SEC Staff Issues Guidance Update and Investor Bulletin on Robo-Advisers

The Securities and Exchange Commission today published information and guidance for investors and the financial services industry on the fast-growing use of robo-advisers, which are registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction. 

Because of the unique issues raised by robo-advisers, the Commission’s Division of Investment Management issued guidance for investment advisers with suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940.

A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy, provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.

The Investor Bulletin describes a number of issues investors should consider, including:

• The level of human interaction important to the investor
• The information the robo-adviser uses in formulating recommendations
• The robo-adviser’s approach to investing
• The fees and charges involved

“As technology continues to improve and make profound changes to the financial services industry, it’s important for regulators to assess its impact on U.S. markets and give thoughtful guidance to market participants,” said SEC Acting Chairman Michael Piwowar. “ This information is designed to help investors tap into the opportunities that fintech innovation can provide while ensuring fairness and investor protection.”

Investors can use the SEC’s Investment Adviser Public Disclosure (IAPD) database, which is available on Investor.gov, to research the background, including registration or license status and disciplinary history, of any individual or firm recommending an investment, including robo-advisers, which are typically registered as investment advisers with either the SEC or one or more state securities authorities.

Robo-advisers, as registered investment advisers, are subject to the substantive and fiduciary obligations of the Advisers Act. The Guidance Update notes that there may be a variety of means for a robo-adviser to meet its obligations to clients under the Advisers Act, and that not all of the issues addressed in the Guidance Update will be applicable to every robo-adviser.

Rochelle Kauffman Plesset, and Robert Shapiro from the Division of Investment Management contributed substantially to preparing the Guidance Update, with significant assistance from the Division of Investment Management’s Risk and Examinations Office and the Office of Compliance Inspections and Examinations. Owen Donley, Jill Felker, and Holly Pal from the Office of Investor Education and Advocacy contributed substantially to preparing the Investor Bulletin.

Both publications follow the Commission’s Fintech Forum, held Nov. 14, 2016, which included a panel discussion on robo-advisers.

SEC to Host Crowdfunding Dialogue February 28

The Securities and Exchange Commission will host a crowdfunding symposium Feb. 28, covering research, challenges, opportunities, and the effects of securities-based crowdfunding on various market participants.

The Commission’s Division of Economic and Risk Analysis is partnering with NYU’s Salomon Center for the Study of Financial Institutions to bring together regulators, practitioners, and academics for the half-day event. Presentations and discussions will focus on protecting investors while facilitating capital formation.

“We are excited to collaborate with NYU in this event focused on new sources of capital formation, and designed to bring together academics, industry participants, and the SEC,” notes Acting Chairman Michael Piwowar.

Regulation Crowdfunding, a key JOBS Act rulemaking that went into effect on May 16, 2016, allows for a large number of retail investors to be solicited on the web and through social media to purchase unregistered securities of small private companies. Additionally, the rule establishes a new type of intermediary – the funding portal – that brings buyers and sellers together online.

To date, 21 funding portals have emerged to facilitate these transactions, with 163 deals initiated, of which 33 have completed their fundraising. Approximately $10 million of new capital has been raised in total since Regulation Crowdfunding became effective.

The event is free and open to the public, and will kick off with welcoming remarks by SEC Acting Chairman Michael Piwowar at 9:15 am at the SEC’s headquarters building at 100 F Street, NE. A webcast will be available at sec.gov. For individuals wishing to attend, please register in advance and provide photo ID to the security personnel at the front desk.

SEC to Host Crowdfunding Dialogue February 28

The Securities and Exchange Commission will host a crowdfunding symposium Feb. 28, covering research, challenges, opportunities, and the effects of securities-based crowdfunding on various market participants.

The Commission’s Division of Economic and Risk Analysis is partnering with NYU’s Salomon Center for the Study of Financial Institutions to bring together regulators, practitioners, and academics for the half-day event. Presentations and discussions will focus on protecting investors while facilitating capital formation.

“We are excited to collaborate with NYU in this event focused on new sources of capital formation, and designed to bring together academics, industry participants, and the SEC,” notes Acting Chairman Michael Piwowar.

Regulation Crowdfunding, a key JOBS Act rulemaking that went into effect on May 16, 2016, allows for a large number of retail investors to be solicited on the web and through social media to purchase unregistered securities of small private companies. Additionally, the rule establishes a new type of intermediary – the funding portal – that brings buyers and sellers together online.

To date, 21 funding portals have emerged to facilitate these transactions, with 163 deals initiated, of which 33 have completed their fundraising. Approximately $10 million of new capital has been raised in total since Regulation Crowdfunding became effective.

The event is free and open to the public, and will kick off with welcoming remarks by SEC Acting Chairman Michael Piwowar at 9:15 am at the SEC’s headquarters building at 100 F Street, NE. A webcast will be available at sec.gov. For individuals wishing to attend, please register in advance and provide photo ID to the security personnel at the front desk.

SEC, NASAA Sign Info-Sharing Agreement for Crowdfunding and Other Offerings

The Securities and Exchange Commission and the North American Securities Administrators Association today signed an information-sharing agreement as new rules to facilitate intrastate crowdfunding offerings and regional offerings take effect.

The agreement signed by the SEC and NASAA is intended to facilitate the sharing of information to ensure that the new exemptions are serving their intended purpose of facilitating access to capital for small businesses. Under the memorandum of understanding (MOU), federal and state securities regulators will be better able to monitor the effects of the new rules and also guard against fraud.

The MOU was signed by SEC Acting Chairman Michael S. Piwowar and Mike Rothman, Minnesota Commissioner of Commerce and President of NASAA, which represents state securities administrators.

The agreement not only builds on an already productive relationship between the SEC and state regulators, it also offers additional insights and protections as we help companies grow and create jobs while providing new opportunities to investors.
-Acting Chairman Piwowar

“The agreement not only builds on an already productive relationship between the SEC and state regulators, it also offers additional insights and protections as we help companies grow and create jobs while providing new opportunities to investors,” said Acting Chairman Piwowar.

“This agreement will strengthen collaboration among state and federal securities regulators to help expand small-business investment opportunities while also protecting investors,” said Rothman. “Ongoing dialogue is essential to carry out our responsibilities going forward. With this MOU in place, we have an opportunity to share information that will bolster our efforts to support small business capital formation and prevent fraud.”

Under the new rules, companies will have more flexibility to engage in intrastate offers through websites and social media without having to register their offering with the federal government. Companies now can also raise up to $5 million per year through other amended rules, which could facilitate the development of regional offering exemptions at the state level to permit companies to raise from investors in a specific region. The previous limit was $1 million.

New JOBS Act rules went into effect in 2015 and 2016.  New amendments to facilitate regional offerings went into effect in January and amendments to provide more flexibility for intrastate crowdfunding offerings will go into effect in April.  These amendments are intended to facilitate greater access to capital for entrepreneurs that may not have been able to otherwise access capital using other alternatives. The MOU will increase the regulators’ ability to share data to better monitor implementation of the new rules and guard against fraud.  

NASAA President Mike Rothman (L) and SEC Acting Chairman Michael Piwowar sign MOU.

SEC, NASAA Sign Info-Sharing Agreement for Crowdfunding and Other Offerings

The Securities and Exchange Commission and the North American Securities Administrators Association today signed an information-sharing agreement as new rules to facilitate intrastate crowdfunding offerings and regional offerings take effect.

The agreement signed by the SEC and NASAA is intended to facilitate the sharing of information to ensure that the new exemptions are serving their intended purpose of facilitating access to capital for small businesses. Under the memorandum of understanding (MOU), federal and state securities regulators will be better able to monitor the effects of the new rules and also guard against fraud.

The MOU was signed by SEC Acting Chairman Michael S. Piwowar and Mike Rothman, Minnesota Commissioner of Commerce and President of NASAA, which represents state securities administrators.

The agreement not only builds on an already productive relationship between the SEC and state regulators, it also offers additional insights and protections as we help companies grow and create jobs while providing new opportunities to investors.
-Acting Chairman Piwowar

“The agreement not only builds on an already productive relationship between the SEC and state regulators, it also offers additional insights and protections as we help companies grow and create jobs while providing new opportunities to investors,” said Acting Chairman Piwowar.

“This agreement will strengthen collaboration among state and federal securities regulators to help expand small-business investment opportunities while also protecting investors,” said Rothman. “Ongoing dialogue is essential to carry out our responsibilities going forward. With this MOU in place, we have an opportunity to share information that will bolster our efforts to support small business capital formation and prevent fraud.”

Under the new rules, companies will have more flexibility to engage in intrastate offers through websites and social media without having to register their offering with the federal government. Companies now can also raise up to $5 million per year through other amended rules, which could facilitate the development of regional offering exemptions at the state level to permit companies to raise from investors in a specific region. The previous limit was $1 million.

New JOBS Act rules went into effect in 2015 and 2016.  New amendments to facilitate regional offerings went into effect in January and amendments to provide more flexibility for intrastate crowdfunding offerings will go into effect in April.  These amendments are intended to facilitate greater access to capital for entrepreneurs that may not have been able to otherwise access capital using other alternatives. The MOU will increase the regulators’ ability to share data to better monitor implementation of the new rules and guard against fraud.  

NASAA President Mike Rothman (L) and SEC Acting Chairman Michael Piwowar sign MOU.

SEC Charges Fuel Cell Company and Officers With Defrauding Investors

The Securities and Exchange Commission today charged a California-based penny stock company and four corporate officers with misleading investors about the research, development, and profitability of their purported business to manufacture power generation products such as fuel cells.

The SEC alleges that while raising approximately $7.9 million from investors in Terminus Energy Inc., the company and its officers claimed to have a viable prototype capable of being sold and earning revenue.  According to the SEC’s complaint, Terminus did not have the fuel cell technology or the funding to match their claims, and the officers were instead converting substantial amounts of investor funds to their own use.

According to the SEC’s complaint, the company failed to disclose to investors that Terminus’s operations manager George Doumanis is a convicted felon who went to prison for securities fraud and was secretly acting as an officer of the company despite being barred from participating in penny stock offerings.  Emanuel Pantelakis served on the Terminus board of directors despite having been permanently barred by the Financial Industry Regulatory Authority.  Also charged in the SEC’s complaint are Terminus’s CEO Danny B. Pratte and its former president, director, and legal counsel Joseph L. Pittera. 

Terminus also allegedly used unregistered brokers to sell its securities and paid them more than twice as much in commissions than was disclosed to investors in offering documents.  Joseph Alborano is charged in the SEC’s complaint with soliciting and selling investments for which he received more than $1 million in commissions.

“As alleged in our complaint, these company insiders spent massive, undisclosed amounts of investor funds and left the company with no realistic chance of developing a fuel cell product,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today filed criminal charges against Pratte, Doumanis, and Pantelakis. 

The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties as well as officer-and-director bars and penny stock bars.

The SEC’s investigation, which is continuing, is being conducted by Robert H. Murphy and Mark Dee in the Miami office.  The case is being supervised by Jessica M. Weissman, and the litigation is being led by Alejandro Soto.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC Announces Agenda for February 15 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the February 15 meeting of its Advisory Committee on Small and Emerging Companies.  The committee will discuss secondary market liquidity for Regulation A companies and reporting companies not listed on an exchange, and explore why more companies may be choosing to stay private.  It also will consider recommendations on corporate board diversity and on the treatment of so-called “finders” that assist companies in capital raising activities.

The February 15 meeting will begin at 9:30 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

AGENDA

SEC Charges Investment Adviser With Stealing Investor Funds

The Securities and Exchange Commission today charged a Connecticut-based investment advisory business and its owner with stealing money from investors to settle a private lawsuit among other misuses.

The SEC alleges that Sentinel Growth Fund Management and its founder Mark J. Varacchi misrepresented to investors that money they deposited with the firm would be allocated to up-and-coming hedge fund managers for investment purposes.  According to the SEC’s complaint, Varacchi and Sentinel Growth Fund Management did not transfer all the money as promised, instead commingling investor assets and manipulating account activity, account balances, and investment returns as part of a scheme to siphon away investor funds.  Varacchi and his firm allegedly stole at least $3.95 million from investors, including more than $1 million to settle litigation brought by Varacchi’s prior employer.

“As alleged in our complaint, Varacchi promised investors that their money would be routed to up-and-coming hedge fund managers when in reality he was diverting significant portions for personal use and unauthorized business expenses,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

The SEC’s complaint seeks disgorgement and penalties against Varacchi and Sentinel Growth Fund Management.  The complaint also names two hedge funds as relief defendants for the purposes of recovering investor assets in their possession.

The SEC’s investigation, which is continuing, is being conducted by the Asset Management Unit and the Boston Regional Office, including Robert Baker, Cynthia Baran, Trevor Donelan, Michael Moran, and Naomi Sevilla.  The SEC’s litigation will be led by Martin Healey, Mr. Baker, and Mr. Moran.    

Sentinel Growth Fund Management was not registered with the SEC or any state to do business as an investment adviser.  Investors can quickly and easily check the SEC’s investor.gov website before they invest to determine whether people selling them investments are properly registered.

Citigroup Paying $18 Million for Overbilling Clients

The Securities and Exchange Commission today announced that Citigroup Global Markets has agreed to pay $18.3 million to settle charges that it overbilled investment advisory clients and misplaced client contracts.

The SEC’s order finds that at least 60,000 advisory clients were overcharged approximately $18 million in unauthorized fees because Citigroup failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories, and other documents.  Citigroup also improperly collected fees during time periods when clients suspended their accounts.  The billing errors occurred during a 15-year period, and the affected clients have since been reimbursed.

“Advisory clients have every expectation that the fees charged by their financial adviser reflect the negotiated rate.  Citigroup failed to take the necessary precautions to ensure clients were billed in a manner consistent with their advisory agreements,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order further finds that Citigroup cannot locate approximately 83,000 advisory contracts for accounts opened from 1990 to 2012.  Without those missing advisory contracts, Citigroup could not properly validate whether the fee rates negotiated by clients when accounts were opened were the same advisory fee rates being billed to clients over the years.  It is estimated that Citigroup received approximately $3.2 million in excess fees from advisory clients whose contracts were lost.

“It’s a fundamental responsibility of a financial adviser to preserve key account documents such as advisory contracts.  Citigroup failed to safeguard its client contracts, which seriously impeded its ability to determine the proper amount of fees the firm was authorized to charge,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office.

Citigroup consented to the SEC’s cease-and-desist order and agreed to undertakings related to its fee-billing and books-and-records practices.  The firm is censured and must pay $3.2 million in disgorgement of the excess fees collected due to the missing contracts plus $800,000 in interest and a $14.3 million penalty.

The SEC’s investigation has been conducted by Olivia Zach and Celeste Chase in the New York office and supervised by Mr. Wadhwa.

SEC Charges Two Former Och-Ziff Executives With FCPA Violations

The Securities and Exchange Commission today charged two former executives at Och-Ziff Capital Management Group with being the driving forces behind a far-reaching bribery scheme that violated the Foreign Corrupt Practices Act (FCPA).

Och-Ziff and two other executives previously settled charges against them in the case.

The SEC’s complaint filed today alleges that Michael L. Cohen, who headed Och-Ziff’s European office, and an investment executive on Africa-related deals, Vanja Baros, caused tens of millions of dollars in bribes to be paid to high-level government officials in Africa.  Their alleged misconduct induced the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds.  Cohen and Baros also allegedly directed illicit efforts to secure mining deals to benefit Och-Ziff by directing bribes to corruptly influence government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo. 

“As alleged in our complaint, Cohen and Baros were the masterminds of Och-Ziff’s bribery scheme that improperly used investor funds to pay bribes through agents and partners to officials at the highest levels of foreign governments,” said Kara Brockmeyer, Chief of the SEC’s FCPA Unit. 

The SEC’s complaint charges Cohen and Baros with violating the FCPA and Section 30A of the Securities Exchange Act, and aiding and abetting Och-Ziff’s violations.  Cohen also is charged with violating Sections 206(1) and 206(2) of the Investment Advisers Act.  The SEC is seeking monetary penalties against Cohen and Baros among other remedies.

The SEC’s investigation was conducted by Neil Smith and Paul Block of the FCPA Unit and Rory Alex of the Boston Regional Office.  The litigation is being led by Marc Jones and Martin Healey of the Boston office.  The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice, the U.S. Attorney’s Office for the Eastern District of New York, the Federal Bureau of Investigation, and the Internal Revenue Service’s Criminal Investigations Division.  The SEC also appreciates the assistance of the United Kingdom’s Financial Conduct Authority as well as the Guernsey Financial Services Commission, Jersey Financial Services Commission, Malta Financial Services Authority, Cyprus Securities and Exchange Commission, Gibraltar Financial Services Commission, and Swiss Ministry of Justice.

SEC Establishes Supervisory Cooperation Arrangement With Hong Kong SFC

The Securities and Exchange Commission today announced that it has established a comprehensive arrangement with the Hong Kong Securities and Futures Commission (SFC) as part of the SEC’s long-term strategy to enhance the oversight of regulated entities that operate across national borders. 

Hong Kong is a major financial center and the new supervisory cooperation arrangement will augment the SEC’s and the SFC’s ability to share information about regulated entities that operate in the U.S. and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies.  The new comprehensive arrangement expands upon the one from 1995 that was limited to investment management activities.

“By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis,” said Paul A. Leder, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts builds on more than three decades of experience with cross-border cooperation, starting in the late 1980s with memoranda of understanding (MOUs) facilitating information sharing between the SEC and other securities regulators in securities enforcement matters. Enforcement cooperation MOUs help the SEC collect information abroad to investigate securities-law violations and compensate victims of securities fraud when possible.  Supervisory cooperation arrangements establish mechanisms for ongoing consultation and the exchange of information regarding the oversight of global firms and markets.  Such information may include routine supervisory information as well as information regulators need to monitor risk concentrations, identify emerging risks, and better understand a globally active regulated entity’s compliance culture.  These arrangements also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located outside the U.S.

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml

Jennifer Diamantis Named Chief of Office of Market Intelligence

The Securities and Exchange Commission today announced that Jennifer A. Diamantis has been named Chief of the Enforcement Division’s Office of Market Intelligence, which is responsible for the collection, analysis, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year.

Before arriving at the SEC in September 2016 to become Deputy Chief of the office, Ms. Diamantis held various positions in the private sector and at federal agencies, including the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and Commodity Futures Trading Commission.  She supervised, investigated, litigated, and managed enforcement actions and oversaw the implementation of complex regulations in the financial space.

The previous Chief of the Office of Market Intelligence, Vincente L. Martinez, left the SEC last summer, and Ms. Diamantis has been serving as Acting Chief since she arrived.

“Within a short time, Jennifer has enhanced the Office of Market Intelligence’s critical mission of overseeing the SEC’s collection, evaluation, and dissemination of the vast array of market intelligence that we receive,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  “Jennifer’s rich work experience as a manager and supervisor and her dedication, expertise, and skill make her an ideal fit for leading the office.”

Ms. Diamantis said, “I am honored to lead the team of dedicated professionals charged with the critically important task of leveraging the valuable intelligence we receive from the public to protect investors, and look forward to continuing to cultivate relationships with our regulatory partners to further this mission.”

Before joining the SEC staff, Ms. Diamantis held various roles at the CFPB’s Division of Research, Markets, and Regulations, most recently Managing Counsel.  Before that, she served as Supervisory Counsel in the FDIC’s Enforcement Section and Senior Trial Attorney in the CFTC’s Division of Enforcement.  She also was a partner at the law firm of Schnader Harrison Segal & Lewis LLP. 

Ms. Diamantis received her law degree from the University of Michigan Law School in 1999, and earned her bachelor of arts degree with honors from the University of Florida in 1996.