A Compilation of Enforcement and Non-Enforcement Actions

13 September 2010 Publication
Author(s): Peter D. Fetzer Terry D. Nelson

Legal News: Investment Management Update

Enforcement Matters

Investment Adviser Agrees to Sanctions Regarding Investment Scam

A New Jersey investment adviser and her various related firms entered into a settlement agreement with the SEC involving the operation of a multi-million dollar investment fraud, primarily targeting elderly and unsophisticated investors (SEC v. Venetis, D. N.J., No. 10-CV-4493, 9/2/10).

According to the SEC’s complaint, Sandra Venetis and her three firms, Systematic Financial, Systematic Financial Services LLC, and Systematic Financial Services, Inc., obtained at least $11 million from investors starting in 1997 to supposedly invest in promissory notes and fixed-income investments. Ms. Venetis told investors that the notes were federally guaranteed and would earn annual tax-free interest of six to 11 percent. However, instead of investing in such notes, Ms. Venetis used the funds to pay personal debts.

The SEC’s charges also included violations by Ms. Venetis and her firms of the securities registration requirements under the Securities Act of 1933 as the notes were securities and neither registered nor exempt from registration, and anti-fraud violations under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

Ms. Venetis and her firms agreed to settle the SEC’s charges and consented to a court order that freezes their assets. The court order also states that payment of monetary penalties will be determined at a later date. The defendants also were enjoined from future violations of the securities laws and barred from future association with any investment adviser or broker-dealer.

Colorado Investment Adviser Charged With Investment Fraud

In another example where elderly investors were the victims of an investment scheme, the SEC charged Colorado-based investment adviser Neal R. Greenberg with fraud and breach of fiduciary duty in connection with the investment adviser’s marketing of his hedge fund to investors.

According to the SEC’s complaint, Mr. Greenberg portrayed his hedge fund as being suitable for conservative investors. However, the hedge fund’s investments did not lend themselves to a conservative approach, including the use of leverage that contributed to substantial losses for the fund and its investors. In addition, the SEC alleges that Mr. Greenberg collected management fees from the fund of approximately $2 million that were not adequately disclosed to fund investors.

Most of the investors in Mr. Greenberg’s fund were elderly relying upon income from their investments to help pay for their living expenses.

The SEC’s order against Mr. Greenberg serves to initiate administrative and cease-and-desist proceedings, among other remedies.

Non-Enforcement Matters

SEC Adopts Interim Rule for Registration of Municipal Advisers

In the first of several rules that the SEC is required to adopt under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Reform Act), the SEC on September 2, 2010 adopted a temporary rule to require municipal advisers to be registered by October 1, 2010. A permanent rule is expected to be adopted at a later date.

The Reform Act requires the registration of municipal advisers by October 1 and includes financial advisers, guaranteed investment contract brokers, third-party marketers, placement agents, and other entities and individuals that provide municipal advisory services. Such advisers provide advice to state and local governments and other borrowers in connection with the issuance of municipal securities.

The Reform Act also requires municipal advisers to register with the Municipal Securities Rulemaking Board (MSRB).

The SEC registration process for municipal advisers is conducted on the SEC’s Web site, which includes the new registration form (Form MA-T). Information included on the registration form, as submitted by the municipal advisers, will be made available to the public on the SEC’s Web site.

The Reform Act’s requirement of registration and requirement to keep certain records is designed, in part, to create greater transparency for both the municipal securities issuers and the public to determine who these municipal advisers are, their background, and any disciplinary history. As a result, according to SEC Chairman Mary Shapiro, “regulators, investors and state and local governments will have a better understanding of those who provide services in the municipal market.”

Dodd-Frank Reform Act Changes the Regulatory Landscape for Investment Advisers

Effective July 21, 2011 (one year from the date that the Reform Act became law), there will be significant changes to the landscape for investment advisers.

For example, investment advisers with less than $100 million of assets under management will be required to register with their home states unless the home states do not require registration or do not have an investment adviser examination program. All states other than Wyoming currently register investment advisers, and a majority of the states have examination programs for registered investment advisers. It is expected that prior to July 2011, additional states will have implemented investment adviser examination programs. This state registration requirement does not pertain to investment advisers to a registered investment company or to a business development company or one that would be required to register as an investment adviser with at least 15 states.

Also, those investment advisers who currently rely on the private investment adviser exemption by having fewer than 15 clients in any 12-month period will need to register with their home state or with the SEC. Many of the advisers to private funds (including hedge funds) rely on this exemption. Under the Reform Act, advisers managing private funds who rely on either the Section 3(c)(1) or Section 3(c)(7) exemptions from registration under the Investment Company Act of 1940 and that have at least $150 million of assets under management, will be required to register with the SEC as investment advisers under the Investment Advisers Act of 1940. The private adviser exemption will go away on July 21, 2011. Such private fund advisers may be able to qualify for an exemption from SEC registration. If such an adviser does not have $150 million of assets under management and provides advice exclusively to those private funds that rely on either Section 3(c)(1) or Section 3(c)(7), it would not have to register with the SEC. Also, advisers solely to venture capital funds will not have to register with the SEC. The definition of venture capital funds will be determined by the SEC by rule prior to July 21, 2011.

Exemptions from SEC registration also will be available to advisers who exclusively advise small business investment companies licensed under the Small Business Investment Act of 1958 and for “family offices,” a term to be defined by rule by the SEC. This term generally pertains to investment advisers who have been formed to exclusively provide investment advice to the members of a single family.

What all of this means is that those investment advisers currently registered with the SEC, having assets under management of less than $100 million prior to July 21, 2011, and are not otherwise required to be registered with the SEC, will have to withdraw from SEC registration and become registered with the state securities commission of their home states and possibly other states, unless exempt from such registration.

The SEC and the state securities administrators are supposedly discussing how to make this registration transformation for investment advisers as efficient as possible. Whether it turns out to be an efficient process will depend, of course, on the degree of cooperation between the SEC and the states, and that is always difficult to predict. Stay tuned.

Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:

Terry D. Nelson
Madison, Wisconsin

Peter D. Fetzer
Milwaukee, Wisconsin