A Compilation of Enforcement and Non-Enforcement Actions

31 March 2015 Publication
Author(s): Peter D. Fetzer Terry D. Nelson

Legal News: Investment Management Update


  • SEC 2015 Rulemaking Geared to Asset Managers 
  • Certain Personnel of Registered Municipal Advisers Will Be Subject to Qualification Exams 
  • Rulemaking Completed for Reg A+, But Will It Matter? 
  • Avoiding Liability for Opinions in Registration Statements


  • Advisor’s False Statements About Assets Under Management and Performance Results in SEC Enforcement Action


SEC 2015 Rulemaking Geared to Asset Managers

According to recent statements by David Grim, acting director of the SEC’s Division of Investment Management, the SEC is working on several proposed rules that would affect registered investment advisers (RIAs). Those proposals would address: (i) an increase in the amount of data reporting; (ii) greater portfolio composition disclosures; and (iii) the requirement to create plans for severe business disruption for RIAs.

The SEC’s rulemaking overall goal is to add to investor protection, according to acting director Grim. Specifically, a new rule would require RIAs to establish written procedures with respect to certain events that would serve to provide an orderly transition of client accounts to one or more other investment advisers when the adviser is unable to service clients. Examples of such events include a material departure of key personnel or the adviser’s termination of business.

In order to obtain more data from RIAs, it is possible that Form ADV and Form PF will be revised to capture additional information in order for the SEC to keep informed of changes in a constantly changing industry. In addition, Form N-SAR, which is required to be filed by certain RIAs, may be amended to require additional data and possibly, filed on a more frequent basis with the SEC. The data collection rules are expected to be the first wave of the SEC’s 2015 rulemaking process affecting RIAs.

According to Mr. Grim, those mutual funds that include derivative investments may in the future have increased reporting and disclosure requirements due to the risks associated with such investment instruments.

Certain Personnel of Registered Municipal Advisers Will be Subject to Qualification Exams

The SEC recently approved a proposal by the Municipal Securities Rulemaking Board (MSRB) to require qualification examinations for professionals employed by a registered municipal advisor (MA).

The new MSRB regulations establish examination requirements for persons who serve an MA as either a principal or representative. MAs are required to have at least one person designated as a principal to conduct supervisory activities over the MA’s municipal advisory activities.

The examinations are expected to be available some time in 2016 after a test pilot period later this year. The amended MSRB Rules G-2 and G-3 provide a one-year grace period during which individuals will be able to take the required examination but still be able to perform municipal advisory activities during that one-year period. An earlier proposal by the MSRB to require representatives to perform 90 days of apprenticeship before they would conduct municipal advisory activities has been abandoned.

Rulemaking Completed for Reg A+, But Will It Matter?

In response to a mandate by Congress under the JOBS Act, the SEC announced on March 25, 2015 the approval of rules to implement the new and supposedly improved securities registration exemption for offerings of up to $50 million in a 12-month period (the so-called “Reg A+” exemption). The newly expanded Reg A+ exemption will be available for use in 60 days from the date of the final rules publication in the Federal Register.

The newly expanded exemption is now divided into two tiers. Tier 1 exempts offerings of up to $20 million (an increase from the current $5 million cap) but such offerings are still subject to state registration requirements. Tier 2 is for offerings of up to $50 million. The reason for non-use of the current Regulation A exemption (for offerings of up to $5 million in a 12-month period) was, in large part, due to the requirement that such offerings needed to be registered in each state in which the securities were offered. Due to the time and expense required by the state registration requirements, issuers largely ignored the Reg. A exemption. Instead, in most cases, issuers conduct a non-public offering under Rule 506 of Regulation D of the Securities Act. State registration requirements are pre-empted by federal law for such offerings.

Supposedly, the Tier 1 offerings, although still subject to state registration requirements, will have a better go at it due to the states’ implementation of a new coordinated review program intended to streamline the state registration process. There is a lot of skepticism about the new state program and only time will tell if it results in an easier path for issuers to conduct a Reg A+ offering.

Apparently, state securities regulators are not pleased that Tier 2 Reg A offerings will not be subject to state securities registration requirements when all purchasers in such offerings are “qualified purchasers.” Such offerings are also subject to certain enhanced disclosure requirements including audited financial statements.

The JOBS Act included, among other things, the expansion of the Reg A exemption to help spur job growth through the liberalization of certain existing exemptions and the creation of others (i.e., the crowdfunding exemption). Congress believed at the time that the greater variety of exemptions and some decrease of certain requirements to qualify for the use of those exemptions would assist in generating capital by companies and lead to an increase in jobs creation by such issuers. Ongoing criticism by some members of Congress are targeted at the SEC’s slow process in implementing final rules to adopt fully the various mandates under the JOBS Act. Case in point is that the final rules for the new crowdfunding exemption have still not been finalized by the SEC. According to the SEC, those rules now have priority and should be implemented within the third calendar quarter of this year.

Whether issuers will utilize the new Reg A+ exemption depends in great part on whether the states can make registration under the Tier 1 exemption truly streamlined. Time will tell whether issuers will be even interested enough to “test the waters” of the Reg A+ exemption.

Avoiding Liability for Opinions in Registration Statements

The recent U.S. Supreme Court decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (U.S. Mar. 24, 2015), makes it less likely registered investment companies, and their directors and officers, can be held liable for opinions included in registration statements, even if those opinions later turn out to be incorrect. In order to avoid liability, a registered investment company must have sincerely believed its opinion at the time, and the company must have had a reasonable basis for making the opinion. At the same time, the court’s emphasis on providing bases for opinions may add to the difficulty and expense of preparing registration statements.

The case began in 2005 after Omnicare, a provider of pharmacy services for nursing homes, filed a registration statement for an offering of its common stock in which the company said it believed its practice of accepting rebates from pharmaceutical suppliers was legal under federal and state law. When the federal government later sued Omnicare for violating anti-kickback laws, investors filed suit as well, claiming Omnicare’s opinion about the legality of its rebate practices was an “untrue statement of material fact” in violation of Section 11 of the Securities Act of 1933. The Sixth Circuit agreed, siding with the investors.

On appeal, the Supreme Court ruled differently, noting that Section 11 liability only arises if the company’s registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein.” Unlike statements of fact, however, opinions convey the possibility of uncertainty, and as a result, the Court said, directors and officers are largely immune to Section 11 liability for opinions. But the Court stressed two important exceptions:

  • A company could be held liable if it expresses an opinion it does not honestly hold. By its nature, a statement of opinion asserts that the speaker “actually holds the stated belief.” Opinions not genuinely held, therefore, would constitute untrue statements of material fact — that is, the company holds an opinion it does not actually hold — and could lead to liability. 
  • A company could be held liable if it expresses an opinion it has no reasonable basis for holding. Reasonable investors assume a company’s opinion is backed by an inquiry into the relevant facts, and the resulting opinion “fairly aligns with the information” in the company’s possession. If the real facts are contrary to what a reasonable investor might conclude from the opinion, and the company omits these facts from its registration statement, liability could likewise result.

The Court also gave companies guidance for avoiding liability under Section 11 when expressing opinions in their registration statements: A company can shield itself by either (1) disclosing the facts and other relevant information that form the basis for its opinion, or (2) making clear the extent to which the company is uncertain about its opinion.

Investor lawsuits under Section 11 will no doubt continue, but for prudent companies that heed the Supreme Court’s advice — making sure their opinions are well stated, carefully hedged, and backed by thoughtful inquiry — the decision in Omnicare should leave directors and officers well protected.


Advisor’s False Statements About Assets Under Management and Performance Results in SEC Enforcement Action

In a recently announced enforcement action (In the Matter of Acamar Global Investments, LLC and Rudolph A. Martin, IAA Release No. 4050, March 18, 2015), a former SEC-registered investment adviser and its principal were sanctioned for making material misstatements about the adviser’s amount of assets under management and performance regarding its investment models.

According to the SEC’s allegations in the matter, the adviser stated that it had more than $150 million of assets under management when it had less than $1 million. The adviser made the misstatement in order to maintain registration with the SEC. Also, according to the SEC’s allegations, the adviser stated on its website and in promotional materials performance numbers of its investment models but failed to state that the performance numbers were not based on actual trading. In addition, the one client of the adviser was convinced to invest in the adviser’s hedge fund which promptly lost over 90 percent of its value.

The adviser was registered with the SEC until 2014 when it became de-registered. The adviser did not have the required amount of assets under management (registration requires more than $100 million of AUM) to continue registration with the SEC. At the time of de-registration, the adviser’s assets under management was about $24.

As a result of the misstatements of material fact, the adviser and its principal violated the “anti-fraud provisions” under Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and with respect to false statements about its hedge fund, violations of Section 206(4) and Rule 206(4)-8 under the Advisers Act.

The parties agreed to settle the enforcement matter by way of an SEC enforcement order that prohibits the adviser and its principal from any further violations of the anti-fraud provisions, bars the principal from association with, among other entities, an investment adviser, and serving in any capacity with, among other entities, an investment adviser.

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