Tags: sec

Yes, the SEC really is reading Form ADV disclosures now and comparing them to reality. One firm is currently facing a cease-and-desist order after allegedly inflating its AUM by several orders of magnitude.

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Calhoun Asset Management got into the hedge fund business back in 2006, claiming that its advisory assets had surged from a healthy $27 million in 1999 to over $200 million.

Unfortunately, the SEC can't find any record of the Illinois firm ever running more than $3 million during that time period.

Likewise, by 2009 Calhoun claimed that its AUM was up around $80 million. It was maybe in the $7 million range.

As the SEC complaint points out, Calhoun principal Krista Ward "herself completed and electronically signed" the ADV forms throughout this period for an affiliated firm, Skore Financial Management -- and the figures look equally inflated.

The regulators have other problems with this firm, but one thing is clear: they're putting their money where their mouth is and are finally fact-checking disclosures.

For those of us who thought they were doing it all along, it's a little bittersweet. But late is better than never.

Tags: sec

The SEC must have been stung by accusations that they're not doing enough to keep advisors in line. They're actually going to start checking form ADV statements for errors and lies.

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It's odd to hear that Robert Khuzami, head of the SEC's enforcement division, is saying that his team is "reviewing registration documents" now.

He's been saying it for weeks.

The implication is that this is something new and revolutionary for the SEC. I applaud them for anything they can do to make their processes more efficient and use their resources in a smarter way.

But I thought they were already doing more than scan ADV forms and file them in the database.

Far from creating confidence, this is actually an ominous development. What else did the public, law makers, and advisors assume the SEC was doing all along -- but they're only bragging about putting in place now?

Otherwise, why were advisors filing all that paperwork all those years in the first place?

Tags: fraud

The SEC has gone to First Tennessee National's brokerage unit in order to collect about $1.5 million clients of failed RIA Sentinel Management are owed.

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The main arc of Sentinel's failure follows plenty of other financial firms that got in over their heads with privately placed securities that simply weren't liquid enough.

However, this case has a few details that set it apart from the near-demise of Securities America, for example.

Sentinel management took on added leverage around the illiquid notes it was selling its clients, so its bets went sour a lot earlier.

All the way back in 2005, the company's balance sheet was looking overly strained. So over the next few years, they wheedled their broker, FTN, into "borrowing" the notes to make the books look cleaner.

FTN employees suspected that the move would bend regulations, but they let it go through anyway.

The SEC estimates that in allowing those transactions, FTN cost Sentinel clients about $150 million -- 10% of their AUM held with the firm -- and so now needs to pay that money back.

Sentinel went bust in 2007.

Tags: FINRA

The SEC has issued a disciplinary order to FINRA demanding that the self-regulatory group stop providing doctored documentation during inspections.

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According to the order, FINRA has altered the paper trail at least three times in the last eight years, most recently in 2008.

"Certain information was deleted or edited, while in other instances, entire passages were removed or changed," the SEC says.

In particular, signatures were updated to make old documentation appear fresh and officially sanctioned.

A whistleblower ended up calling the infractions to the SEC's attention and the director of the offending office has resigned.

However, the SEC now wants FINRA to hire an outside compliance consultant to ensure that all policies and documentation procedures are adequately designed and enforced.