38 allegedly false entities found in Colorado highlights how easily advisers can manipulate certifications to infiltrate the SEC’s filing system.
Last month, the SEC’s Cyber and Emerging Technology Unit filed complaints against these entities in federal court. According to the agency’s accusation, each falsely presented themselves as SEC-registered, or exempt reporting advisors (ERAs) to boost their credibility to prospective retail investors.
There has been a mounting level of evidence against the defendants, as follows:
- Several operate from overseas IP addresses.
- Nonexistent Colorado business addresses and disconnected phone numbers were listed in some cases.
- Likewise, audit relationships with accounting firms were sometimes missing from any public licensing registry.
- Identical ownership structures and financial data was allegedly copied across multiple shell filings by a number of firms.
- Some displayed fabricated SEC registration certificates on their websites.
As a result, all 38 companies’ ERA filings have been pulled from the SEC’s public site, with injunctions and civil penalties sought for violations of Sections 204(a) and 207 of the Investment Advisers Act.
The regulator’s Office of Investor Education has also flagged this tactic of using the ERA filing system to manufacture legitimacy as an expectedly increasing fraud pattern, given how simply professional websites can be fraudulently manufactured at the click of a button these days.
So, what does this mean for fund marketers?
The event shows the SEC’s proactive hunting of bad actors, who will no longer wait for investor complaints to take action. So too will investors likely be far more thorough in their research when credibility and trust can be eroded greatly, knowing that counterfeit certifications can be passed off easily.
A growing number of prospective allocators and consultants are in fact utilising their first-pass screening process to delve into a firm’s ADV/ERA status – as well as their registration claims and auditor relationships – well before any meeting takes place.
Fund marketers are implicated in how well audited their public-facing materials are, for every webpage, pitch deck and LinkedIn feed. Every reference to registration claims, auditor referencing, addresses etc. must match the SEC’s file, or else appear sloppy and outdated at best. At worst, a firms’ negligence here could look fraudulent!
Another recommendation is to signpost to investors how they can verify your firm’s status on the Investment Adviser Public Disclosure (IAPD) database, as the SEC is doing itself to coach retail investors.
It is inevitable that ERA filings will face greater scrutiny as a result of this news. Ensuring filings are audited and airtight will show that firms are ready for any potential SEC enforcement, and away from treating the filing as a mere formality to cross off of a checklist.
Source
SEC.gov, SEC: 38 Entities Feigned Legitimacy as U.S. Advisers Through False Filings to Lure Retail Investors
