A Compilation of Enforcement and Non-Enforcement Actions

24 June 2009 Publication
Author(s): Peter D. Fetzer Terry D. Nelson

Legal News: Investment Management Update

Non-Enforcement Matters

Obama Administration Releases Plan to Overhaul Financial Regulation
The Obama administration, through the U.S. Department of the Treasury (Treasury), recently released a white paper entitled, “Financial Regulatory Reform.” It outlined the administration’s plan to create what it called “comprehensive regulatory reform” for the financial industry. Although the white paper proposed substantial new regulations, particularly in mortgage lending and securitization, the white paper indicated that in addition to the proposed reforms, “[m]ore can and should be done.”  

Creation of Overarching Regulatory Council
The white paper called for the creation of a new regulatory body called the Financial Services Oversight Council (Council), chaired by the Secretary of the Treasury. The new Council will be charged with reviewing the systematic risks facing the American and global economies. After identifying the emerging risks, the Council would then request the appropriate regulators act to curb the problems associated with the market risks. The white paper averred that each regulatory agency is currently too focused on its own discrete area of regulation to recognize system-wide problems in the market.

New Requirements Contemplated for Funds That Use Investment Adviser Services
According to the white paper, Treasury will propose new rules that will require investment advisers to hedge funds and other “pools of private capital” (including private equity and venture capital funds) who manage a to-be-determined minimum amount of assets to register with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (Advisers Act). In fact, proposed legislation in Congress includes this registration concept already. Funds that use investment adviser services would be subject to reporting requirements to the SEC, disclosure requirements to investors, and recordkeeping requirements. Moreover, the SEC would conduct regular, periodic exams of private funds to ensure compliance with these new regulations. Notably, the administration’s plan does not include registration for hedge funds or other pools of private capital under the Investment Company Act of 1940 (Investment Company Act). Currently, such funds and pools operate outside of the registration requirements under the Investment Company Act pursuant to certain exemptions for “private” funds. However, SEC Chair Mary Schapiro has recently stated that registration under the Investment Company Act may still be required for such funds and pools.

New Call to “Harmonize” Regulation of Broker-Dealers and Investment Advisors
Additionally, the white paper called for “harmonizing” the regulation of broker-dealers and investment advisers. Treasury pointed out that early 19th century legal distinctions existed between broker-dealers and investment advisers that, according to Treasury, are “no longer meaningful.” Consequently, the administration proposed that broker-dealers and investment advisers be subject to the same rules and regulations. The white paper was short on details of how that harmonization would occur. However, it is clear it will involve broker-dealers and investment advisers being subject to the same fiduciary duties. The proposal would require broker-dealers that provide investment advisory services to perform under the same fiduciary obligations of registered investment advisers under the Advisers Act. They would also create new “simple and clear” disclosure requirements for investors, which will be equally applicable to both broker-dealers and investment advisers.

FINRA Chair Ketchum Wants Authority to Regulate Investment Advisers
Continuing a months-long public relations campaign, the Financial Industry Regulatory Authority (FINRA) chair and chief executive officer Richard Ketchum recently reiterated his positions that FINRA should have regulatory authority over not only broker-dealers but also investment advisers. Broker-dealers are required to comply with FINRA’s suitability rule when they make investment recommendations. Alternatively, investment advisers are required to comply with the fiduciary duties that flow from the Advisers Act.

Although SEC Chair Mary Schapiro and, now, the Obama administration (see previous article) support “harmonizing” regulation of broker-dealers and investment advisers, some investment adviser industry representatives would prefer the SEC retain its direct regulatory authority. Mr. Ketchum pointed out that, although the SEC is charged with regulating more than 11,000 investment advisers, it conducted fewer than 1,500 examinations of investment advisers. Referencing the spike in Ponzi schemes perpetrated by investment advisers, Mr. Ketchum noted that FINRA would be in a better position to regulate investment advisers.

Given the administration’s plan to bring broker-dealers under the fiduciary obligations of the Advisers Act, rather than bringing investment advisers under suitability rule, it is unclear that Mr. Ketchum will get his full wish. However, regulators seem poised to bring broker-dealers and investment advisors under the same regulation. What that regulation will eventually look like remains to be seen.

Enforcement Matters

SEC Settles Charges Against Investment Adviser That Failed to Provide Information
New York Life Investment Management LLC (New York Life) is a registered investment adviser under the Advisers Act. It advised Mainstay Equity Index Fund (Mainstay), a mutual fund, on its investments. Mainstay provided a “guaranty” that investments in Mainstay would be at least equal to the value of the S&P 500 index over a 10-year period.

Mainstay’s board of trustees (board) was determining whether to renew its investment advisory agreement with New York Life. In making its decision, the board noted that New York Life’s advisory fees were at the high end of the range among comparable advisers. New York Life claimed that the guaranty justified the higher fee. However, New York Life filed prospectuses and annual reports with the SEC in which it noted that there were no fees for the guaranty.

New York Life and the SEC settled charges against New York Life for “anti-fraud” violations of the Advisers Act and the Investment Company Act. The SEC’s order requires New York Life to refund nearly $4 million in fees it charged for the guaranty, to repay more than $1.3 million in interest on those refunded fees, and assesses a fine of $800,000.

SEC Charges Manager of Investment Fund for Solicitation Under False Pretenses
Michael Kilesak, a former NFL player and the manager of Kilesak Capital Group, LLC (Kilesak Capital), consented to the issuance of an Order by the SEC that imposed remedial sanctions on him. According to the SEC, Mr. Kilesak solicited $24 million from 14 investors but did so under false pretenses.

The SEC Order alleged Mr. Kilesak did not tell investors, for example, that Kilesak Capital took a 35 percent fee on the profits. According to the SEC’s allegations, Mr. Kilesak also did not properly disclose the investments made by Kilesak Capital. Mr. Kilesak consented to the SEC’s Order without admitting fault or denying any of the SEC’s allegations.

Legal News: Investment Management Update is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss these topics further, please contact your Foley attorney or the following:


Terry D. Nelson
Madison, Wisconsin

Joseph D. Shumow
Madison, Wisconsin

Peter D. Fetzer
Milwaukee, Wisconsin