registration.
The two firms settled with the SEC without admitting or denying the findings.
In the case of the “aspirational AUM,” in the SEC’s own words, an SEC investigation found that Evens Barthelemy and his New York-based firm Barthelemy Group LLC misled SEC examiners by inflating the firm’s claimed assets under management tenfold on its Form ADV in an apparent attempt to show that the firm was eligible for SEC registration. It did so, the complaint charges, by literally moving decimal points on a spreadsheet to increase each client’s assets tenfold.
In the second case, an SEC investigation found that Seth Richard Freeman and his San Francisco-area firm EM Capital delayed for nearly 18 months in producing books and records related to its Indian equity mutual fund advisory business. The firm agreed to pay a $20,000 fine in settling the case.
“Barthelemy was not truthful and Freeman was not responsive during their respective interactions with SEC examiners,” said Bruce Karpati, chief of the SEC Enforcement Division’s Asset Management Unit. “We will continue to pursue enforcement actions against firms that obstruct or delay the SEC’s critical work in overseeing investment advisers.”
Carlo di Florio (right), director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), added, “Examinations of SEC-registered firms play a vital role in protecting markets and investors, and we expect their candor and prompt cooperation as SEC staff works to promote compliance, monitor risk, and prevent fraud.”
Case One: Aspirational AUM; Moveable Decimal Points
According to the SEC’s order against Barthelemy and his firm, when examiners asked for a list of client assets, "Barthelemy misrepresented his firm’s AUM as $26.28 million instead of the actual $2.628 million. He downloaded client account balances from the firm’s online custodial platform onto a spreadsheet, and then manually moved the decimal points for each client one place to the right before providing it to the SEC staff."
From July 2009 to early 2011, "Barthelemy improperly registered Barthelemy Group with the SEC on the basis of the aspirational AUM that was 10 times higher than reality. Barthelemy Group, through Barthelemy’s actions as chief compliance officer, also failed to adopt reasonable compliance policies and procedures or to maintain required books and records concerning codes of ethics and providing the firm’s disclosure brochure to clients," the SEC says.
The Dodd-Frank Act required advisors with AUM of $25 million to $100 million to switch from federal to state registration as of July 2012.
Scott Weisman, assistant director of the SEC's Asset Management Unit, housed within the agency's Enforcement Division, told AdvisorOne in an email message that “smaller advisers have incentive to manipulate AUM to qualify for SEC registration, which provides a badge of credibility with clients and potential clients.”
Barthelemy agreed to be barred from the securities industry and from associating with an investment company, with the right to reapply after two years. Without admitting or denying the allegations, Barthelemy and his firm consented to cease-and-desist orders, and the firm was censured, the SEC says. Barthelemy and his firm also will provide a copy of the proceeding to their clients and appropriate state securities regulators, will post a copy on the firm’s website, and will disclose the proceeding in an amended SEC Form ADV filing.
Case Two: Failing to Timely File on Indian Mutual Fund
According to the SEC’s order issued Tuesday against Freeman and EM Capital, they failed to immediately furnish the required books and records upon request by SEC staff in December 2010. "EM Capital and Freeman repeatedly promised to provide the records including financial statements, e-mails, and documents related to their management of a mutual fund. However, they did not fully comply until September 2012, months after learning that SEC staff was considering enforcement action against them."
According to the SEC complaint, the documents that EM capital failed to file with Commission staff all related to EM Capital’s management of the EM Capital India Gateway Fund, a mutual fund that primarily invested in Indian equities.
Freeman and EM Capital agreed to pay a combined $20,000 penalty. Without admitting or denying the SEC’s findings, Freeman and EM Capital also agreed to censures and cease-and-desist orders.