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Defending SEC Complaints – Section 206 of the Investment Advisers Act (“IAA”) Litigation

defending sec complaints

Experienced IAA Defense Team

Are you facing a federal investigation under the Investment Adviser’s Act (“IAA”)? Have you failed to register as an investment adviser? Did you allegedly violate your fiduciary duty? Is the SEC scrutinizing your advice? If so, then you need the legal services of an experienced investment/financial attorney today.

The SEC is especially wary of wrongdoing under the Investment Adviser’s Act. Investment advisers are held to very high fiduciary standards and any breach of this duty can lead to a federal investigation.

Whether your federal investigation began as a tip from a disgruntled investor or was initiated by the SEC itself, the stakes are high.

Litigation under the IAA can lead to substantial fines and penalties, massive disgorgement orders, injunctions, reputational harm, etc. We are here to help you fight these charges and protect your life’s work.

At Oberheiden, P.C., our attorneys include former FBI agents, former U.S. attorneys, and former prosecutors as well as attorneys with decades of experience in private practice. Our interdisciplinary background gives you the best chance at success.

If you have been charged or are being investigated for behavior violative of the IAA, now is the time to take prompt action in your defense by retaining an experienced team of defense attorneys.

Put Oberheiden, P.C. on your side today to fight for you.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

What is an Investment Adviser?

Introduction

The Securities and Exchange Commission (“SEC”) regulates the conduct of investment advisers under the Investment Adviser’s Act of 1940 (“IAA”) and its corresponding rules.

The basic requirement of the IAA is that every individual or entity that meets the definition of “investment adviser” must register with the SEC unless there is an applicable exemption or exception.

Typically, only advisers that have assets of $25 million or more under their control register with the SEC. If not, the advisers with less assets register under their state securities laws.

Elements

Section 202(a)(11) of the IAA defines investment adviser as any person or firm that “(1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications.”

The elements are explained in more detail below:

  1. Compensation: This term is applied broadly and refers to the receipt of any economic benefit or item of value. This could be an advisory fee or commission, as some examples. Either the individual who receives the advice from the investment adviser or another person could pay the “compensation” and therefore satisfy this element.
  • Engaged in the Business: The person rendering the advice must be engaged in the business of giving such advice. The easiest way to satisfy this element is if the individual is providing advice about specific securities that are not given on a single or isolated occasion. However, this does not have to be the individual’s sole or primary business activity. Courts use many factors to determine if the individual is “engaged in the business” of giving investment advice. Some factors include the frequency that the advice is given, whether the individual receives compensation for providing investment advice, or whether the individual holds himself or herself out to the public as an investment adviser capable of providing such advice.
  • Advising about Securities: Providing advice about specific types of securities such as bonds, mutual funds, stocks, etc. would satisfy this last element. However, advice about coins, real estate, and precious metals is not considered “advising about securities.”

The person or firm must satisfy all the above elements in order to be subject to the SEC’s regulation as an investment adviser under the IAA.

Duties of an Investment Adviser

The text of the IAA does not impose strict rules and requirements on investment advisers but instead requires that all investment advisers act with a fiduciary duty towards their clients.

This fiduciary duty is a broad requirement. It mandates that investment advisers avoid conflict of interests, act honestly with their clients, and never take undue or unfair advantage of their client’s trust or economic interests.

The relationship of the adviser to their client is one of trust. The fiduciary duty cannot be negotiated away or contracted out of. It is imposed because of the intrinsic nature of the adviser and the investor client.

Section 206 of the IAA makes this fiduciary duty requirement enforceable through its anti-fraud provisions and the IAA’s disclosure requirements.

Section 206 of the Investment Advisers Act of 1940

Briefly, Section 206 of the IAA prohibits misstatements or omissions of material facts and other fraudulent acts that are in connection with the business of the investment adviser. It acts as the anti-fraud provision of the IAA.

However, unlike the antifraud provisions of the Exchange Act—Section 10(b) and Rule 10b-5 thereunder—Section 206 liability is not dependent upon fraud “in connection with” the purchase or sale of a security. The adviser’s fiduciary duty under the IAA instead extends to all services undertaken on behalf of the adviser’s client(s).

Section 206 outlines various prohibited transactions of investment advisers. It states that it should be unlawful for any investment adviser to use the mails or any means of instrumentality of interstate commerce, directly or indirectly, to

  1. employ any device, scheme, or artifice to defraud any client or prospective client;
  2. engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
  3. act as principal for his own account, knowingly to sell any security to or purchase any security from a client, or act as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction; or
  4. engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.

Sections 206(1) and (2) prohibit fraud and unlawful conduct against clients or prospective clients. Section 206(3) makes it unlawful for the adviser to sell or purchase a security to or from a client unless there is a writing and the client’s consent. Lastly, Section 206(4) grants broad authority to the SEC to define and prescribe rules to prevent fraudulent, deceptive, or manipulative practices by investment advisers against their clients.

In addition to these antifraud provisions, Rules 206(4)-1, 206(4)-2, 206(4)-3, and 206(4)-4 of the IAA regulate advertising by the investment adviser; the possession of client funds or securities; fee payments to third parties and client referrals; and the disclosure of the financial backgrounds of investment advisers.

The sections and rules of the IAA can be quite complicated and demand the experience of a dedicated IAA defense attorney, especially one knowledgeable in the IAA’s anti-fraud provisions.

SEC Interpretation of Section 206 of the IAA

On June 5, 2019, the SEC released an interpretation of the investment adviser’s fiduciary duty under Section 206 of the IAA.

The release makes clear that the fiduciary duty of an investment adviser is broad and covers the entire investment adviser-client relationship. Its purpose is to avoid or expose all conflicts of interests that are detrimental to the client’s interests—those interests that are not disinterested.

The fiduciary duty includes a duty of care and a duty of loyalty:

  • Duty of Care: This includes the duties to provide advice that is in the client’s best interests, seek best execution of client transactions, and provide continuous advice and monitoring.
  • Duty of Loyalty: This obligates the adviser not to subordinate its client’s interests to his or her own. It also requires that the adviser maintain full disclosure of all material facts.

Lastly, even though the scope and extent of the investment adviser’s fiduciary relationship may vary depending on the adviser-client relationship at issue, the fiduciary duty cannot ever be waived.

Need Assistance with the IAA?

A charge of IAA violations or being investigated for violating the anti-fraud provisions of the IAA can be a worrisome time. It can also lead to serious reputational harm not to mention the fines, penalties, and injunctions that could follow.

If the SEC determines that you made an illegal profit, you could also face substantial disgorgement orders—the return of all ill-gotten gains plus interest. All in all, this could waste endless time and money.

The SEC vigorously regulates the conduct of investment advisers to ensure that investor clients are treated with honesty, full disclosure, and with good faith. Any conduct that falls short of this could expose you to liability.

The defense attorneys at Oberheiden, P.C. have the experience and knowledge needed to defend you against a federal investigation for fraud under the IAA and advise you on issues of investment adviser compliance, registration, etc.

Let us help you. Call us today or contact our office online for a free consultation.

Impeccable Service

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Nick Oberheiden is the absolute best federal litigation attorney. Nick gives you the immediate comfort of feeling 100% protected. He is polite, respectful— and extremely compelling. His legal strategy turned out to be brilliant.

– Marshall M.

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