SEC Brings Action for Falsely Claiming Federal Registration Eligibility
The SEC has instituted enforcement proceedings against an adviser that it alleges falsely claimed SEC registration eligibility and failed to disclose to clients an impaired financial condition and certain disciplinary events. The adviser claimed that it was eligible for SEC registration because it advised a registered investment company. However, the SEC argues that the respondent did not have an advisory contract with a UIT but only had consulting agreements with the UIT sponsor whereby the respondent would assist the UIT sponsor in selecting a portfolio of securities for a one-time fee. Moreover, the respondent could not claim the UIT’s assets because it did not provide “continuous and regular supervision of the trust’s assets.” The SEC also charges that the respondent failed to communicate to clients a seriously impaired financial condition because the firm “had minimal liquid assets and several overdue bills.” Additionally, the SEC alleges that the firm failed to disclose a litigation judgment and a FINRA action.
OUR TAKE: SEC registration may become the Mendoza Line for advisers seeking to attract institutional assets. And, with the threshold moving from $25 to $100 Million, many advisers may try to get creative to claim SEC eligibility. The SEC shows its willingness to bring enforcement actions for false AUM or business claims.