The Securities and Exchange Commission has initiated cease-and-desist proceedings against a New York-based advisor for submitting false information on a registration form in a bid to duck its regulatory obligations with state authorities.
The SEC has reached a settlement with Barthelemy Group and its principal, Evens Barthelemy, for violations of the 1940 Investment Advisers Act and the Investment Company Act that includes a two-year industry ban.
In its order describing the settlement, the SEC detailed a series of false statements the Barthelemy Group made on its Form ADV, variously misrepresenting its state-registration obligations and its level of assets under management (AUM) to claim an exemption that would enable the firm to register with the SEC, rather than the relevant state agencies.
In July 2009, the Barthelemy Group submitted its first Form ADV to the SEC, claiming that it was eligible for federal registration under the multistate exemption. By invoking that provision, the firm averred that it was required by at least 30 states to register with their securities regulators. But the Barthelemy Group is a small-scale operation, and had never been required to register in any states other than New York, New Jersey and Pennsylvania, according to the SEC.
The following year, the firm filed an amended Form ADV with the SEC, this time invoking the AUM exemption as its basis for registering at the federal level. At the time, the SEC maintained a minimum threshold of $25 million in AUM to qualify for the exemption from state oversight (with the implementation of the Dodd-Frank Act, the agency has increased that threshold to $100 million). The Barthelemy Group reported that it managed more than $26.5 million in assets for between 60 and 70 clients, a claim the SEC called "grossly overstated."
"Contrary to Form ADV's instructions, Barthelemy sought to include in the multi-state and AUM calculus certain aspirational client portfolios, including those he had serviced at previous employers. However, aspirational clients and their assets may not be included under Form ADV's definitions," the SEC said in its order.
SEC staffers questioned Barthelemy after he produced a spreadsheet during a 2010 advisor exam indicating that his firm had $26.28 million in AUM, when the actual figure was $2.628 million, according to the firm's independent custodian. Barthelemy acknowledged the discrepancy and withdrew the firm's SEC registration in June 2011.
"Barthelemy had downloaded client account values from the custodian's online platform, and then manually moved the decimal point for each client one place to the right. After being confronted by the exam staff, Barthelemy provided a corrected spreadsheet and later withdrew BG's SEC registration," the agency said.
According to the SEC's order, the Barthelemy Group never managed more than $5 million in client assets during the time it was registered at the federal level.
Barthelemy could not immediately be reached for comment.
In addition to the improper registration, the SEC also charged Barthelemy with failing to draft and implement sufficient compliance policies and procedures, claiming that a policy manual produced in 2010 had been adopted "largely verbatim" from a document at the broker-dealer where he had previously worked.
"That firm did not engage in the business of an investment adviser, and therefore the manual Barthelemy borrowed was not reasonably designed to prevent his small advisory firm from violating the Advisers Act," the SEC said in its order. "Also, the firm's manual included duties of suitability and fairness, but failed to mention the fiduciary duty advisers owe their clients. BG's manual also included provisions about commission-based compensation, broker-dealer related filings and broker-dealer books and records provisions, none of which were applicable to the firm or its employees."
Other citations in the SEC's order included the charge that the Barthelemy Group failed to maintain certain books and records as required by the Advisers Act.
In addition to Barthelemy's two-year suspension from the investment advisory field, his firm is also required to post the SEC's order on its website and deliver a copy to each of its clients, a penalty that should serve as a cautionary tale for other practices, according to compliance experts at the law firm Cipperman and Company.
"Firms should note the staff's 'Scarlet Letter' punishment of requiring that the firm deliver and publish the enforcement order," Todd Cipperman, the firm's principal, warned in a blog post. "Combined with the principal's 2-year industry ban, the staff, for all intents and purposes, put this firm out of business."