SEC Focus on Retail Investors Yields Actions Against Advisers

A key focus of the Commission and its Enforcement program is retail investors. This has resulted, in part, in a significant number of actions against investment advisers. This week is no exception. Four settled actions were brought based on the “testimony” rule while another three are predicated on the “pay-to-play” rules.

Testimony Rule: In the Matter of Brian S. Eyster, Adm. Proc. File No. 3-18587 (July 10, 2018) is a proceeding which names as a Respondent, Mr. Eyster, an investment adviser representative and registered representative. Mr. Eyster is an investment adviser representative of ONIMCO and a registered representative of O.N. Equity Sales Co. Investment advisory and brokerage services are offered to individuals.

Mr. Eyster hired marketing consultant Dr. Leonard Schwartz and his firm, Create Your Fate, LLC in September 2015. That firm provides a service called Squeaky Clean Reputation through which testimonials are solicited on behalf of the adviser which are posted to various websites. Dr. Schwartz and his firm sent emails to clients of Mr. Eyster soliciting testimonials. Four were received and posted on Yelp.com whose purpose is to aid people looking for a good local business. Three video testimonials were also created which described the advisory services offered. The videos were published on YouTube.com and Google.com.

ONIMCO had polices and procedures that prohibited recommendations, testimonials and endorsements. Under Advisers Act Section 206(4) and rule 206(4)-1)a-(1) it is a fraudulent, deceptive, or manipulative act, practice for any investment adviser registered with the Commission to publish or otherwise distribute an advertisement which refers to any testimonial of any kind regarding the adviser. Here ONIMCO violated and Mr. Eyster caused the firm to violate section 206(4) and the related rule. To resolve the proceedings Mr. Eyster consented to the entry of a cease and desist order based on the section and rule cited in the Order. In addition, he agreed to pay a penalty of $10,000. See also In the Matter of HBA Advisors, LLC, Adm. Proc. File No. 3-18588 (July 10, 2018)(action against adviser and its founder Jaime Enrique Biel who also retained the services of Dr. Schwartz re testimonials; the action is based on facts similar to those above; resolved with a cease and desist order against each Respondent based on the same section and rule, a censure of the firm, and the payment by the firm of a $15,000 penalty); In the Matter of William Greenfield, Adm. Proc. File No. 3-18586 (July 10, 2018)( proceeding naming investment adviser representative as Respondent who retained Dr. Schwartz re testimonials; the action is based on facts similar to those above; resolved with a cease and desist order based on the same section and rule and the payment of a $10,000 penalty); In the Matter of Leonard S. Schwartz, Adm. Proc. File No. 3-18589 (July 10, 2018)(proceeding naming as a Respondent the owner of the firm retained by the individuals and firm listed above and one other adviser re testimonials; Dr. Schwartz received notice of the testimony rule from an adviser and reviewed the applicable section prior to accepting engagements from Mr. Eyster, HBA, Mr. Greenfield and another adviser but persisted; resolved by consenting to the entry of a cease and desist order based on the same section and rule as the proceedings above and the payment of a $35,000 penalty).

Pay-to-play: In the Matter of Sofinnova Ventures, Inc., Adm. Proc. File No. 3-18583 (July 10, 2018) is a proceeding which names as a Respondent the registered investment adviser. Prior to March 22, 2017 the firm was an “exempt reporting adviser.” Between July 2011 and August 2011 the Illinois Teacher’s Retirement System or TRS, committed to invest $40 million with Respondent. The public pension plan did in fact invest at least $33.2 million with Sofinnova. Subsequently, TRS committed to invest $50 million with the adviser. At lest $12.5 million was invested.

In April 2014 a covered associate – essentially a partner or manager, employee who solicits a government entity for an adviser or a political action committee for the adviser – made a $2,500 campaign contribution to a candidate for Governor of Illinois, a person who has the ability to influence investments by TRS. Later the covered associate sought and obtained a return of the contribution. For eight months following the contribution Respondent continued to provide advisory services for compensation to the Funds.

Advisors Act rule 206(4)-5(a)(1) prohibits a registered investment adviser, foreign private adviser, or exempt reporting adviser from providing advisory services for compensation to a government entity within two years of making a contribution to an official of the government entity who was an incumbent, candidate or successful candidate for elective office if the office is directly or indirectly responsible for or can influence the outcome of the hiring of the adviser. These pay-to-play rules do not require a quid pro quo. Rather, the contribution triggers a two year “time out” period. The Order alleges violations of the rule and Advisers Act section 204(4). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section and rule cited in the Order. The firm was also censured and agreed to pay a penalty of $120,000. See also In the Matter of Oaktree Capital Management, L.P., Adm. Proc. File No. 3-18585 (July 10, 2018)(Respondent is a registered investment adviser; the proceedings are based on facts similar to those above; resolved with a cease and desist order based on the same section and rule, a censure and the payment of a $100,000 penalty); In the Matter of Encap Investments L.P., Adm. Proc. File No. 3-18584 (July 10, 2018)(Respondent is an “exempt reporting adviser;” the proceedings are based on facts similar to those above; resolved with the entry of a cease and desist order based on the section and rule cited above, a censure and the payment of a $500,000 penalty).