Regulatory Update

SEC Charges CCO for Failure to Supervise

03.17.25. The SEC filed charges against registered investment adviser Momentum Advisors LLC, its former Managing Partner and Chief Compliance Officer, Allan J. Boomer, and its former Chief Operating Officer and partner, Tiffany L. Hawkins, for breaching their fiduciary duty by misusing fund and portfolio company assets.

Over three years, Hawkins misappropriated approximately $223,000 using portfolio company debit cards to pay for vacations, clothing, and other personal expenses and caused herself to be paid compensation in excess of her authorized salary. Boomer was charged in his capacity as Chief Compliance Officer for failure to supervise Hawkins, “Boomer was aware of facts that should have constituted red flags of potential misappropriation by Hawkins, but he failed to supervise Hawkins reasonably.”

To settle the SEC’s charges, Hawkins agreed to pay a $200,000 civil penalty and to be subject to an associational bar; Boomer agreed to pay an $80,000 civil penalty and to be subject to a 12-month supervisory suspension; and Momentum Advisors agreed to a censure and to pay a $235,000 civil penalty.

Crypto is King: SEC’s New Task Force

03.25. SEC Acting Chairman Mark Uyeda recently launched a crypto task force, selecting Commissioner Hester Pierce to lead the task force dedicated to developing a regulatory framework for crypto assets. Until now, the SEC primarily relied on regulation by enforcement for crypto-related assets, and there was a lack of clarity for market participants. This task force intends to coordinate with other federal departments, including the Commodity Futures Trading Commission (“CFTC”). It will draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously. Task force members were announced earlier this month, and the task force will host its first Roundtable on key areas of interest in regulating crypto assets from 1–5 p.m. on March 21, 2025.

Deal or No Deal: SEC Drops Hedge-Fund Dealer Case

03.13.25. In June of 2023, the SEC sued Boston-based exempt reporting adviser Auctus Fund Management, LLC (“Auctus”) and its owners, Alfred Sollami and Louis Posner, for failing to register as a securities dealer with the SEC. Auctus is one of several hedge funds that fell victim to the SEC’s broadside against the convertible note industry.

With convertible notes, the issuer of the note has the option of paying the debt in cash within a limited period of time or converting the note into newly issued shares of the company at a steep discount (30% to 60%) to the market price. Issuers were also often required to issue warrants in addition. This process, which the SEC viewed as predatory, dilutes existing shareholders and tends to depress the market price of the issuer’s stock. Auctus would obtain newly issued shares and sell them at a substantial profit based primarily on acquiring them at a discount. The SEC theorized that any person engaged in buying or selling securities for such person’s own account (in other words, any hedge fund) must register as a broker-dealer. Auctus argued that this was an overreach by the SEC that ignored decades of the SEC’s own guidance and the legislative history that defines a dealer as an entity that effectuates a customer’s order by buying and selling securities for such a person’s own account. The SEC dropped its case and claim against Auctus on March 13, 2025.

Rulemaking

What’s in a Meme?

02.27.25. The SEC’s Division of Corporation Finance provided guidance that “meme coins” are not securities. A “meme coin” is a crypto-asset inspired by internet memes, characters, current events, or trends. The promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading. Meme coins are typically purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation.

In this regard, meme coins are akin to collectibles. The Division reasoned that a meme coin does not constitute any of the common financial instruments enumerated explicitly in the definition of “security” because, among other things, it does not generate a yield or convey rights to future income, profits, or assets of a business. Any expectation of profits that meme coin purchasers have is not derived from the efforts of others; the value of meme coins (like collectibles) is derived from speculative trading and the collective sentiment of the market. The Division’s guidance was met with swift criticism from Commissioner Caroline Crenshaw, who said: “The purpose of written guidance from SEC staff is to promote understanding of, and compliance with, the federal securities laws. Today’s guidance from the Division of Corporation Finance turns that concept on its head. It advances an incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction.”

Beneficial Ownership Reporting: Off Again

03.02.25. In the most recent update to the beneficial ownership reporting saga, the U.S. Department of Treasury announced that despite the new compliance deadline of March 21, 2025, that it will not enforce any penalties or fines against U.S. citizens or domestic reporting companies and their beneficial owners based on a failure to file or update beneficial ownership information (“BOI”) reports pursuant to the Corporate Transparency Act (“CTA”), effectively rendering the filing requirement moot.

Marketing Rules Relaxed

03.19.25.In the last week, there have been two huge wins for the investment management industry from a marketing perspective. First, the SEC released no-action guidance providing clarity to issuers relying on Rule 506(c) of Regulation D, an exemption from securities registration that permits issuers to publicly advertise an offering, provided they take reasonable steps to verify investor accreditation.Pursuant to the new guidance, issuers relying on Rule 506(c) can satisfy the verification requirement through an investor’s self-certification if the investor meets certain investment minimums ($200,000 for natural persons and $1 million for entities) and the issuer obtains written representations that the purchaser's minimum investment is not financed in whole or in part by any third party. Second, the SEC released new FAQs related to the Marketing Rule. The SEC wrote that it would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if, among other things, it is accompanied by the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule.