Investment Management & Funds Regulatory Update - December 2024
In this issue, we discuss recent developments regarding enforcement of the Corporate Transparency Act, and enforcement actions involving investment advisers’ alleged violations of the Marketing Rule, conflicts of interest disclosures and repeated filing violations.
Table of Contents
Industry update
Fifth Circuit reinstates injunction on Corporate Transparency Act; reporting requirements on pause
Reversing an order issued earlier this week, the Fifth Circuit reinstated the nationwide injunction on enforcement of the Corporate Transparency Act, placing reporting requirements back on pause. For more information, please see our recent client update on this topic.
Litigation
SEC settles alleged Marketing Rule violations arising out of hypothetical and back-tested performance models
On December 20, 2024, the SEC issued an order (the Atlas Order) instituting and settling administrative and cease-and-desist proceedings against Atlas Financial Advisors, Inc., (Atlas) a Oroville, California-based registered investment adviser with approximately $106 million in assets under management. Atlas allegedly advertised its investment strategies using hypothetical and back-tested performance models without complying with Advisers Act Rule 206(4)-1, the Marketing Rule).
Under the Marketing Rule, registered investment advisers are prohibited from including hypothetical performance information in their advertisements unless, among other things, the adviser adopts and implements procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the audience of the advertisement.
According to the Atlas Order, Atlas’s public website advertised its “Portfolio Shield” investment strategies using statements and factsheets that presented hypothetical performance derived from model portfolios and backtested against data predating the development and implementation of the Portfolio Shield strategies. Atlas also allegedly failed to disclose that the hypothetical performance was calculated from model portfolios that did not follow the advertised investment strategies.
In addition, Atlas allegedly stated that the Portfolio Shield strategies used a “systematic options overlay,” when no such overlay was used, and misstated the portfolio managers’ experience.
Atlas also violated the Marketing Rule, according to the Atlas Order, by failing to present net hypothetical performance alongside gross hypothetical performance, as the Marketing Rule requires, and failed to ensure that the hypothetical performance presented was relevant to the financial situation and investment objectives of the intended audience, as the Marketing Rule also requires.
In addition to these substantive violations, Atlas also failed, allegedly, to maintain books and records necessary to demonstrate the calculation of the performance models, and failed to implement compliance policies and procedures relating to representatives’ trading in the same securities they recommended to clients.
On account of these alleged violations, the SEC charged Atlas with violating Sections 204 and 206(4) of the Advisers Act, and Rules 204-2(a)(16), 206(4)-1(a), 206(4)-1(d), and 206(4)-7 thereunder. Atlas agreed to be censured, to pay a civil money penalty of $175,000, to cease and desist from future violations, and to evaluate and update its policies, procedures, and disclosures.
SEC settles charges arising out of conflicts of interest due to principal’s familial connections to portfolio company
On December 20, 2024, the SEC issued an order (the Rose Park Order) instituting and settling administrative and cease-and-desist proceedings against Rose Park Advisors, LLC (Rose Park), a Boston-based registered investment adviser with approximately $632 million in assets under management, and Matthew Q. Christensen (Christensen, its founder, managing partner, and 100% owner). Christensen allegedly failed to disclose conflicts of interest arising from the fact that the CEO of a portfolio company of a fund advised by Rose Park (the Fund) is Christensen’s uncle and other familial and business connections.
According to the Rose Park Order, the Fund was designed to invest in early-stage and startup companies. Between 2012 and 2024, Rose Park caused the Fund to invest a total of $49.6 million in a certain company, described in the order as “Portfolio Company A.” The Fund was the only investor in Portfolio Company A, and the Fund’s investments were allegedly “essential for Portfolio Company A to maintain its business operations, including salaries to the CEO and other employees.”
The CEO and co-founder of Portfolio Company A is Christensen’s uncle. They shared a close personal relationship, and spent holidays together. Christensen allegedly gave the CEO a gift of a car that cost more than $175,000. In addition, the CEO allegedly became the trustee for certain irrevocable trusts of which Christensen was a beneficiary; in that capacity, the CEO controlled the timing and distribution of assets from the trust to Christensen. He also decided how to invest the trusts’ assets; the trusts were among the top five largest investors in the Fund. In addition, in his capacity as a trustee, the CEO allegedly authorized certain transactions that allowed Christensen to obtain a substantial revolving credit facility, proceeds of which Christensen allegedly invested in the Fund.
Although the personal and financial connections between the Fund and Portfolio Company A through its CEO were allegedly known to Rose Park’s compliance personnel, neither Rose Park nor Christensen disclosed these actual or potential conflicts of interest to the Fund or the Fund’s other investors.
As a result of the conduct described above, the SEC charged Rose Park and Christensen with violations of Sections 206(2) and 206(4) of the Advisers Act, and Rules 206(4)-7 and 206(4)-8 thereunder.
Rose Park and Christensen agreed to cease and desist from further violations, and to be censured. Rose Park agreed to pay a civil money penalty of $550,000; Christensen agreed to pay a civil money penalty of $50,000.
SEC reaches settlements with seven private fund advisers for repeated failures to file Form PF
On December 13, 2024, the SEC issued seven orders (the Form PF Orders) instituting and settling administrative and cease-and-desist proceedings against seven private funds advisers for repeated failures to file Form PF as required.
Since 2012, private fund advisers managing $150 million or more of assets are required to file Form PF at least annually. In its Administrative Summary of these settlements, the SEC states that it uses the information disclosed in Forms PF in its regulatory programs “including examinations, investigations and investor protection efforts,” and that the Financial Stability Oversight Council uses the aggregate data disclosed in Forms PF to evaluate systemic risks.
Each of the private fund advisers charged in the Form PF Orders allegedly failed to file Form PF for multiple years; the shortest period alleged was three consecutive years, and some of the funds allegedly failed to file for five consecutive years.
On account of these failures, each fund is alleged to have violated Rule 204(b)-1 under the Advisers Act. The seven funds agreed to pay civil money penalties aggregating to a total of $790,000, ranging from $90,000 to $150,000.