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A man wears a protective mask as he walks past the New York Stock Exchange on the corner of Wall and Broad streets during the coronavirus outbreak in New York City, New York, U.S., March 13, 2020.
The U.S. Securities and Exchange Commission recently charged a Florida-based investment adviser for failing to provide required books and records during an examination.
According to the complaint[go-ri.tr.com/J2c5ED], the adviser did not cooperate with various document and information requests, and claimed that by doing so he would risk violating the state’s stay-at-home order during the COVID-19 pandemic.
The SEC also charged that the adviser was ineligible for SEC registration and improperly registered itself as an internet investment adviser.
A case of this nature highlights that multiple compliance failures and that using the COVID-19 pandemic as an excuse for deliberate non-compliance will not be looked at favorably by the SEC and its examiners.
The SEC on June 3 filed suit against E*Hedge Securities, Inc., based on the firm’s failure to respond to a request for documents and information during an examination, in violation of the Investment Advisers Act[go-ri.tr.com/TAKWBd]. E*Hedge’s President, Devon W. Parks, is also named as a defendant in the complaint.
A message requesting comment from E*Hedge was left, without response, at the firm’s most recent office phone number.
The SEC complaint seeks relief including an order of expedited discovery and the imposition of civil penalties.
The SEC describes a history of regulatory evasion by E*Hedge, stemming from a 2017 exam request that resulted in unanswered phone calls and undelivered exam request lists.
E*Hedge continued to thwart attempts by the local SEC exam staff despite having more than 45 days to comply with the examiner’s requests.
Finally, in April of 2020, the exam staff made initial contact with E*Hedge through Parks via telephone to announce the examination and sent follow-up correspondence regarding the examination to email addresses Parks provided.
Parks then gave a variety of reasons why he could not cooperate with the examination, including Florida’s stay-at-home order. Parks did not specify how his activities to cooperate with the exam would violate the order.
Soon after contact, Parks asked for an extension to produce documents and it was granted by the SEC examiners.
During a subsequent phone conversation, Parks wouldn’t answer any questions and requested all exam inquiries be in writing. Therefore, the SEC examiners sent questions via secure email, but soon after, the SEC was able to see Parks had never accessed them.
To date, E*Hedge and Parks have failed to respond, produce any records or communicate further with the exam staff.
Parks claimed that the stay-at-home order issued by the state of Florida prevented him from cooperating with the April 2020 examination. However, the order was lifted on May 18th and E*Hedge managed to publish new blog posts on a COVID-19-focused website and host a webinar between late April and May 2020.
The website touted investment opportunities in connection with COVID-19 vaccines and diagnostic tests.
An adviser seeking SEC registration must be qualified or expect to be qualified in 120 days. For most firms, the eligibility is achieved by having regulatory assets under management of $100 million or more.
However, there are other ways to qualify; a firm may be a multi-state adviser, related to an SEC-registered adviser or be an exempt reporting adviser, among others.
The internet adviser qualification is often misunderstood and requires very specific ways of conducting business to qualify.
A firm is eligible if:
— Investment advice provided to clients is through an interactive website. An interactive website means a website in which computer software-based models or applications provide investment advice based on personal information to each client submitted through the website. Other forms of online or internet investment advice do not qualify for this exemption;
— The firm provides investment advice to all its clients exclusively through the interactive website, except that a firm may provide investment advice to fewer than 15 clients through other means during the previous 12 months; and
— The adviser maintains records demonstrating that it provides investment advice to clients exclusively through the interactive website in accordance with these limits. According to the complaint, E*Hedge did not have any clients and did not provide advice through an interactive website, therefore, it would not be eligible for SEC registration.
Most likely, the firm would have had to apply for registration with the proper state regulator to offer investment advice.
A firm may be able avoid an SEC examination for a limited period, but eventually the SEC will act and charge the firm and any individuals involved with evasion.
In addition, any firm that qualifies for SEC registration must be certain that it achieves each element of the rule and be prepared to demonstrate compliance and records during examinations.
Lastly, the SEC will take any COVID-19 considerations seriously but it is not an excuse for non-compliance.
(By Jason Wallace, Regulatory Intelligence)
This article was produced by Thomson Reuters Regulatory Intelligence – bit.ly/TR-RegIntel – and initially posted on June 22. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters