Advisers identify wrong state on ADV filings

The Securities and Exchange Commission on Wednesday issued orders against three investment advisers for falsely identifying the state where they practice on their registration documents.

The agency fined Craig M. Scariot, president of Wyoming Investment Management Services, $10,000 for claiming on a Form ADV filed in February 2013 that his firm was based in Cheyenne, Wyo. The SEC said that, from March through December 2013, Mr. Scariot worked out of his home in Ft. Collins, Colo., and never used the firm’s Wyoming office space.

In the second case, the SEC fined David A. Nagler, owner of New Line Capital, $25,000 for indicating on his Form ADV since March 2012 that the firm operates out of Wyoming, after having been based in Santa Fe, N.M., since 2007. The agency asserted that Mr. Nagler continued doing business from Santa Fe and never met clients and rarely showed up in rented Wyoming office space.

The SEC also charged Mr. Nagler for overstating the firm’s assets under management on the Form ADV.

Both WIMS and New Line have less than $100 million in assets under management, which means they must be overseen by state regulators. Investment advisers with more than $100 million AUM register with the SEC, under a mandate in the Dodd-Frank financial reform law.

But Wyoming does not regulate investment advisers. Wyoming advisers must register with the SEC.

In the third case, the SEC filed a charge against Arete Ltd., which was doing business as Sky Peak Capital Management. In a November 2012 ADV filing, Arete claimed that it was based in Cheyenne, Wyo. The agency said it actually was operating out of Irvine, Calif.

The firm also never mentioned on its ADV a complaint filed by the state of Colorado against the company and its chief compliance officer, Brenda L. Ridley, for improper use of investments in a private-equity fund, the SEC said. The regulator barred Ms. Ridley from the financial industry. Arete ceased doing business in late 2013.

“These investment advisers made false filings to become SEC-registered and risked giving investors the misleading appearance that they were larger firms with more assets than those required to register at the state level,” Julie Lutz, director of the SEC Denver Regional Office, said in a statement. “Investment advisers must base their business where they say it is or face the consequences.”

Mr. Scariot and Mr. Nagler have agreed to settle with the SEC.

Mr. Scariot, who resided in Colorado while attending graduate school and undergoing physical therapy, declined to comment. Mr. Nagler did not respond to a request for comment. Ms. Ridley could not be reached.

The Dodd-Frank law shifted smaller investment advisers to the states in order to reduce the regulatory burden on the SEC. The agency has said it has the resources to review annually only about 10% of the approximately 11,500 registered investment advisers. It is once again seeking a big budget boost from Congress in 2015 to address that shortfall.

The agency spends a lot of time combing through a firm’s ADV during an examination, said Todd Cipperman, principal at Cipperman Compliance Services.

“They’ve been very aggressive on ADV disclosure for a couple of years,” Mr. Cipperman said. “They won’t tolerate inflating AUM or your qualifications.”

Advisers may have an incentive to fudge their ADV and register with the SEC to try to avoid examination. They also may want to be SEC-registered in order to attract institutional clients who only do business with larger firms.

Playing games with an ADV can be dangerous, as the advisers Wednesday found out.

“There’s securities law liability that attaches to an ADV,” Mr. Cipperman said. “You need to take it seriously, like you would any other disclosure.”

Related Topics: Securities and Exchange Commission