SEC Enforcement Action Rundown

Who may be interested: Registered Investment Advisers, Registered Investment Companies, Compliance Staff

Quick Take: The SEC recently announced a number of enforcement actions relating to recordkeeping failures, registration and disclosure violations, and violations of both the Marketing Rule and Custody Rule.

I. Credit Rating Agencies Fined Over $49 Million for Recordkeeping Failures

The SEC announced settled charges against six nationally recognized statistical rating organizations (NRSROs) for failing to maintain and preserve electronic communications. Each NRSRO was charged with violating Section 17(a)(1) of the Exchange Act and Rule 17g-2(b)(7) thereunder. These enforcement actions are the latest in the SEC’s sweep of off-channel communications recordkeeping violations.

In total, the firms will be required to pay more than $49 million in civil penalties. In addition, each firm acknowledged that its behavior violated recordkeeping provisions of the federal securities laws and has begun to implement remedial compliance measures. Four of the firms also must hire compliance consultants and conduct comprehensive reviews of their policies and procedures with respect to the retention of electronic communications on their employees’ personal devices and methods of addressing employee noncompliance with these policies.

The SEC noted that two of the firms made significant efforts to follow the recordkeeping requirements and cooperated with the SEC’s investigations. As a result, these firms will not be required to retain compliance consultants.

The SEC’s ongoing recordkeeping sweep has focused on firms that fail to maintain records in connection with electronic communications, including texts and WhatsApp messages. See Seward & Kissel’s publications covering the SEC’s prior enforcement actions involving off-channel communications here, here, here and here.

The SEC’s press release announcing the settled charges can be found here.

II. SEC Charges Private Fund Adviser with Marketing Rule and Registration Violations

The SEC charged a private fund adviser and its CEO with violations of Sections 203(a), 204, and 206(4) of the Advisers Act and Rules 204(b)-1(a), 206(4)-1(a)(6), and 206(4)-(8) thereunder. These violations fell into two buckets: violations of the Marketing Rule and violations of registration requirements.

According to the SEC’s complaint, the adviser and its CEO violated the Marketing Rule by using performance data in an unfair and unbalanced manner on the firm’s website, distributing misleading performance information in marketing materials, and failing to maintain required books and records.

Additionally, the complaint states that the adviser and its CEO failed to register as investment advisers with the SEC between December 2021 and March 2024.

Without admitting or denying the allegations and subject to court approval, the adviser and CEO agreed to be permanently enjoined from violating the aforementioned Advisers Act provisions and to pay civil penalties.

This enforcement action resulted from the ongoing Marketing Rule sweep by the SEC. In September 2023, the SEC brought nine enforcement actions under the Marketing Rule. In March 2024, the SEC brought two additional enforcement actions under the Marketing Rule relating to AI washing. In May 2024, the SEC brought charges against five investment advisers for Marketing Rule violations and issued a Risk Alert on investment adviser compliance with the Marketing Rule.

The SEC’s complaint can be found here.

III. SEC Charges Adviser with Custody Rule and Liability Disclaimer Violations

The SEC announced settled charges against an adviser for using impermissible liability disclaimers in its advisory and private fund agreements and for not complying with requirements related to the safekeeping of client assets. Through these violations, the order alleges, the adviser violated Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder.

According to the SEC’s order, the adviser failed to timely distribute audited financial statements annually to investors in some private funds that it advised. Further, the SEC’s order alleges that the adviser included liability disclaimers, or hedge clauses, in its advisory agreements and private fund partnership and operating agreements that could cause clients to incorrectly believe they had waived certain non-waivable causes of action against the adviser. Certain of the hedge clauses were also allegedly misleading with respect to the adviser’s unwaivable fiduciary duty.

Without admitting or denying the findings, the adviser agreed to a cease-and-desist order, a censure, and to pay a $65,000 civil penalty.

The SEC’s order can be found here.

IV. Adviser Fined $225,000 for Custody Violations

The SEC announced settled charges against an investment adviser to a private fund for not following Custody Rule requirements with respect to safeguarding crypto assets, including crypto assets that are offered and sold as securities. Charges against the adviser were based on alleged violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

According to the order, the adviser failed to ensure that crypto assets held by the private fund that it advised were maintained with a qualified custodian in violation of the Custody Rule. Certain of the fund’s crypto assets were held in online trading accounts on crypto asset trading platforms that were not qualified custodians. When one of these platforms collapsed, the fund lost approximately half of its total assets under management.

Additionally, the SEC’s order alleges that the adviser misled fund investors about the notice required for redemptions, allowing certain investors to make redemptions upon shorter notice than that which was disclosed to investors.

Without admitting or denying the findings, the adviser agreed to a cease-and-desist order, a censure, and to pay a $225,000 civil penalty that will be distributed to the fund’s harmed investors.

The SEC’s order can be found here.

V. Adviser Fined $350,000 for Disclosure and Approval Failures Regarding Affiliated Service Providers

The SEC announced settled charges against an adviser for breaches of its fiduciary duty for failing to follow certain contractually agreed procedures relating to the timely disclosure of, and consent to, expenses that the adviser allocated to its managed funds. According to the SEC’s order, the adviser violated the antifraud and compliance provisions of Advisers Act Sections 206(2) and 206(4), as well as Rules 206(4)-8 and 206(4)-7 thereunder.

The SEC’s order alleges that under approximately 40 agreements between the adviser’s affiliates and the adviser’s private funds, the affiliates acted as service providers in various capacities for the funds. Between 2017 and 2021, the adviser allegedly failed to provide timely disclosures to limited partners or receive consent from the limited partnership advisory committees or majority-in-interest of limited partners with respect to affiliate transactions, as required by the agreements.

Moreover, the adviser failed to disclose to the limited partnership advisory committee of one fund certain expenses that the fund incurred in affiliate transactions during the same fiscal year that the expenses were charged.

Without admitting or denying the findings, the adviser agreed to a cease-and-desist order, a censure, and a civil penalty of $350,000.

The SEC’s order can be found here.

VI. SEC Charges Nine Investment Advisers for Marketing Rule Violations

The SEC announced settled charges against nine advisers for allegedly violating the Marketing Rule, Advisers Act Rule 206(4)-1. According to the SEC’s orders, the advisers disseminated marketing materials containing untrue or unsubstantiated statements of material fact or testimonials, endorsements, or third-party ratings without required disclosures.

The alleged Marketing Rule violations in the orders varied by firm. According to the SEC’s orders,

• two of the firms published false statements regarding third-party ratings;
• one firm’s advertisement claimed that it was a member of a nonexistent organization;
• four firms advertised that they provided “conflict-free advisory services” without being able to substantiate the claim;
• one firm disseminated marketing materials touting an award given to a firm principal that it could not substantiate;
• one firm disseminated testimonials that were not from current clients and endorsements that did not disclose the endorser was both (i) a non-client and (ii) paid for its endorsement; and
• four of the firms included third-party ratings in their advertisements without disclosing when the ratings were given, what periods of time the ratings were based on, or that (in some cases) the ratings were over five years old.

Without admitting or denying the findings, the advisers agreed to pay a cumulative $1,240,000 in civil penalties. Individual firms’ penalties ranged from $60,000 to $325,000.

The SEC’s press release announcing the charges can be found here.