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Written by: Jay B. Gould, Michael G. Wu and Jessica M. Brown

In January, 2010, the Securities and Exchange Commission (“SEC”) announced its Enforcement Cooperation Initiative (“Initiative”), which provided the SEC with the ability to offer certain individuals or entities immunity or other preferential treatment in exchange for information about illegal activities and/or cooperation with the SEC in connection with SEC enforcement actions. These techniques, such as cooperation and immunity agreements, or deferred and non-prosecution agreements were adopted by the SEC as a result of their effectiveness against organized crime investigations and the then recent hires by the SEC from the U.S. Attorney’s Office which regularly employs those tools. 

For a full description of the types of agreements in which the SEC may enter with an enforcement target or other “person of interest,” see the 2013 Enforcement Manual HERE.  Since the Initiative began, the SEC has entered into thirteen cooperation agreements, three deferred prosecution agreements and four non-prosecution agreements. See those agreements on the Initiative website HERE.

On November 12, 2013, the SEC announced its first deferred prosecution agreement with an individual. Scott Herckis (“Herckis”) had brought to the attention of the SEC certain fraudulent activities at the Heppelwhite Fund LP, where he acted as fund administrator through his financial and accounting services firm, SJH Financial, LLC. With the information and materials provided by Herckis, the SEC was able to bring an enforcement action against fund manager Berton Hochfeld for misappropriating over $1.5 million from the fund and overstating performance. The harmed Heppelwhite investors have since been granted a $6 million distribution by a federal judge.

After Herckis became aware of the fraudulent scheme, his actions and omissions enabled the scheme to continue for many months, yet without his cooperation and information, the scheme may have gone undetected. The deferred prosecution agreement provides for sanctions and penalties against Herckis for his role in the fraud but no further action will be taken against him for his violations, provided he does not violate the terms of the agreement.  This leaves industry participants pondering what further action the SEC would have taken against Herckis had he not cooperated and what the value of a deferred prosecution agreement might really be. Click HERE to read the Herckis deferred prosecution agreement.  

The SEC and federal prosecutors are continuing to explore alternative approaches to penalize companies and their principals for what they consider egregious securities law violations. In the recent criminal proceeding of SAC Capital Advisors LP (“SAC”), prosecutors considered whether criminal charges under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) would be appropriate. RICO allows for criminal charges, with substantial penalties, against the leader of an organization for acts that they ordered others to commit. Traditionally RICO has been successfully used against organized crime figures.  Federal prosecutors have taken the position that RICO may also be successfully used against the leaders of a legal entity, which could greatly increase the potential personal liabilities that an executive may face.  Although the SEC has now incorporated certain enforcement techniques used by criminal prosecutors, the SEC can only bring civil actions against alleged wrongdoers, but it can, and with increasing frequency does, refer cases over to the Justice Department for criminal prosecution.

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Written by:  Jay B. Gould and Jessica M. Brown

On October 28, 2013, the Securities and Exchange Commission (“SEC”)  brought enforcement actions and imposed sanctions on three different registered advisers and their principals for violations of Rule 206(4)-2 under the Investment Advisers Act of 1940 (the “Custody Rule”).  The circumstances that gave rise to each adviser being deemed to have custody differed, however, certain violations of the Custody Rule were present in each case.  These advisers were sanctioned for (i) incorrectly reporting their custody of client assets on their Form ADV, (ii) not conducting a surprise audit by an independent public accountant to verify client assets in custody, (iii) not having a reasonable belief that a qualified custodian was delivering account statements to fund investors at least every quarter, and (iv) a lack of properly written policies and procedures to protect client assets in custody.

This interest by SEC examination and enforcement staff should come as no surprise to investment advisers.  Each year, the SEC publishes a list of areas on which examiners will focus their efforts during the year.  The 2013 examination priority publication listed the Custody Rule as the first item on the priority list.  The SEC clearly stated to the industry that examinations of investment advisers would scrutinize the adviser’s (i) understanding of what constitutes custody, (ii) compliance with the “surprise exam” requirement of the Custody Rule, (iii) satisfaction of the “qualified custodian” provision and, (iv) if applicable, proper use of the exception for pooled investment vehicles.

Generally, any adviser that has access to a client’s account or assets, or has an arrangement in place that permits it to withdraw client assets, must comply with the Custody Rule.  An exception to the annual surprise audit and account statement delivery requirements are available for advisers that have custody of private fund or hedge fund assets, as long as certain conditions are met.

Because the definition of custody is both broad and somewhat convoluted, advisers should regularly review how client assets are maintained to determine if they have custody of client assets within the meaning of the Custody Rule and, if so, whether their compliance procedures, regulatory disclosures and marketing materials accurately reflect current business practice.  Investment advisers should always stay familiar with what the SEC has determined will be examination and enforcement priorities.

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This is a reminder that the 2014 IARD account renewal obligation for investment advisers starts this November.  An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 11, 2013 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 13, 2013 – Deadline for full payment of Preliminary Renewal Statements.  By December 10, 2013, an investment adviser should have submitted to FINRA through the IARD system, its preliminary renewal fee in order for the payment to be posted to its IARD Renewal account by the December 13 deadline.

January 2, 2014 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 10, 2014 – Deadline for full payment of Final Renewal Statements.

For more information about the 2014 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit