SEC Charges Three Investment Advisory Firms with False Filings to Avoid State Registration SEC Charges Three Investment Advisory Firms with False Filings to Avoid State Registration

SEC Charges Three Investment Advisory Firms with False Filings to Avoid State Registration

On February 4, 2015, the Securities and Exchange Commission charged three investment advisory firms with making false representations and statements in their Form ADV, which improperly enabled them to register with the SEC rather than with their respective State agencies.  In the Matter of New Line Capital, LLC and David A. NaglerIn the Matter of Brenda L. RidleyIn the Matter of Arete Ltd.

Section 410 of the Dodd-Frank Act amended Section 203A of the Investment Advisers Act of 1940 by creating a new category of “mid-sized advisers,” which includes registered investment advisers (“RIAs”) holding assets under management between $25 million and $100 million.  Like “small advisers” (managing less than $25 million), these new “mid-sized advisers” must register as investment advisers with the State where they maintain their principal office and place of business rather than with the SEC.  However, if an investment adviser operates in a State that does not regulate advisers, the adviser still must register with the SEC.  The only State currently that falls within that exception is Wyoming.  Thus, any investment adviser working principally in Wyoming is required to register with the SEC.

The SEC alleges that the three investment advisory firms and their top officials falsely represented that they were based in Wyoming, in order to retain their SEC registration.   In the Matter of New Line Capital, LLC and David A. Nagler, for example, the SEC alleged that New Line Capital and its owner did not control or coordinate any activities of New Line from Wyoming, Nagler did not reside in Wyoming, Nagler never met with clients in Wyoming, New Line Capital rarely used a small rented office in Wyoming, and New Line Capital did not maintain any books and records in Wyoming.  As an SEC Regional Director noted, “[t]hese investment advisers made false filings to become SEC registered and risked giving investors the misleading appearance that they were larger firms with more assets than those required to register at the state level.” 

Two of the investment advisory firms and their principals have already agreed to settle the SEC enforcement actions, agreeing to fines and cease and desist orders.    

These recent SEC enforcement actions underscore that, after the 2010 Dodd-Frank amendments, the States are the principal regulators of RIAs in the United States, and the SEC will not look kindly upon an RIA’s circumvention of that arrangement.  Indiana registration requirements can be found at Indiana Code § 23-19-4 et seq.  Pursuant to Ind. Code § 23-19-4-3(a), it is a violation of the Indiana Uniform Securities Act for a person to transact business as an investment adviser unless the person is registered under the Indiana Act or is exempt from registration.  Illinois registration requirements are similar to Indiana and can be found at 815 ILCS 5 et seq.  Section 12.C of the Illinois Securities Law Act further states that it is a violation of the Act for any person to act as an investment adviser representative unless registered.  Ohio registration requirements can be found at Ohio R.C. §1707.141.   Ohio R.C. § 1707.44(A)(2) prohibits the unlicensed giving of investment advice.  R.C. § 1707.42(B) also provides that whoever acts as an investment adviser without registration shall be liable for damages resulting from the violation. 

We recommend that you consult legal counsel for guidance on registration requirements and the potential for regulatory and private causes of action.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.


View Full Site View Mobile Optimized