Tag Archives: policies and procedures

EB-5 Program Operator Settles With SEC For Over $7.9 Million

The SEC has announced that an Idaho man who operated an EB-5 regional center has agreed to settle a case against him alleging that he took millions of dollars to pay for luxury cars and investments unrelated to the purpose of the particular EB-5 program at issue, i.e., to develop luxury real estate and invest in gold mining ventures in Idaho and Montana.

The EB-5 program is a special expedited path to a green card for foreign investors who provide a set minimum of investment capital that creates at least 10 U.S. jobs within 2 years of the investment. The program is designed to incentivize investment in rural areas (e.g., Idaho) or high unemployment areas. Whereas the minimum for such “targeted employment areas” is $500,000, the minimum for more affluent areas is $1 million.

The respondent, Serofim Muroff, and his assistant and bookkeeper are alleged to have diverted about $5.5 million of the $140.5 million in investment money provided by Chinese investors. In addition to disgorging the allegedly diverted proceeds, Muroff has agreed to a $2 million penalty plus interest, and to be barred from conducting further EB-5 offerings. Neither Muroff nor his assistant admitted or denied the allegations in the SEC’s complaint.

Here is the press release.

https://www.sec.gov/litigation/litreleases/2017/lr23818.htm

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DOL Proposes 60-Day Delay of Fiduciary Rule

The DOL has proposed an initial 15-day public comment period on the issue of whether to delay the April 10 implementation date of the DOL fiduciary rule, which, if ever effective, would subject large amounts of IRA rollover advice, and other retirement advice, to a fiduciary standard. After the 15 days, the DOL has proposed another 45 days during which the DOL is to analyze the economic impact of the Rule on investors and the marketplace.

Specifically, in his February 3, 2017 memorandum, President Trump directed the the DOL “to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” Accordingly, it is likely that the Rule, as is or amended, will not become effective for some time. Meanwhile, many broker dealers, registered investment advisers, and the representatives they employ have already spent thousands of hours in training and millions of dollars preparing to comply with the Rule.

Stay tuned.

SEC Sanctions $1B AUM Investment Adviser for Weak Compliance Culture

On June 23, 2015, the SEC censured an investment advisor and its two principals for rickety compliance policies and procedures.[1] Among other things, the SEC found that, due to systemic compliance failures, the advisor overcharged its high net worth clients for their investments in a mutual fund called the Appleseed Fund. The firm, Pekin Singer, offered shares in the Appleseed Fund under a sliding fee structure where clients who met a higher minimum investment paid a lower fee. Pekin Singer failed to timely advise its clients, most of whom met the higher minimum investment threshold, that they could convert to the lower costs shares, thereby improperly increasing the firm’s bottom line at the expense of customers.

Pekin Singer’s internal compliance issues ran deep. In 2009 and 2010, it failed to conduct required annual compliance program reviews and it chronically underfunded and underemphasized its compliance function. For example, the firm’s former CCO had limited compliance experience and was required to simultaneously serve as the CFO of the firm. Because of the multiple hats the he wore, the CCO was only able to devote 10% to 20% of his time to compliance issues.

Further, the CCO, aware of his limitations in the compliance area, sought to hire outside compliance help. After two years of lobbying, the firm hired an outside compliance consultant. The consultant’s review coincided with an OCIE examination by the SEC’s Chicago office. The examination and consultant’s review uncovered a number of compliance failures, including improper trading by an employee, which could have been prevented if the firm had enforced its code of ethics.

To its credit, Pekin Singer fully cooperated with the SEC and returned the excessive fees to its clients. It also hired a new CCO whose only job is compliance and hired an outside attorney to advise on securities law issues relating to mutual funds. Finally, the firm has continued and expanded its relationship with an outside compliance consultant who is charged with monitoring and advising on the firm’s annual compliance program reviews.

Bottom line: Advisory firms and their principals should not skimp on or de-prioritize compliance issues. While having robust compliance policies and controls in place can seem costly up front, the costs to the firm, both in terms of reputation and money, can be much more if OCIE finds deficiencies.

[1] http://www.sec.gov/litigation/admin/2015/ia-4126.pdf