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News & Events

Below are the recent entries for this section - which includes industry news (communiques). articles / whitepapers, SEC exam documents and event categories. You can jump directly to the desired category by clicking the category name in the right hand menu.

Pre-Dating & Back-Dating are Equally Risky

in Communiques

October 17, 2018

The SEC today suspended three accountants formerly of BDO USA LLP for improper professional conduct during its 2013 audit of AmTrust Financial Services Inc., an exchange-listed insurance company.

According to the SEC’s order, BDO fell behind schedule while conducting the audit and failed to complete necessary audit procedures before AmTrust’s deadline to file its annual report. To create the appearance that the audit was complete, the senior manager instructed the audit team to sign off on all work papers, regardless of whether work was finished, and to load signed blank or placeholder work papers in BDO’s electronic files. The audit team finished its audit procedures after the filing and preserved the predated sign-offs in BDO’s electronic files by overwriting existing documentation in the placeholder work papers.

The SEC identified the audit deficiencies and predated work papers by comparing BDO’s final, archived work papers to a snapshot of the work papers as they existed at the time that BDO released its audit report. The SEC’s order also found that if BDO’s engagement partner and engagement quality review partner had exercised due professional care, they would have identified these audit deficiencies before they released BDO’s audit report, which provided unqualified opinions on AmTrust’s 2013 financial statements and reporting controls.

The SEC’s order finds that the team violated auditing standards and engaged in improper professional conduct. Without admitting or denying the findings, each team member agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies, for between one and five years.

The SEC has long since learned to read the metadata in electronic records. We are all under pressure to meet deadlines and complete projects, but meeting those deadlines is not more important than risking your reputation and career.

Additional Information
SEC Release
Administrative Order
Administrative Summary

 

Fiduciary Duty

in Communiques

October 03, 2018

On Friday, September 28, 2018 the SEC charged LendingClub Asset Management (LCA) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation (LendingClub), LCA’s parent company that Laplanche founded and for which he served as CEO. LCA, Laplanche, and LCA’s former CFO also were charged with improperly adjusting fund returns.

LCA provides investment advisory services to several private funds that purchase loan interests offered by LendingClub. LendingClub offers a platform matching borrowers seeking consumer credit loans with investors seeking securities backed by those loans. It generates revenue from origination fees charged to borrowers and servicing fees charged to investors on the platform. For this business, it is important to promptly match borrowers with investors, to generate revenue as well as to enable LendingClub to compete with other platforms. Accordingly, LendingClub’s profitability is tied to the volume of loans that it is able to match.

LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded - to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty. The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.

LCA, Laplanche and the former CFO agreed to settle the charges and will pay $4.2 million in combined penalties. The SEC also barred Laplanche from the securities industry.

Fiduciary duty invokes the duty of care and the duty of loyalty upon investment advisers. This case speaks to both. Under the duty of loyalty, an adviser cannot favor its own (or an affiliate’s) interests over those of a client or favor one client over another. Under the duty of care, an adviser must provide advice that is solely in the client’s best interest. Recent guidance provided by the Securities and Exchange Commission in their April, 2018 Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers notes that it is inconsistent with fiduciary duty to infer client consent where the client did not understand the nature and/or import of the conflict or where the material facts concerning the conflict could not be fully and fairly disclosed: including the nature, extent, magnitude, and potential effects of the conflict, as well as any other material facts. In such cases, the SEC will expect an adviser to eliminate the conflict or to mitigate the conflict so that it can be more readily disclosed. Given this, it would be difficult to imagine a disclosure adequate to mitigate a conflict of interest that goes beyond the security itself to effectively support the trading volume of a platform.

The Administrative Proceeding can be found here.

The April, 2018 release of the proposed Commission interpretation on standards of conduct for investment advisers, including a detailed discussion of fiduciary responsibilities can be found here.

 

Dorsey PF 2018 Symposium

in Events

September 13, 2018

Dorsey PF Symposium

When: September 26, 2018 (8:30 am - 6 pm
Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019
Directions >

SEC3’s President, Janaya Moscony will join a group of industry leaders discussing trending topics in the private fund sector at Doresy’s annual Private Fund Symposium.

Click here for the agenda and speakers bios.

Register >

 

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Process?

in Communiques

July 20, 2018

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment Advisers Act of 1940 (the “Advisers Act”). The release reflects the results of over 1,500 adviser examinations.

In addition to the 30,000-foot items – inadequate policies and procedures, not performing reviews or otherwise failing to follow policies and procedures – OCIE reminds us of some of the underlying considerations of best execution assessment and brokerage practice disclosure. However, we do not see anything novel in this alert. It is not the first time the SEC has issued a risk alert that appears to contain just reminders without adding new content. For example, last September, the SEC issued an Advertising Risk Alert that was a repeat of old information.

Best Ex Refresher

OCIE reemphasized Advisers’ responsibility to seek best execution taking into consideration the circumstances of the particular transaction and the range and quality of the services provided by the broker-dealer. A key component of fulfilling this obligation is for Advisers to systematically assess the execution quality of broker-dealers used on behalf of their clients and that, while there are a range of potentially valid considerations, some consideration should be given to which factors may be more relevant to the particular trade. For example,

  • Execution efficiency – for clients with large orders, Advisers may focus on market impact and confidentiality;
  • Market access – for clients in niche strategies, Advisers may emphasize specialized inventory or handling; and/or
  • Other services –access to research, custody, trading systems, or other efficiencies may play an important role for Advisers in serving their clients.

Some of the areas of deficiency in this regard were found to be inadequate overall due diligence on broker-dealers, a failure to assess any qualitative factors whatsoever during best execution reviews, and failure to incorporate trader and portfolio manager inputs, their perspectives on how a broker-dealer best serves those clients, into the assessment. Another area of deficiency was a failure to seek comparisons from other broker-dealers, a consideration which is particularly important where firms rely predominantly on a single broker-dealer.

The release also emphasizes disclosure in terms of both brokerage practices and soft dollar arrangements. Where certain brokerage practices may present the appearance of a conflict of interest, adequate disclosure calls not only for a clear statement of the practice, but also the conflict introduced by the practice and the potential implications of the practice on clients. This is true whether the potential conflict of interest may be between the firm and its clients, as is the case with soft dollars, or between different groups of an Adviser’s clients, as is the case with a static trade order - where one group of clients systematically trades behind another group.

When OCIE issues risk alerts with new information or as a reminder, it as a warning to firms that this is a priority area for the SEC. Learn from peer deficiencies, take the warning, and re-confirm policies, process and documentation. SEC Compliance Consultants is available to assist you with reviewing your firm’s best execution processes.


Other resources:

OCIE Risk Alert: July 11, 2018
Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers
Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters
Commission Guidance Regarding Client Commission Practices under Section 28(e) of the Securities Exchange Act of 1934

 

Newsletter

Get the latest compliance news and insights - delivered weekly. The SEC3 Communique covers all compliance topics. CCO3 focuses on CCO topics.
tip: check both to keep informed!

Communiques

Pre-Dating & Back-Dating are Equally Risky

The SEC today suspended three accountants formerly of BDO USA LLP for improper professional conduct during its 2013 audit of AmTrust Financial Services Inc., an exchange-listed insurance company. According to the... read more »

Fiduciary Duty

On Friday, September 28, 2018 the SEC charged LendingClub Asset Management (LCA) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation (LendingClub),... read more »

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment... read more »

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

Events

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...