Author: Doug Cornelius

You can find out more about Doug on the About Doug page

More Filing Relief from the SEC

The SEC must have realized that its relief from Form ADV filing and Form PF filing deadlines was not providing much relief. The SEC issued a new order for the deadlines.

You still have to send the SEC a notice that your firm is relying on the Order, but you no longer have to say why you can’t file the forms on a timely basis and don’t have to provide an estimated date for delivery.

The SEC has not extended the deadline. It’s still only 45 days.

If you are relying on the Order, you still need to post a notice on your firm’s website.

I think most firm’s are not going to take advantage of the order. Nobody wants to tell the SEC that can’t meet a deadline, even in the case of a pandemic.

Sources:

SEC Exams During the Covid-19 Pandemic

The SEC’s Office of Compliance Inspections and Examinations issued a statement on operations and exams during the pandemic. OCIE is still operational and can still run exams. They will be off-site through correspondence, unless necessary to be on site. I assume this means that OCIE is focusing on firms suspected of fraud and is limiting routine exams.

I’ve also heard that OCIE is asking firms about their pandemic response as part of their business continuity plans. For many firms this pandemic is a test of their BCPs.

Some of the SEC questions:

Does the firm have: (i) a written Business Continuity Plan; (ii) a Pandemic Continuity of Operations Plan; and/or (iii) equivalent informal plans or guidance (collectively, “BCP”)?

If so: Briefly describe some of the aspects of the BCP that are particularly applicable to maintaining continuity of business operations when dealing with the COVID-19 pandemic (e.g., personnel working remotely).

Are there any business operations that cannot be performed remotely?

Is the firm prepared to have all of its personnel operate remotely for several weeks (e.g., 3+) or months, if required or appropriate? Are any personnel unable to operate remotely or unable to do so for several weeks or months?

Has the COVID-19 pandemic created hardships for the firm (e.g., financial, human resources, or otherwise)?

Sources:

Some Additional Relief From the SEC

The timing of the Coronavirus is coming at the time most private funds are working on audited financial statements.

Form ADV and Form PF

The first move was giving some extra time to file your Form ADV. It requires notifying the SEC and posting information on your website. Similar extensions are available for filing Form PF.

Custody

The SEC updated Question II.1 of the Custody Rule FAQ about inadvertently receiving client funds or securities. Given that many firms are unable to access mail and deliveries at their offices, The SEC has revised the guidance to set the date when the firm is considered to have received such securities on the date that they actually are able to access mail or deliveries at their office locations. The guidance requires investment advisers to return inadvertently received client funds and securities. Now the FAQ modifies that the “three business day” clock begins to run when you have access to office mail and deliveries. This relief is only available when the investment adviser’s personnel are unable to access mail or deliveries as a result of the investment adviser’s business continuity plan relating to COVID-19.

Form ADV – Office Locations

With many firms operating under business continuity and working from home, I’ve heard some concerns about office locations. If people are working from home on a longer basis does that become an office location that needs to be reported on Form ADV?

The SEC stepped up and answered the question. ” As long as the employees are temporarily teleworking as part of the firm’s business continuity plan due to such circumstances, staff would not recommend enforcement action if the firm does not update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses.”

Audited Financial Statements

There is an older FAQ on delivery of audited financial statements under the custody rule for pooled investment vehicles. What happens if you’re not able to get your audited financial statements out within the 120 days mandated by the custody rule?

A: The Division would not recommend enforcement action for a violation of rule 206(4)-2 against an adviser that is relying on rule 206(4)-2(b)(4) and that reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances. (Question VI.g Modified March 5, 2010.)

I would put the Covid-19 into the category of unforeseeable circumstances. On the other hand, private fund documents typically contain a contractual obligation to deliver financial statements in a stated period of time.

Stay Healthy

I hope all the readers of Compliance Building are staying healthy. These are extraordinary times. Use common sense.

Sources:

Compliance Bricks and Mortar for March 20

I’m going to assume that most of the readers of Compliance Building are working remotely. I hope your firms’ business continuity processes are holding up and you’re keeping things together.

I have to admit that I’m getting a little crazy being stuck in the house and working from home so many days in a row. I’ve cut back on riding outside and am spending more time on Zwift in my basement. If you’re a Zwift rider, let me know and we can ride a virtual meetup.

If your looking for compliance-related stories to read, here are a few that caught my attention.

Coronavirus, Systemic Risk, and Lessons from 2008
by Kathryn Judge
The CLS Blue Sky Blog

Banks cannot be blamed for starting the current crisis, nor can financial regulators be expected to contain it.  It is, at bottom, a public health crisis, and  the top priority must be to contain the spread of Covid-19. Yet the pandemic will inevitably trigger widespread economic problems, and while congressionally authorized fiscal support will be the most important tool for minimizing them, the health of the financial system will also come into play. If the reforms of the last decade work, the financial system should be able to absorb this shock and continue to provide the support that the real economy will so desperately need to recover.  But if runs, losses, and uncertainty take over – and sadly, this seems more likely at this stage – the financial system could magnify, rather than soften, the economic impact of Covid-19.

https://clsbluesky.law.columbia.edu/2020/03/16/lessons-from-the-last-crisis/

A Horse Racing Scandal: Lessons Learned
by David D. Dodge
SCCE’s The Compliance & Ethics Blog

Following the announcements of the federal indictments on March 9, Kentucky Derby-winning trainer Graham Motion stated that, “If this doesn’t wake up as an industry, I don’t know what will… it’s our own fault. We let it happen. This shows we are incapable of policing our own sport and that’s a sad situation.” Motion went on to express hope that “the indictments will bring the sport to rock bottom where opposition to the Horseracing Integrity Act will evaporate and the sport will finally embrace national standards for medications and safety.”

https://complianceandethics.org/a-horse-racing-scandal-lessons-learned/

SEC Has Two ‘Suspected’ Coronavirus Cases, Agency Official Says
by Andrew Ramonas
Bloomberg

Two workers at the SEC’s Washington headquarters may have the new coronavirus, an agency official said in a court filing. The Securities and Exchange Commission’s Enforcement Division has implemented an emergency policy of “either requiring or strongly encouraging telework for its personnel, depending on their individual circumstances and each employee’s physical proximity to the workstations of two suspected COVID-19 cases,” David Mendel, an SEC assistant chief litigation counsel, said in a letter to U.S. District Judge Alvin Hellerstein in New York March 13.

https://news.bloomberglaw.com/securities-law/sec-has-two-suspected-coronavirus-cases-agency-official-says

COVID-19 and the Compliance Risks Related to Sales and Marketing Practices
by Jennifer Kennedy Park and Jonathan Kelly
NYU Law’s Compliance & Enforcement

Those businesses hardest hit in the initial stages of the crisis — e.g., cruise lines, airlines and hotels —  quickly face pressures that raise the risks of private litigation and government enforcement in connection with sales and marketing efforts.  For example, what assurances should sales representatives in response to inquiries about the chances of contracting the virus in connection with the use of a product or service?  What information should be provided about safety measures being taken?  Do sales commission and incentive programs exacerbate the risks of non-compliant responses, and should they be suspended? 

https://wp.nyu.edu/compliance_enforcement/2020/03/17/covid-19-and-the-compliance-risks-related-to-sales-and-marketing-practices/

Freshfields Discusses How Companies Can Switch to Virtual Annual Meetings After Proxy Filings
By Pamela L. Marcogliese, Elizabeth K. Bieber and Jillian Simons
The CLS Blue Sky Blog

In light of the novel coronavirus, COVID-19, companies are considering the advisability of holding in-person annual meetings.  Given the timing of the COVID-19 emergence, companies with December 31 fiscal year ends may be weighing a change to their meeting format after filing their proxy statements and with little time until their annual meeting date.

https://clsbluesky.law.columbia.edu/2020/03/16/freshfields-discusses-how-companies-can-switch-to-virtual-annual-meetings-after-proxy-filings/

Welcome to Watopia – Let’s Be Nice

With many newly-arriving Zwifters worldwide there are a few tips that I think all of us experienced Zwifters need to follow. Let’s cut these newbies a little slack and lend a teaching hand as these new riders find out how many meters the Tron bike actually requires, how to see the real race results on Zwift Power, and most importantly how to connect with the Zwift community more intimately. Whether that’s through group rides, races or just a social club environment, let’s make these folks feel welcome.

https://zwiftinsider.com/welcome-to-watopia-lets-be-nice/

Compliance in Time of Coronavirus

We are in extraordinary times. To me it feels like a combination of the days after 9-11 and the 2008 Lehman collapse. We are sheltered in place, fearful for our lives and the economy is grinding to a halt.

Our government came up short in its response to pandemic. (I try to keep this blog out of the political debate. This is not one of those times.) The administration was ill-equipped to handle the pandemic, ignored the problem, failed to take early action, and has consistently gotten the facts wrong. It’s initial response was tax cuts, which did not address the pandemic and was a poor tool to help those in economic distress. Things will stabilize, eventually.

The next problem will be be figuring out when to end things. We will need to release people from their isolation and tell everyone it’s okay to start meeting again. I fear that we will lack the leadership and trust in government to hit the restart button. Who will honestly tell us that it’s okay to go out?

That leaves us where we are now. Trying to keep our businesses running in this time of crisis. Holding thing together. Waiting for normal to return.

For registered investment advisers, the Securities and Exchange Commission has offered some relief. You can have some extra time to file your Form ADV. It requires notifying the SEC and posting information on your website. Similar extensions are available for filing Form PF. I hope things are better a month from now and firms won’t need that extension.

Sources:

Compliance Bricks and Mortar for March 13

These are some of the compliance-related stories that recently caught my attention. It’s a lot of Coronavirus, but not all of it.

New FINRA Guidance on Pandemic Risks
Matt Kelly
Radical Compliance

Another day, another gumdrop of guidance from financial regulators that’s worth reading for the whole compliance community. This time it’s FINRA, which published a bulletin Monday reminding broker-dealer firms about how to manage pandemic risk.
FINRA has Rule 4370 for broker-dealers, which requires them to draft and maintain a business continuity plan. That rule doesn’t cite pandemics per se, but does say the business continuity plan (BCP) should address “significant business disruption,” which coronavirus certainly is. 

http://www.radicalcompliance.com/2020/03/10/new-finra-guidance-pandemic-risks/

Coronavirus and securities compliance related considerations
Brian Dunlay
Federal Securities Law Source

On March 4, 2020, the Securities and Exchange Commission issued an Order granting conditional relief from certain filing obligations under the federal securities laws for reporting companies whose compliance may be delayed by the coronavirus disease (COVID-19). In the press release accompanying this unprecedented Order, SEC Chairman Jay Clayton noted, “The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, we recognize that this situation may prevent certain issuers from compiling these reports within the required timeframe.”

https://www.fedseclaw.com/2020/03/articles/other-articles/coronavirus-and-securities-compliance-related-considerations/

COVID-19: Evaluating the Need for In-Person Fund Board Meetings and Other Considerations for U.S. Asset Managers
Lori L. Schneider and Marguerite W. Laurent
The National Law Review

In our recent experience, fund boards of directors, in consultation with fund advisers, have begun to consider alternative options to in-person board meetings in light of COVID-19 concerns. Some have decided to hold their meetings telephonically, while others have opted to permit those directors who would need to travel to the meeting to instead attend the meeting telephonically, with those who live in close proximity to the meeting location attending in person. Fund complexes likewise have been reviewing meeting agendas to determine whether any in-person approvals are required under the 1940 Act. To the extent they are, funds that determine to rely on the IDC Letter and/or IM Statement should have the board make a determination (presumably before or at the beginning of the meeting) regarding the unforeseen or emergency circumstances that make reliance on the no-action position appropriate.

https://www.natlawreview.com/article/covid-19-evaluating-need-person-fund-board-meetings-and-other-considerations-us

Pervasive Threat of Business Email Compromise Fraud
Jennifer Archie and Serrin Turner
Harvard Law School Forum on Corporate Governance

Business email compromise is a type of Internet-based fraud that typically targets employees with access to company finances—using methods such as social engineering and computer intrusions. The objective of the fraud is to trick the employee into making a wire transfer to a bank account thought to belong to a trusted partner, but that in fact is actually controlled by the fraudster. According to the FBI, between May 2018 and July 2019, there was a 100% increase in identified global exposed losses due to BEC. 

https://corpgov.law.harvard.edu/2020/03/09/pervasive-threat-of-business-email-compromise-fraud/

Practice Alert: Is every email another FCPA violation?
Bill Steinman
The FCPA Blog

In U.S. v. Coburn and Schwartz, Judge McNulty held that when it comes to charging defendants with violating the FCPA, the relevant question isn’t the number of bribes paid, but the number of calls made or emails sent. To reach this decision – one of first impression under the FCPA – Judge McNulty simply relied on the statute’s plain language. Chatty defendants beware: you can face a separate criminal count for each individual missive you send about the same overall bribery scheme.

https://fcpablog.com/2020/03/10/practice-alert-is-every-email-another-fcpa-violation/

BlackRock and the Curious Case of the Poultry Farmer
Paul Rissman
Harvard Law School Forum on Corporate Governance

Typically, an 11% vote is the end of the story, at least until the next annual meeting when the shareholder may try again. Yet, in this case something unusual happened. Later that same day, a Sanderson press release informed the public that it was going beyond the request of the resolution to issue a report fully compliant with all applicable environmental and social standards set by SASB. Notably, the press release explained that, after “recent extensive engagement with many of its largest stockholders, and in recognition of evolving investor expectations in regard to sustainability reporting,” Sanderson had reversed course.

https://corpgov.law.harvard.edu/2020/03/10/blackrock-and-the-curious-case-of-the-poultry-farmer/

The Latest Revisions to the California Consumer Privacy Act Regulations: Key Considerations for Private Fund Managers
Shulte Roth & Zabel

Although the California Consumer Privacy Act (“CCPA”) went into effect on Jan. 1, 2020, the California Attorney General’s regulations are not yet final, and likely will not go into effect until July 2020. Nonetheless, the most recent version of the proposed regulations, which were issued in February (“Proposed Regulations”), addresses some of the questions fund managers raised during initial compliance with the law.

https://www.srz.com/resources/the-latest-revisions-to-the-california-consumer-privacy-act.html

FinCEN Imposes Its First Penalty on a Bank Compliance Officer for $450,000 for Failing to Prevent AML Violations
NYU Law’s Compliance & Enforcement

On March 4, 2020, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a consent order assessing a $450,000 civil money penalty against Michael LaFontaine, a former Chief Operational Risk Officer at U.S. Bank NA (“U.S. Bank”), for his alleged failure to prevent Bank Secrecy Act/anti-money laundering (“BSA/AML”) violations that took place during his tenure.[1] This action—which follows U.S. Bank’s 2018 BSA/AML-related resolution with FinCEN, the U.S. Department of Justice (“DOJ”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve for a combined $613 million in financial penalties—marks the first time FinCEN has imposed a penalty on a bank compliance officer for his role in failing to prevent BSA/AML compliance program failures.

https://wp.nyu.edu/compliance_enforcement/2020/03/11/fincen-imposes-its-first-penalty-on-a-bank-compliance-officer-for-450000-for-failing-to-prevent-aml-violations/

Foreign Ownership of Real Estate Under New CFIUS Regulations

In September 2019, the U.S. Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Part of those proposed real estate transactions passing ownership to a foreign person near critical locations. The final regulations came out and are largely unchanged.

The regulations extend CFIUS jurisdiction to cover the purchase or lease by, or a concession to, a foreign person of real estate in and/or around specific airports, maritime ports and military installations. The restricted areas depending on the type of critical real estate.

The specific restricted areas are:

  1. Within one mile of any of the 100 identified military installations
  2. Within 99 miles of any of 32 identified military installations
  3. Any county or other geographic area identified in connection with certain Air Force bases located in Colorado, Montana, Nebraska, North Dakota, and Wyoming;
  4. Any part of 23 identified military installations and located within 12 nautical miles of the U.S. coast
  5. Located within or will function as part of an airport or maritime port

Arnold & Porter put together this map of its applicability:

That’s a lot of real estate covered by this rule assuming its accurate. The rule talks about the creation of tool to make this more certain.

One of the exceptions is urbanized areas. Unless the real estate is in “close proximity” of an identified military installation or is part of a covered port, the rule provide an exception for transactions that involve real estate located within an “urbanized area” or “urban cluster.” Those two terms: “urbanized area” or “urban cluster” are defined by the Census Bureau based on population density. Hopefully, most major cities inside all of those problematic areas in the map will fall under this exception. The question will be how far does the urbanized area extend outside the CBD.

Another exception is if your foreign investor is from Australia, Canada or the United Kingdom. Apparently, the Trump administration likes these countries and investors from those three get a pass from CFIUS on real estate transaction. The rules do allow for other countries to be added to the list.

Leases are also excluded from CFIUS as long as the lease is for less than 10% of the building and there are at least 9 other tenants.

Real estate transactions are not subject to mandatory CFIUS filings. Of course you risk having the transaction fall apart if CFIUS comes in later to undo the transaction.

The new rules give you the option of filing a short-form “declaration” rather than the longer, traditional form of “notice.”  That also means a shorter 30-day review period.

Sources:

Compliance Bricks and Mortar for March 6

These are some of the compliance related stories that caught my attention.

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19)

Securities and Exchange Commission announced that it is providing conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws. The impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions.

To address potential compliance issues, the Commission has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances. The Commission may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

https://www.sec.gov/news/press-release/2020-53

How’s Your Business Continuity Plan?
Bruce MaCEwen
Adam Smith, Esq.

Doing all you can to support the professionals and staff who work for you, to provide ongoing reassurance to clients, and to be, to the best of your ability, a genuinely helpful and calming resource to those who might be hit more severely, is your professional and ethical duty.

https://adamsmithesq.com/2020/03/hows-your-business-continuity-plan/

Emergency Preparedness Plan
Joshua M Brown
The Reformed Broker

There’s a regulation in place for investment advisory firms like ours that an emergency preparedness plan must be in place in the event that employees are unable to reach their primary place of business. When regulators come in to a registered investment advisor’s office, they will usually request a copy and check to see if the firm’s plans are up to date and appropriate. It’s part of their normal course of protecting the public.

https://thereformedbroker.com/2020/03/05/emergency-preparedness-plan/

Mapping the Landscape of Comments to the SEC’s New Proxy Rules
Jens Frankenreiter
The CLS Blue Sky Blog

A couple of interesting features of this graphical representation stick out immediately. First, comments by institutional authors (which mostly appear in the upper half of the graph) seem to be qualitatively different from comments by private senders (which mostly appear in the lower half). Second, there are several tight clusters of documents, indicating nearly identical letters. In fact, a simple plagiarism tool indicates that 67 documents (roughly 13 percent) share 50 percent or more of their text with at least one other document. Most of these documents can be found in clusters 6, 7, and 8. On the other hand, 384 documents (around 73 percent) contain language deemed to be at least 90 percent unique, suggesting that a majority of authors produced highly bespoke opinions (rather than relying on a copy-and-paste template).

https://clsbluesky.law.columbia.edu/2020/03/04/mapping-the-landscape-of-comments-to-the-secs-new-proxy-rules/

Russia updates crypto regulations after string of scandals
Selva Ozelli
The FCPA Blog

With plans to launch its own cryptocurrency later this year, Russia has updated its anti-bribery and AML laws to aid its burgeoning digital economy while dealing with corruption risks associated with the new technology amid reports the Federal Security Service (FSB) allegedly tried to extract a bribe worth $1 million in bitcoin from a media mogul last year.

https://fcpablog.com/2020/03/04/russia-updates-crypto-regulations-after-string-of-scandals/

In A Setback For The DOJ, Judge Grants Hoskin’s Motion For Acquittal Of All FCPA Charges
FCPA Professor

[I]n a setback for the Department of Justice and its FCPA theory of prosecution, Judge Janet Bond Arterton (D. Conn) granted Hoskin’s motion for acquittal on the seven FCPA charges he was convicted of by the jury (See here for the decision. The judge denied Hoskin’s motion for acquittal on the five money laundering charges he was convicted of by the jury).

http://fcpaprofessor.com/setback-doj-judge-grants-hoskins-motion-acquittal-fcpa-charges/

Prosecutors urge the judge to deny early prison release for Bernie Madoff
CNBC

Over 500 victims had written to a Manhattan federal court judge to oppose early release for the 81-year-old Madoff from a 150-year sentence imposed in 2009, while only 20, or 4% of letter writers, supported it, prosecutors said.

https://www.cnbc.com/2020/03/05/prosecutors-urge-the-judge-to-deny-early-prison-release-for-bernie-madoff.html

Compliance Patterns in Raked Leaves
Tom Fox
FCPA Compliance & Ethics

Patrick Taylor has said that AI allows the compliance practitioner to understand the “subtle clues in that pattern of activity that will clue me in to take a different look.” He likened it to seeing “patterns in raked leaves” which allows you to then step in and take a deeper and broader look at an issue, either through an audit or investigation. This is where compliance practitioner can step back and literally keep an eye on the big picture and longer term as opposed to just the immediate numbers and information in front of them. It may also be the best hope for finding that kind of systemic fraudulent behavior.

http://fcpacompliancereport.com/2020/03/compliance-patterns-raked-leaves/

Proposed Harmonization of Exempt Securities Offerings

In what proposes to be a big change in private placements, the Securities and Exchange Commission issued a set of proposed amendments that “provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections.”

Offering and Investment Limits. The Commission proposed revisions to the current offering and investment limits for certain exemptions.

For Regulation A:
– raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
– raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.

For Regulation Crowdfunding:
– raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
– amend the investment limits for investors in Regulation Crowdfunding offerings by: not applying any investment limits to accredited investors; and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.

For Rule 504 of Regulation D:
– raise the maximum offering amount from $5 million to $10 million.

Integration:

The current Securities Act integration framework for determining whether multiple securities transactions should be considered part of the same offering is proposed to be revised with four new safe harbor. This would be particularly useful in private fund offerings. One is strict 30-day separation between the offerings.

General Solicitation:

Demo days and similar events would be exempt from “general solicitation” restrictions.

Accredited investor verification:

The amendments would change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings.

There would be new items to the non-exclusive list of verification methods in Rule 506(c) public-private placements.

It’s just a proposed rule. You have two months to review and provide comments.

Sources:

The One That “May” Pay Commissions

EquiAlt is in the business of snapping up distressed properties in Florida. That takes capital and it raised it through a series of funds through debt offerings. That seems like mismatched cash flow to me. You have to make interest payments on investments in real estate that are not generating cash flow. The SEC took an even more skeptical view and accused the firm of being a Ponzi Scheme and defrauding investors.

“The SEC’s filings present an inaccurate picture of Mr. Rybicki’s business dealings,” Washington D.C. attorney Stephen L. Cohen said in an email to the Tampa Bay Times. “We look forward to addressing these matters with the court.”

Since it was a real estate company it caught my attention, a found a few items that were worth exploring.

As with most alleged frauds, the SEC lists a bunch of luxury items by the alleged fraudsters. The EquiAlt’s principals apparently bought Ferraris, Porsches and a Rolls Royce. Plus expensive watches and private jet charters.

Lesson: Just assume that if the SEC shows up at your office and sees a Rolls Royce or a Ferrari out front, the SEC is going to be immediately suspicious.

The SEC got hung up on the use of “may” is the private placement documents. EquiAlt was is accused of using in-house employees and unlicensed external sales agents to to raise investor money. According to the SEC, they were ALWAYS paid commissions. The SEC is taking the position that the fundraising documents should not have said that the funds MAY pay commissions.

I hate that the SEC raises this issue. But it does.

Lesson: If you always pay some kind of fee, especially to an affiliate, make sure you use a more forceful term than “may.” Or I suppose you could find a time to forego the payment so that “may” is more accurate.

The last thing that caught my attention was a claim that the fund raising documents falsely stated that a certain individual was EquiAlt’s Chief Financial Officer when that person did not do so.

Lesson: Always make sure you get your firm’s personnel right in the fund-raising documents.

Sources: