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SEC Once Again Sanctions The CCO of An Investment Advisory Firm

By Harry Frischer and Philip Arnold on November 24, 2ol5

Posted in Financial Services, SEC Enforcement

On November t9, 2o15, the SEC announced a settlement with investment advisory firm Sands Brothers Asset Management, LLC for violating the Custody Rule, SEC Rule 2o6(4)-2, which requires that

registered investment advisers who have custody of their clients' assets put in place policies and

procedures intended to safeguard those assets against loss, misuse or misappropriation. The SEC also

imposed sanctions on Sands Brothers' Chief Compliance Officer who was subjected to a one-year

suspension and a fine for aiding and abetting these violations.

The Sands Brothers settlement comes on the heels of considerable commentary by SEC Commissioners

and staff on the circumstances justifying the discipline of a chief compliance officer of a registered investment adviser. Earlier this year, then SEC Commissioner Daniel M. Gallagher explained his dissent

from two decisions imposing sanctions on a CCO. In his comments, Commissioner Gallagher voiced

concern that such outcomes improperly place the obligation to implement compliance policies and

procedures on the CCO, where, in Commissioner Gallagher's view, such responsibilities are intended to be

borne by the Firm. Those comments triggered a response from both Commissioner Luis A. Aguilar

and SEC Chair Mary Jo White.

Most recently, in a speech earlier this month, SEC Director of Enforcement, Andrew Ceresney, outlined

three types of conduct that would lead the staff to recommend an enforcement action against a CCO. The

first category involves CCOs who are affirmatively involved in misconduct that is unrelated to their

compliance functions. Such cases often involve CCOs who "wear other hats" and serve as CEO, CFO or some other position in addition to being the CCO, and have engaged in intentionally fraudulent or harmful

conduct while operating in that other role. The second category involves CCOs who intentionally mislead

or obstruct the SEC staff, especially during the course of an investigation or examination, We recently

blogged about one such case.

The third category involves CCOs who exhibit a "wholesale failure" to carry out their compliance

responsibilities. Such cases often involve situations where a CCO is accused of "egregious conduct, " such as

the failure to create policies and procedures to prevent an employee from misappropriating client funds,

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By the Office of Compliance Inspections and Examinations ("OCIE")

In this Alert: Volume V, Issue 1 November 9, 2015 Topic: Staff observations

regarding examinations of investment advisers and

investment companies that

outsource their chief compliance

officer ("CCO").

Eey Takeaways: Advisers and

funds with outsourced CCOs should review their business

practices in light of the risks

notedin this RiskAlert to

determine whether these

practices comport with their

responsibilities as set forth in the

Compliance Rules. Advisers with

outsourced CCOs retain the

responsibility for adopting and

implementing an effective

compliance program.

Examinations of Advisers and Funds That Outsource Their Chief Compliance Officers

OCIE staff (the "staff") have noted a growing trend in the investment management industry: outsourcing compliance activities to third parties, such as consultants or law firms. Some investment advisers and funds have outsourced all compliance activities to unaffiliated third parties, including the role of their chief compliance officers ("CCOs"). Outsourced CCOs may perform key compliance responsibilities, such as updating firm policies and procedures, preparing regulatory filings, and conducting annual compliance reviews.

The staff conducted nearly 20 examinations as part of an Outsourced CCO Initiative that focused on SEC-registered investment advisers and investment companies (collectively, "registrants") that outsource their CCOs to unaffiliated third parties ("outsourced CCOs"). The purpose of this Risk Alert is to share the staff's observations from these examinations and raise awareness of the compliance issues observed by the staff.

The views expressed herein are those of the staff of OCIE, in coordination with other staff of the Securities and Exchange Commission ("SEC" or "Commission" ), including staff of the Division of Investment Management and the Division of Enforcement. The Commission has expressed no view on the contents of this Risk Alert. This document was prepared by SEC staff and is not legal advice.

See Charles Schwab & Corp. , Independent Advisors* Revenue and Assets Rebound for Record Year, Says 2011 Charles Schwab RIA Benchmarking Study (July 5, 2011). The study recorded that 38% of firms are outsourcing some aspect of their compliance function, which was up over ten percent Irom 27% the previous year. This survey covered 820 RIAs with more than $300 billion in combined assets, with the median study participant having ended 2010 with $212 million in assets under management. In a Charles Schwab Market Knowledge Tools synopsis regarding the 2012 Benchmarking Study, Charles Schwab stated that "[i]ncreased reliance on outside experts for compliance has been a strong trend. . . not only reducing expense but potentially lowering the risks of overlooking or misinterpreting evolving requirements. " (See, Charles Schwab & Corp. , "Moving Forward in Uncertain Times: Insights From the 2012 RIA Benchmarking Study from Charles Schwab. ") By contrast, see Investment Adviser Association ("IAA"), Summary Report for the 2013 Investment Management Compliance Testing Survey (June 11, 2013). The survey reported that 99% of the firms surveyed did not outsource the role of the CCO. More than 92% of the participants in the 2013 IAA survey managed in excess of $500 million in assets, and the average fum managed between $1 billion and $20 billion.

Articles have been written and speeches delivered on the trend of outsourcing the role of the CCO. See, e. g. , Rachel Louise Ensign, "Com anies Are Outsourcin the Chief Com liance Officer Job, " WALL STREET JoURNAL (July 17, 2014); Nick Georgis, "The Outsourcin Boom: Com liance, "

THrNR ADvtsoR (December 27, 2011); and Bettiny Eckerle, "Trend to Watch for 2012: Outsourcin Investment Adviser Com liance " Eckerle Law (January 11, 2012).

I. The Compliance Rules

under the Investment Advisers Act of 1940 (" Advisers Act") and Rule 38a-1 under the Investment Company Act of 1940 (" Investment Company Act"), often referred to as the "Compliance Rules, " require registrants to: »4

~ Adopt and implement written policies and procedures that are reasonably designed to prevent violations by the adviser and its supervised persons of the Advisers Act and its rules and violations by the fund of the federal securities laws and the rules under those laws, respectively;

~ Designate an individual as CCO to be responsible for administering the policies and procedmes; and

~ Review the policies and procedures at least annually for their adequacy and the effectiveness of their implementation. Fund CCOs must also prepare a written report for the fund's board of directors.

The Commission has provided guidance regarding the quality, experience, and empowerment of the CCOs to advisers. For example, the Commission has stated that an adviser's CCO should be "competent and knowledgeable regarding the Advisers Act and. . . empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm [and] have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures. " Similarly, the Commission stated that a fund's CCO should be "competent and knowledgeable regarding the federal securities laws and should be empowered with full

responsibility and authority to develop and enforce appropriate policies and procedures for the fund. " &310

Moreover, the Commission highlighted that fund and adviser CCOs "should have sufficient seniority and authority to compel others to adhere to the compliance policies and procedures. ""

See also SEC, Com liance Pro s of Investment Com anies and Investment Advisers Release Nos. IA-2204 and IC-26299 (December 17, 2003) (" Adopting Release" ). In the Adopting Release, the Commission stated that it is of critical importance that registrants have "strong systems of controls in place to prevent violations of the federal securities laws and to protect the interests of shareholders and

clients. " ~Rle2064-7a 6 th Ad i rsAt d~RIe38tet a I dertheln est tC mpanyAct. TheC mplianceRI drthe Advisers Act applies to advisers and their "supervised persons. " The term "supervised persons" is defined as "any partner, officer, director

(or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. "

of the Advisers Act.

As otcdtntheA~do ti Rel, i designi gitspoliciesa dpo educe, each egistnmtshouldide tifycoWicts, a dothe co pg factors that create a risk exposure for the firm and clients in light of the firm's particular operations and design policies and procedures to address these risks. An adviser should also consider its fiduciary obligations.

6 R~ule2064-7c d theAd isersAct(r 0 I' gthattheCCOheampercisedpersoniandR~ute38tet a 4 unde theln esime»t

Company Act.

~Rle2064-70 unde theAd ise Actand~RI 38-1 3 u d theln st e tCo panyAct

under the Investment Company Act.

AAdo ~An Release S tion II. C. I.

~Ado tin Rel a S ti R. C. 2.

~Ad ti Release Sectio s II. C. I and II. C. 2.

II. Staff Examinations

CCOs are integral participants in OCIE's examinations of registrants. For example, each examination

typically includes interviews with the CCO and other senior officers. During these interviews, the staff assesses the registrants' tone at the top and culture of compliance. These assessments are important

12

factors in the staff s review of the effectiveness of the registrants' compliance programs in which a CCO plays an important role.

As part of the Outsourced CCO Initiative, the staff evaluated the effectiveness of registrants' compliance programs and outsourced CCOs by considering, among other things, whether:

~ The CCO was administering a compliance environment that addressed and supported the goals of the Advisers Act, Investment Company Act, and other federal securities laws, as applicable (i. e. , compliance risks were appropriately identified, mitigated, and managed);

~ The compliance program was reasonably designed to prevent, detect, and address violations of the Advisers Act, Investment Company Act, and other federal securities laws, as applicable;

~ The compliance program supported open communication between service providers and those with compliance oversight responsibilities;

~ The compliance program appeared to be proactive rather than reactive;

~ The CCO appeared to have sufficient authority to influence adherence with the registrant's compliance policies and procedures, as adopted, and was allocated sufficient resources to perform his or her responsibilities; and

~ Compliance appeared to be an important part of the registrant's culture.

III. Staff Observations

During these examinations, the staff observed instances where the outsourced CCO was generally effective in administering the registrant's compliance program, as well as fulfilling his/her other responsibilities as CCO. The staff observations regarding effective outsourced CCOs generally involved: regular, often in-person, communication between the CCOs and the registrants; strong relationships established between the CCOs and the registrants; sufficient registrant support of the CCOs; sufficient CCO access to registrants' documents and information; and CCO knowledge about the regulatory requirements and the registrants' business. More specifically, the staff observed the following:

~ Communications: Outsourced CCOs who frequently and personally interacted with advisory and fund employees (in contrast with impersonal interaction, such as electronic communication

The staff's assessment of the registrant's tone at the top and culture, however, is not based solely on interviews with the CCO and other senior officers, but can be informed by other factors.

or pre-defined checklists) appeared to have a better understanding of the registrants' businesses, operations, and risks. As a result, at these registrants the staff noted fewer inconsistencies between the compliance policies and procedures and the registrants' actual business practices. The staff also noted that these CCOs were typically able to effectuate compliance changes that

they deemed to be necessary.

~ Resources: More significant compliance-related issues were identified at registrants with an outsourced CCO that served as the CCO for numerous unaffiliated firms and that did not appear to have sufficient resources to perform compliance duties, especially given the disparate and

dispersed nature of the registrants that the CCO serviced.

~ Empowerment: Annual reviews performed by outsourced CCOs, who were able to independently obtain the records they deemed necessary for conducting such reviews, more accurately reflected the registrants' actual practices than annual reviews conducted by CCOs, who relied wholly on the firm to select the records subject to their review. In some instances, the registrants' employees had discretion to determine which documents were provided to the outsourced CCOs. In these cases, the registrants' ability to selectively provide records to the outsourced CCO may have affected the accuracy of these registrants' annual reviews.

The staff s observations with respect to the strength and effectiveness of the registrants' compliance programs are described in further detail below.

A. Meaningful Risk Assessments

The staff observed that an effective compliance program generally relies upon, among other things, the correct identification of a registrant's risks in light of its business, operations, conflicts, and other compliance factors. The compliance policies and procedures should then be designed to address those risks. The staff observed that certain outsourced CCOs could not articulate the business or compliance risks of the registrant or, to the extent the risks were identified, whether the registrant had adopted written policies and procedures to mitigate or address those risks. In some instances, the risks described to the staff by the registrant's principals were different than the risks described by the outsourced CCO. In these instances, the staff identified several areas where the registrant did not appear to have policies, procedures, and/or disclosures in place necessary to address certain risks.

~ Standardized checklists: The staff notes that some outsourced CCOs used standardized checklists to gather pertinent information regarding the registrants. While the use of questionnaires or standardized checklists may be a helpful guide to identify conflicts and assess risks at registrants, the staff observed the following:

o Some standardized risk checklists utilized by outsourced CCOs were generic and did not appear to fully capture the business models, practices, strategies, and compliance risks that were applicable to the registrant.

o Some of the responses to the standardized questionnaires completed by the registrants included incorrect or inconsistent information about the firms' business practices. The

outsourced CCOs did not appear sufficiently knowledgeable about the registrant to identify or follow-up with the registrant to resolve such discrepancies. '

~ Policies, procedures, and disclosures: Several registrants did not appear to have the policies, procedures, or disclosures in place necessary to address all of the conflicts of interest identified by the staff. These issues were identified in critical areas that affect the registrants' clients, such as compensation practices, portfolio valuation, brokerage and execution, and personal securities transactions by access persons.

B. Compliance Policies and Procedures

Although the Compliance Rules do not expressly require compliance policies and procedures to 14

contain specific elements, the Commission stated in the Adopting Release that it expects an adviser's policies and procedures, at a minimum, to address ten core areas to the extent that they are relevant to the adviser's business. The staff observed certain instances where the registrants did not appear to 15

have adopted, implemented, and/or adhered to policies and procedures that were reasonably designed to prevent the violation of applicable regulations or that were relevant in light of the registrant's business and operations, such as the following:

~ Compliance policies and procedures were not followed: The staff observed instances in which compliance policies and procedures were not followed or the registrants' actual practices were not consistent with the description in the registrants' compliance manuals. These practices were observed in areas that are required to be reviewed by regulations (e. g. , reviews required for the payment of cash for solicitation activities and personal securities transactions) and in areas that registrants included in their policies and procedures, but that are not expressly required to be reviewed by regulations (e. g. , quarterly review of employees' e-mails). In many instances, the 16

outsourced CCOs were designated as the individuals responsible for conducting the reviews.

Similarly, in a recent enforcement action, the Commission's Division of Enforcement alleged that the conduct of an adviser's outsourced CCO contributed to the firm making false filings with the Commission because the outsourced CCO "did not personally review [the adviser's] records" to validate the information. Instead, he relied "exclusively on information provided to him by [advisory personnel]. " See In re Ae 's Ca ital LLC Advisers Act Rel. No 4054 (March 30, 2015).

See Section I herein for definition of Compliance Rules.

15 A~do tt R tees. gttete coeaeasare:poof tt snag ntpoc; y fdt I d t I store, tte ts, and

regulators; proprietary trading; safeguarding of client assets from conversion or inappropriate use by advisory personnel; accurate creation and retention of required records; safeguards for the privacy protection of client records and information; trading practices; marketing advisory services; processes to value client holdings and assess fees based on those valuations; and business continuity plans.

Rule 206 4 -3 a 2 iii C under the Advisers Act requires an adviser that pays a cash fee to a solicitor for solicitation activities to make a "bona fide effort to ascertain whether the solicitor has complied with the agreement, and has a reasonable basis for believing that the

written code of ethics that includes "[p]rovisions that require all of [registrant's] access persons to report, and [registrant] to review, their

and its adviser, among others, to, no less frequently than annually, furnish to the fund's board o f directors a written report that describes, among other things, any issues arising under the fund's code of ethics or procedures since the last report to the board of directors, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations. The staffhas observed that the CCO typically participates in the preparation of such reports.

~ Compliance policies and procedures were not tailored to registrants' businesses or practices: Several of the compliance manuals that the staff reviewed were created using outsourced CCO-provided templates. However, some of these templates were not tailored to registrants' businesses and practices and, thus, the compliance manuals that had been adopted contained policies and procedures that were not appropriate or applicable to the registrants' businesses or practices. ' Examples include:

o Critical areas were not identified, and thus certain compliance policies and procedures were not adopted, such as reviewing third-party managers hired to manage client money, or safeguarding client information.

o Policies were adopted, but were not applicable to the advisers' businesses and operations, such as: monitoring of account performance composites when in practice the adviser did not monitor composites because it did not advertise performance; collecting management fees quarterly in advance when in practice clients were billed monthly in arrears; and referencing departed employees as responsible parties in performing compliance reviews or monitoring.

o Critical control procedures were not performed, or not performed as described, including: oversight of private fund fee and expense allocations; reviews of solicitation activities for compliance with the Advisers Act; trade allocation reviews for fairness of side-by-side management of client accounts with proprietary accounts; oversight of performance advertising and marketing; personal trading reviews of all access persons; and controls over trade reconciliations.

C. Annual Review of the Compliance Programs

For the registrants examined, the outsourced CCOs were typically responsible for conducting and documenting registrants' annual reviews, which included testing for compliance with existing policies and procedures. The staff, however, observed a general lack of documentation evidencing the testing. 18

In addition, the staff notes that certain outsourced CCOs infrequently visited registrants' offices and conducted only limited reviews of documents or training on compliance-related matters while on-site. Such CCOs had limited visibility and prominence within the registrants' organization, which appeared to result in the CCOs also having limited authority within the organization to, among other things, improve adherence to the registrants' compliance policies and procedures. Limited authority also appeared to affect the outsourced CCOs' ability to implement important changes in disclosure regarding key areas of client interest, such as advisory fees.

lathe~Ado lin Release theC i lo ot dthati etmentad isa s t o '

dinthei operation fordnrnl toi po as single set of universally applicable required elements" and that instead "[e]ach adviser should adopt policies and procedures that take into consideration the nature of that firm's operations. " In describing how advisers should actually design their policies and procedures, the Commission suggested that each firm "should first identify conflicts and other compliance factors creating risk exposure for the firm and its clients in light of the firm's particular operations, and then design policies and procedures that address those risks. "

The staff notes that, while registrants must review their policies and procedures at least annually for their adequacy and the effectiveness of their implementation, there are no specific requirements under the Compliance Rules regarding documentation. The staff notes, however,

records" documenting the annual review conducted pursuant to the Compliance Rule.

IV. Conclusion

During these examinations, the staff observed certain compliance weaknesses associated with registrants that outsourced their CCOs, as described in this Risk Alert. Advisers and funds with outsourced CCOs should review their business practices in light of the risks noted in this Risk Alert to determine whether these practices comport with their responsibilities as set forth in the Compliance Rules. The staff anticipates that, by sharing these examination observations, it will assist registrants in assessing whether

their compliance programs have weaknesses, particularly with respect to identifying applicable risks and

ensuring that the firm's compliance program encompasses all relevant business activities.

A CCO, either as a direct employee of a registrant or as a contractor or consultant, must be empowered with sufficient knowledge and authority to be effective. Each registrant is ultimately responsible for adopting and implementing an effective compliance program and is accountable for its own deficiencies. Registrants, particularly those that use outsourced CCOs, may want to consider the issues identified in

this Risk Alert to evaluate whether their business and compliance risks have been appropriately identified, that their policies and procedures are appropriately tailored in light of their business and

associated risks, and that their CCO is sufficiently empowered within the organization to effectively perform his/her responsibilities. The staff observed fewer compliance-related issues at the registrants examined that had developed appropriate controls in each of the areas identified in this Risk Alert.

The staff welcomes comments and suggestions about how the Commission's examination program can better fulfill its mission to promote compliance, prevent fraud, monitor risk, and inform SEC policy. If you suspect or observe activity that may violate the federal securities laws or otherwise operates to harm

investors, please notify us at h://www. sec. ov/com laint/info ti scorn laint. shtml.

This Risk Alert is intended to highlight for firm risks and issues that the staff has identified. In addition, this Risk

Alert describes factovs that firms may consider to (i) assess their supervisory, compliance andlor other risk

management systems velated to these risks, and (ii) make any changes, as may be appropriate, to addvess or strengthen such systems. These factors are not exhaustive, nor will they constitute a safe harbor. Other factors besides those described in this Risk Alert may be appropriate to consider, and some of the factors may not be

applicable to a particular finn 's business. While some of the factors discussed in this Risk Alert reflect existing

regulatory requirements, they are not intended to altev such requirements. Moreover, future changes in laws or regulations may supersede some of the factors or issues raised here. The adequacy of supervisory, compliance and

other risk management systems can be determined only with reference to the pvofile of each specific firm and other

facts and civcumstances.

SEC. gov l 2015 National Society of Compliance Professionals, National Conference: Ke. . . Page 1 of 8

~Seech

2015 National. Society of Compl. iance Professionals, National. Conference: Keynote Address

Andrew Ceresney, Director, Division of Enforcement

Washington, D. C.

Nov. 4, 2015

Good morning. Thank you for inviting me to speak to you today. Before I begin my remarks, let me give

the necessary disclaimer that the views I express here today are my own and do not necessarily represent

the views of the Commission or its staff. +1

It is a pleasure to join you at your annual meeting, and to applaud your hard work and dedication as compliance professionals in the financial services industry. You have a challenging and difficult job and

play a critical role in fostering compliance with the federal securities laws. You work to ensure that your

firms have robust compliance programs and to provide sound advice and guidance to business line

personnel. The Commission and its staff hold compliance professionals in high regard and consider you

key partners in our efforts to serve and protect investors. We thank you for your diligence and commend

and support your work.

Today I want to address Enforcement's perspective on compliance officers and how we approach

enforcement cases that touch compliance personnel. I have heard, both from the leaders of your

organization and others, that certain recent enforcement actions by the Commission against compliance

personnel in the investment adviser space have caused concern in the compliance community. I am

hopeful that, after you hear my remarks, you will understand that these actions punish misconduct that

falls outside the bounds of the work that nearly all of you do on a daily basis; do not involve the exercise of

good faith judgments; and are consistent with the partnership we have developed to foster compliance

with the laws.

I should note at the outset that my remarks today are largely going to be focused on the investment

adviser space because that is where the recent actions I referenced arose and where I think much of the

concern lies. Some of what I will say has relevance to broker-dealers, and indeed in this day and age of

dual registrants, some of these lines have blurred. But I will primarily be focused on the duties and

responsibilities of compliance personnel of investment advisers and the cases we have brought in that

area.

My plan is first to discuss recent cases that emphasize the importance we place on compliance personnel

receiving the resources, cooperation, and transparency from the firm's business personnel they need to

do their job. These cases show that the Commission is in your corner when your work is hindered by

uncooperative or obstructionist business personnel, and that a number of our actions have sent the clear

message that you must be provided with the resources and support necessary to succeed.

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2015 National Society of Compliance Professionals, National Conference: Ke. . . Page 2 of 8

Second, I will discuss Rule 206(4)-7 under the Investment Advisers Act, which is a key provision

underpinning the responsibilities of investment advisers towards their clients. As you know, the Rule

creates certain requirements for SEC-registered investment advisers. The Commission's adoption of Rule

206(4)-7 empowered compliance personnel to improve compliance procedures, but also placed important

responsibilities on the firm to adopt written policies and procedures reasonably designed to ensure

compliance with the Advisers Act and the regulations thereunder.

Finally, I want to address the rare instances in which the Commission has charged CCOs in an

enforcement action. I want to emphasize that we and the Commission carefully weigh recommending and

bringing actions against CCOs. We look hard at the facts and fairness concerns in each case. The

overwhelming majority of the cases we bring involve CCOs who crossed a clear line by engaging in

affirmative misconduct or obstructing regulators, or who wore multiple hats. I haven't heard any concern

about those cases. The concern I have heard relates to the small number of cases where we have

charged CCOs with causing violations, I'. e. , where the CCOs exhibited wholesale failures in carrying out

responsibilities that were clearly assigned to them. In my view, a complete understanding of these cases should provide comfort that we are exercising our judgment appropriately to recommend actions only

when the conduct crossed a clear line.

Enforcement's Efforts to Protect the Compliance Function Let me start by speaking first about a line of cases that sometimes gets lost in the discussion of

compliance-related enforcement actions — those cases demonstrating our support for the compliance

function and its resource needs. In my time at the Commission and in private practice, I have come to

appreciate that the state of a firm's compliance function says a lot about the firm's likelihood of engaging in misconduct and facing sanctions. I have found that you can predict a lot about the likelihood of an

enforcement action by asking a few simple questions about the role of the company's compliance

department in the firm:

~ Are compliance personnel included in critical meetings?

~ Are their views typically sought and followed?

~ Do compliance officers report to the CEO and have significant visibility with the board?

~ Is the compliance department viewed as an important partner in the business and not simply as a support function or a cost center?

~ Is compliance given the personnel and resources necessary to fully cover the entity's needs?

Far too often, the answer to these questions is no, and the absence of real compliance involvement in

company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues. ~2

Now, I recognize that it can be difficult for compliance professionals to stand up to management,

particularly in organizations where they are not supported. I also recognize that compliance personnel

may sometimes lack the resources and information to do their jobs effectively. In the end, while

compliance officers have certain responsibilities, which I will discuss, it is the business that is primarily

responsible for compliance with the law. Two recent enforcement actions demonstrate that we recognize these issues and take them into account in our charging and sanction determinations, and that our intent

is to encourage firms to give compliance the prominence and resources it needs to be effective.

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2015 National Society of Compliance Professionals, National Conference: Ke. . . Page 3 of 8

In Pekin Singer, for example, the Commission charged an investment adviser with numerous compliance

failures, and also charged the adviser's president with causing those violations. +3 The compliance failures

were significant and widespread. Among other things, the adviser failed to conduct timely annual

compliance program reviews and failed to implement and enforce provisions of its policies and procedures

and its code of ethics. Of particular importance, the Commission's order found that the firm did not

dedicate sufficient resources to its compliance program. The CCO, who was not charged, was tasked with

numerous non-compliance responsibilities that severely limited his ability to focus on his compliance

function. The CCO repeatedly told the firm's president that he needed help to fulfill his compliance

responsibilities, including the annual compliance program review. The CCO also expressed concern about

not completing compliance testing, and warned that the firm would not be ready for an SEC examination.

The CCO's pleas for help went unanswered for over a year, and before Pekin Singer could get its

compliance program in order, the Commission's examination staff was knocking on the door.

An important takeaway from that case is not only did we not charge the CCO, but we did charge the

president of the firm with causing the firm's compliance violations, in large part because he ignored the

CCO's pleas for more resources and support. The clear message from that case to the business side of

firms is to ensure that your calls for resources and support are heeded.

Our 2013 enforcement action in Carl Johns, in which we filed our first-ever charge against an individual for

misleading and obstructing a CCO, also underscores how we have used our enforcement program to

support your efforts. ~41n that case, an assistant portfolio manager at an SEC-registered investment

adviser failed to pre-clear or report his personal securities transactions. He also submitted false quarterly

and annual reports related to his securities trading, altered trade confirmations, and manually deleted

securities holdings on his brokerage statements. When the CCO detected irregularities in the altered

documents and confronted the portfolio manager, he misled the CCO about the transactions, and even

accessed the hard copy file of his previously submitted brokerage statements and physically altered them.

The message of Pekin Singer and Carl Johns, as well as similar cases, is clear: we will aggressively

pursue business line personnel and firms who mislead or deceive you, or obstruct the compliance

function, or who fail to support you in a manner that causes compliance violations.

Rule 206(4)-7 Now let me turn to actions involving compliance officers. The recent matters of most interest to the

compliance community involved Rule 206(4)-7 under the Investment Advisers Act of 1940. Before I

discuss those actions, I want to spend a little time discussing the Rule and the circumstances surrounding

its adoption because that bears, in part, on how we view compliance officer actions in connection with the

written policies and procedures and annual review required under the Rule.

In 2003, the Commission proposed and adopted the Rule. +5 As described in the Commission's Adopting

Release, the Commission and state securities authorities found that some fund advisers, broker-dealers,

and other service providers were engaging in or facilitating inappropriate market timing and late trading of

fund shares and misusing material, nonpublic information about fund portfolios. +6 The Adopting Release also reported the finding that some senior executives of fund advisers had breached their fiduciary duties

to the funds involved and their shareholders by placing their own interests ahead of those of their funds

and their shareholders. ~7 The Adopting Release concluded that these actions harmed the funds, their

management organizations, and fund investor confidence. +8 Finally, and critically, the Adopting Release noted that the failure of an adviser or fund to have in place adequate compliance controls was something

the Commission should address before that failure had a chance to harm clients or investors. +9

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To address the failure of an adviser or fund to have in place adequate compliance controls, the

Commission, among other things, adopted Rule 206(4)-7. The Rule requires registered investment

advisers to "adopt and implement written policies and procedures reasonably designed to prevent violation

[s]" of the Advisers Act and the rules thereunder and periodically "[r]eview. . . the adequacy of the policies

and procedures. . . and the effectiveness of their implementation. "~10 In the Adopting Release, the

Commission indicated that the policies and procedures should be reasonably designed to prevent

violations from occurring, detect violations that have occurred, and correct promptly any violations that

have occurred. ~11

Under Rule 206(4)-7, each registered investment adviser must designate a CCO. The Adopting Release

noted that the CCO should be competent and knowledgeable regarding the Advisers Act and empowered

with "full responsibility and authority to develop and enforce appropriate policies and procedures for the

firm. "~12 Rule 206(4)-7 also specifies that the CCO is "responsible for administering [the adviser's]

compliance policies and procedures. "~13 The Release emphasizes that the CCO should have a position

of seniority and authority sufficient to compel others to adhere to the compliance policies and procedures.

~14

Essentially, I believe that the Commission in this rule sought to empower CCOs within their organizations.

At the same time, it also placed certain responsibilities upon the CCO. As I will discuss in a moment, when

we have charged a CCO with causing violations of this provision, we have not second guessed their

professional judgment, critiquing the choices they made in the creation of policies; rather, we have brought

actions when there was a wholesale failure to develop such policies or to implement them, and where the

CCO was properly held responsible for that failure.

Compliance Officer Liability Let me then turn now to the infrequent circumstances in which the Commission charges CCOs. At your

annual meeting two years ago, Chair White addressed the potential liability of compliance professionals

for securities law violations. ~15 She said that compliance officers should not fear enforcement action if

they perform their responsibilities diligently, in good faith, and in compliance with the law. That is still true

today. ~16 You should know that both we in Enforcement and the Commission take the question of

whether to charge a CCO very seriously and consider it carefully. We think very hard about when to bring

these cases. When we do, it is because the facts demonstrate that the CCO's conduct crossed a clear

line. ~17

As I have said before, when we do bring actions against CCOs, they generally fall into three categories. In

the first category are cases against CCOs who are affirmatively involved in misconduct that is unrelated to

their compliance function. I trust that everyone in this room agrees with that approach. We bring cases against these CCOs when they are directly involved in fraudulent activity or other conduct that harms

investors. Often, the CCOs involved in affirmative misconduct wear other hats in addition to their CCO hat,

such as serving as CEO or CFO, and it frequently is their actions in those other roles that lead to charges.

~18 A good example of this is our recent action against AlphaBridge Capital Management's CCO. There

we charged a CCO who was also a co-portfolio manager who affirmatively misled the fund administrator

and auditor about asset values. ~19

We also charge CCOs who engage in efforts to obstruct or mislead the Commission staff. ~20 For

example, in Parallax, we charged a CCO for compliance-related violations where he, in the course of an

exam, altered documents to deceive the staff about whether the firm had conducted the required annual

compliance review. ~21 We also charged a former Wells Fargo Advisors compliance officer who altered a

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document before it was provided to the SEC during an insider trading investigation. The compliance

officer, who was responsible for identifying and reviewing potentially suspicious trading by Wells Fargo

personnel or the firm's customers and clients, conducted a review of a broker's trading and closed her

review with no findings. After we charged the broker with insider trading, she altered her review document

to make it appear that she performed a more thorough review than she actually had and provided the

document to our staff. ~22 An administrative law judge found her liable for violating the federal securities

laws, although he imposed no remedies. ~23 I think you will agree that in these sorts of cases, charges

against the CCOs or other compliance personnel are warranted.

The third category of cases where we have charged CCOs are where the CCO has exhibited a wholesale

failure to carry out his or her responsibilities. It is in this category that you will find CCOs charged for

causing their firm's compliance failures under Rule 206(4)-7 and other compliance-related rules. ~24 This

category is considerably smaller than the first but has drawn significantly more attention. ~25

Taking a step back, the Commission has brought more than 8, 000 enforcement actions since 2003, ~26

and 807 in fiscal year 2015 alone, including follow-on administrative actions and delinquent filings. ~27 Of

those 8, 000 enforcement actions since 2003, approximately 1, 300 were investment adviser/investment

company cases, ~28 including 126 in fiscal year 2015 alone. ~29 During this 12-year period, the

Commission has only brought five enforcement actions against individuals with CCO-only titles affiliated

with investment advisers that involved charges under Rule 206(4)-7 and other compliance-related

violations, where there wasn't otherwise efforts to obstruct or mislead Commission staff. ~30

These numbers make clear that the Commission only rarely charges CCOs for causing violations of Rule

206(4)-7. There has not been any recent trend toward more enforcement activity involving CCOs in their

compliance function. The two recent charges against the CCOs do not signal a change in how

Enforcement staff or the Commission approaches the issue of CCO liability. The facts in each case demonstrate why the Commission held the CCO responsible for causing his firm's compliance failures.

Being a CCO does not provide immunity from liability. VVhen CCOs completely fail in their responsibilities,

and particularly when significant investor harm results, it is appropriate for us to address that misconduct.

Turning to the facts of those two cases, in BlackRock, the firm, one of the largest money management

firms in the world, did not have any written policies and procedures regarding the outside business

activities of its employees, even though the BlackRock CCO knew of and approved numerous outside

activities engaged in by BlackRock employees. BlackRock's CCO also was involved in extended

discussions about a significant outside family business of a senior portfolio manager that posed a conflict

with the investments his funds held. Despite these red flags, the CCO failed to develop and implement

written policies and procedures to assess and monitor the outside activities of BlackRock employees and

to disclose related conflicts of interest to the BlackRock funds' boards and to advisory clients. ~31

It is important to recognize that we did not charge the CCO with failing to disclose the conflict of the senior

portfolio manager to the fund boards; we only charged the firm with that conduct. Rather, we charged the

CCO with a wholesale compliance failure — causing BlackRock's failure to adopt written policies

regarding outside business activities such as those engaged in by the senior portfolio manager. The

absence of an outside business policy, in the face of red flags, was a clear compliance failure given the

CCO's awareness of, and focus on, the issue.

The facts in SFX are similarly compelling. In SFX, an employee of the investment adviser with full

signatory power over client bank accounts misappropriated client assets for more than five years by

withdrawing money directly from those accounts. The CCO was not involved in and was not charged with

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the misappropriation. However, he was charged with causing the firm's violation of Rule 206(4)-7. The

firm's policies and procedures specifically assigned the CCO with responsibility to implement the firm's

policy requiring review of "cash flows in client accounts. " Yet, for more than five years, the CCO failed to

ensure that any review occurred, even though certain SFX employees had full signatory power over client

bank accounts. ~32

As in BlackRock, SFX's compliance failures had significant consequences — had the CCO fulfilled his

obligation to implement the firm's cash flow review policies, the firm likely would have uncovered the

misappropriation years earlier.

I hope it is clear from a recitation of the facts in each of these cases that they do not represent a deviation

from the Commission's historical approach to CCO liability but instead a reaffirmation of our traditional

views.

Conclusion There are three important takeaways from my remarks today. First, you have the Commission's full

support. We rely on you as essential partners in ensuring compliance with the federal securities laws and

we will do all we can to help you perform your work.

Second, and to that end, we will bring enforcement actions against business line personnel in appropriate

circumstances where they have deceived or misled you, or where their failure to provide you with

adequate resources and information causes compliance rule violations.

Third, there has been no change in our longstanding careful and measured approach to determining

whether we should charge a CCO. As reflected in the small number of enforcement actions brought

against CCOs for their compliance work, and the clear facts in each of those actions, we decide to

recommend charging a CCO only when warranted after a thorough analysis of the facts and

circumstances and consideration of fairness and equity. As I have previously said, you should not hesitate

to provide advice and help remediate when problems arise. And I do not want you to be concerned that by

engaging in good faith judgments, you will somehow be exposed to liability.

Thank you for your time and attention.

~1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any

private publication or statement by any of its employees. The views expressed herein are those of the

author and do not necessarily reflect the views of the Commission or of the author's colleagues on the

staff of the Commission.

+2Andrew J. Ceresney, Director, Div. of Enforcement, Secs. 8 Exch. Comm'n, Keynote Address at

Compliance Week 2014 (May 20, 2014), available at

htt://www. sec. ov/News/S ecch/Detail/S ecch/1370541872207 ("Ceresney Compliance Week

Speech" ).

+3 Pekin Singer Strauss Asset Management Inc. , Advisers Act Release No. 4126 (Jun. 23, 2015), available athtt://www. sec. ov/liti ation/admin/2015/ia-4126. df.

~4 Press Release, Secs. 8 Exch. Comm'n, SEC Sanctions Colorado-Based Portfolio Manager for Forging

Documents and Misleading Chief Compliance Officer (Aug. 27, 2013), available at

htt://www. sec. ov/News/PressRelease/Detail/PressRelease/1370539791420.

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fg See U. S. Secs. 8 Exch. Comm'n, Compliance Programs of Investment Companies and Investment

Advisers, Advisers Act Release No. 2204, Investment Company Act Release No. 26299, 68 Fed. Reg.

74714 (Dec. 24, 2003), available athtt s://www. sec. ov/rules/final/ia-2204. df("Adopting Release" ).

+6 Id. at 74714.

+7 Id. at 74715.

+8 Id.

+9 Id.

~10 17 C. F. R. g 275. 206(4)-7.

~11 Adopting Release, supra note 5, at 74716.

L112 Id. at 74720.

~13 Id. ; see also 17 C. F. R. g 275. 206(4)-7(c) (imposing requirement on registered investment advisers to

"designate an individual (who is a supervised person) responsible for administering the policies and

procedures. . . ").

~14 Adopting Release, supra note 5, at 74720.

~15 See Chair Mary Jo White, Remarks at National Society of Compliance Professionals National

Membership Meeting (Oct. 22, 2013), available at

htt://www. sec. ov/News/S ecch/Detail/S ecch/1370539960588.

~16 Id. ; see also Chair Mary Jo White, Opening Remarks at the Compliance Outreach Program for

Broker-Dealers (Jul. 15, 2015), available at htt:I/www. sec. ov/news/s ecch/o enin -remarks-

com liance-outreach- ro ram-for-broker-dealers. html; Ceresney Compliance Week Speech, supra note

2; Andrew J. Donohue, Chief of Staff, Secs. 8 Exch. Comm'n, Remarks at NRS 30th Annual Fall

Investment Adviser and Broker-Dealer Compliance Conference (Oct. 14, 2015), available at

htt://www. sec. ov/news/s ecch/donohue-nrs-30th-annual. html.

~17 Ceresney Compliance Week Speech, supra note 2.

~18 Ceresney Compliance Week Speech, supra note 2.

~19 Press Release, Secs. 8 Exch. Comm'n, SEC Charges Hedge Fund Advisory Firm With Conducting

Fraudulent Fund Valuation Scheme (July 1, 2015), available at

htt://www. sec. ov/news/ ressrelease/2015-134. html see also Press Release, Secs. 8 Exch. Comm'n,

SEC Announces Charges Against Compliance Director Accused of Defrauding Investors and Stealing

Brokerage Firm Assets (May 28, 2015) (announcing Enforcement Division's charges against a brokerage

firm's director of compliance who was accused of fleecing investors and stealing money from the firm),

available at htt://www. sec. ov/news/ ressrelease/2015-102. html.

~20 Ceresney Compliance Week Speech, supra note 2.

~21 In the Matter of Parallax Investments, LLC, John P. Bott, II, and F. Robert Falkenberg, Advisers Act

Release No. 4159 (Aug. 6, 2015).

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~22 Press Release, Secs. 8 Exch. Comm'n, SEC Announces Enforcement Action Against Former Wel/s

Fargo Advisors Compliance Officer for Altering Document (Oct. 15, 2014), available at

htt://www. sec. ov/News/PressRelease/Detail/PressRelease/1370543175814.

~23 Judy K. Wolf, Initial Decision Release No. 851 (Aug. 5, 2015), available at

htt s:I/www. sec. ovlal lal dec/2015/id851ce. df; see also Judy K. Wolf, Exchange Act Release No. 75969

(Sept. 23, 2015) (finality order), available athtt s:I/www. sec. ovlal'laldec/2015/34-75969. df.

~24 Ceresney Compliance Week Speech, supra note 2.

~25 SEC Commissioner Luis A. Aguilar, The Role of Chief Compliance Officers Must be Supported (Jun.

29, 2015), availableathtt:/lwww. sec. ov/news/statement/su ortin -role-of-chief-com liance-

officers. html; SEC Commissioner Daniel M. Gallagher, Statement on Recent SEC Settlements Charging

Chief Compliance Officers With Violations of Investment Advisers Act Rule 206(4)-7, (Jun. 18, 2015), available at htt:I/www. sec. ov/news/statement/sec-cco-settlements-iaa-rule-206-4-7. html.

~26 See Secs. 8 Exch. Comm'n, Select SEC and Market Data 2004 — 2015, et. seq. (2004 — 2015) and

Annual Report 2003 (2003), available at htt://www. sec. ov/about/secre orts. shtml ("SEC Enforcement

Data" ).

~27 See Press Release, Secs. 8 Exch. Comm'n, SEC Announces Enforcement Results for FY 2015:

Results Include Significant Number of High-Impact and First-of-their-Kind Actions (Oct. 22, 2015), available at htt:llwww. sec. ov/news/ ressrelease/2015-245. html ("SEC Enforcement FY 2015 Press Release" ).

~28 See SEC Enforcement Data, supra note 26.

~29 See SEC Enforcement FY 2015 Press Release, supra note 27.

~30 In the Matter of SFX Financial Advisory Management Enterprises, Inc. and Eugene S. Mason,

Advisers Act Release No. 4116 (June 15, 2015); In the Matter of Blackrock Advisors, LLC and

Bartholomew A. Battista, Advisers Act Release No. 4065 (Apr. 20, 2015); In the Matter of Equitas Capital

Advisors, LLC, Equitas Partners, LLC, David S. Thomas, Jr. and Susan Christina, Advisers Act Release

No. 3704 (Oct. 23, 2013); In the Matter of Ronald S. Rollins, Advisers Act Release No. 3635 (July 29,

2013); In the Matter of The Buckingham Research Group, Inc. , Buckingham Capital Management, Inc. ,

and Lloyd R. Karp, Advisers Act Release No. 3109 (Nov. 17, 2010).

~31 Press Release, Secs. 8 Exch. Comm'n, SEC Charges BlackRock Advisors With Failing to Disclose

Conflict of Interest to Clients and Fund Boards (Apr. 20, 2015), available at

htt://www. sec. ov/news/ ressrelease/2015-71. html.

~32 Press Release, Secs. 8 Exch. Comm'n, Investment Advisory Firm's Former President Charged With

Stealing Client Funds (June 15, 2015), available at htt://www. sec. ov/news/ ressrelease/2015-120. html.

Modified: Nov. 4, 2015

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EXAMINATION PRIORITIES FOR 2016

I. Introduction

This document identifies selected 2016 examination priorities of the Office of Compliance Inspections

and Examinations ("OCIE, " "we, " or "our") of the Securities and Exchange Commission ("SEC" or "Commission" ). In general, the priorities reflect certain practices and products that OCIE perceives to present

potentially heightened risk to investors and/or the integrity of the U. S. capital markets. '

OCIE serves as the "eyes and ears" of the SEC. We conduct examinations of regulated entities to

promote compliance, prevent &aud, identify risk, and inform policy. '

We selected our 2016 examination

priorities in consultation with the Commissioners, senior staff &om the SEC's regional offices, the SEC's policy-

making and enforcement divisions, the SEC's Investor Advocate, and our fellow regulators.

This year, our priorities are organized around the same three thematic areas as last year:

1. Examining matters of importance to retail investors, including investors saving for retirement;

2. Assessing issues related to market-wide risks; and

3. Using our evolving ability to analyze data to identify and examine registrants that may be

engaged in illegal activity.

This document does not address OCIE's examination priorities for the national securities exchanges, which we

are addressing separately.

II. Protecting Retail Investors and Investors Saving for Retirement

Protecting retail investors and retirement savers remains a priority in 2016, and it will likely continue to

be a focus for the foreseeable future. Retail investors of all ages face a complex and evolving set of choices when

determining how to invest their money. Additionally, as investors are more dependent than ever on their own

investments for retirement, ' the financial services industry is offering a broad array of information, advice,

This document was prepared by SEC staff, and the views expressed herein are those of OCIE. The Commission has expressed no view on this document's contents. It is not legal advice; it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.

The regulated entities that OCIE examines include investment advisers, investment companies, broker-dealers, municipal advisors, transfer agents, exchanges, clearing agencies, and other self-regulatory organizations.

For decades, employers have shifted from offering defined benefit pensions to defined contribution plans, such as 401(k) accounts, that place funding and investment risk directly on participants. Today, it is estimated that approximateiy $16. 5 trillion is invested in defined contribution plans (including individual retirement accounts and annuity reserves), while approximately $8. 2 trillion is invested in defined benefit plans. See Nari Rhee, "Retirement Savings Crisis: Is it Worse than We Think" (June

products, and services to retail investors to help them plan for, and live in, their retirement years. We are

planning and/or conducting various examination initiatives to assess risks to retail investors that could arise from

these trends.

~ Re TIRE. In June 2015, we launched a multi-year examination initiative, focusing on SEC-registered

investment advisers and broker-dealers and the services they offer to investors with retirement

accounts. ' We will continue this initiative, which includes examining the reasonable basis for

recommendations made to investors, conflicts of interest, supervision and compliance controls, and

marketing and disclosure practices.

~ Exchan e-Traded Funds "ETFs" . We will examine ETFs for compliance with applicable

exemptive relief granted under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and with other regulatory requirements, as well as review the ETFs' unit creation and

redemption process. We will also focus on sales strategies, trading practices, and disclosures

involving ETFs, including excessive portfolio concentration, primary and secondary market trading

risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs.

~ Branch Offices. We will continue to review regulated entities' supervision of registered

representatives and investment adviser representatives in branch offices of SEC-registered investment

advisers and broker-dealers, including using data analytics to identify registered representatives in

branches that appear to be engaged in potentially inappropriate trading.

Fee Selection and Reverse Churnin . We will continue to examine investment advisers and dually-

registered investment adviser/broker-dealers that offer retail investors a variety of fee arrangements

(e. g. , asset-based fees, hourly fees, wrap fees, commissions). We will focus on recommendations of account types and whether the recommendations are in the best interest of the retail investor at the

inception of the arrangement and thereafter, including fees charged, services provided, and disclosures

made about such arrangements.

~ Variable Annuities. Variable annuities have become a part of the retirement and investment plans of many Americans. ' We will assess the suitability of sales of variable annuities to investors (e. g. , exchange recommendations and product classes), as well as the adequacy of disclosure and the

supervision of such sales.

Public Pension Advisers. We will examine advisers to municipalities and other government entities,

focusing on pay-to-play and certain other key risk areas related to advisers to public pensions,

including identification of undisclosed gifts and entertainment.

2013), a publication of the NATIONAL INSTITUTE ON RETIREMENT SECURITY; see also "Retirement Assets Total $24. 8 Trillion in Second Quarter 2015" (Sept. 2015), a publication of the INYEsTMENT CoMPANY INSTITUTE.

See OCIE Risk Alert, "Retirement-Targeted Industry Reviews and Examinations Initiative, ' June 22, 2015, htt:// . . / h t/ fr / t/etre e t-taheted-t de trt-e te s-a d-e a t at -t taxied e. df.

See SEC Investor Publications, 'Variable Annuities: What You Should Know, " April 18, 2011, httte//, ~ /i~t/ hs/va a»th. htm.

III. Assessing Market-Wide Risks

The SEC's mission includes not only protecting investors and facilitating capital formation, but also

maintaining fair, orderly, and efficient markets. We will examine for structural risks and trends that may involve

multiple firms or entire industries. In 2016, we will focus on the following initiatives:

"""*'"'e investment advisers' cybersecurity compliance and controls. ' In 2016, we will advance these efforts, which include testing and assessments of firms' implementation of procedures and controls.

~ Re ulation S stems Com liance and Inte ri "SCI" . We will examine SCI entities to evaluate

whether they have established, maintained, and enforced written policies and procedures reasonably

designed to ensure the capacity, integrity, resiliency, availability, and security of their SCI systems. ' This will include, among other things, assessing the resiliency of their primary and back-up data

centers, evaluating whether computing in&astructure components are geographically diverse, and

assessing whether security operations are tailored to the risks each entity faces.

examine advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid

fixed income securities. We will also examine registered broker-dealers that have become new or

expanding liquidity providers in the marketplace. These examinations will include a review of various

controls in these firms' expanded business areas, such as controls over market risk management,

valuation, liquidity management, trading activity, and regulatory capital.

~ Ciearin A encies. We will continue to conduct annual examinations of clearing agencies designated

systemically important, pursuant to the requirements of the Dodd-Frank Wall Street Reform and

Consumer Protection Act. Areas for review will be determined through a risk-based approach in

collaboration with the Division of Trading and Markets and other regulators, as applicable.

IV. Using Data Anaiytics to Identify Signals of Potential Illegal Activity

Since our examination program is risk-based, we are always striving to detect risks across those industries

and within those firms that we oversee. In all of our examination initiatives, including those highlighted in this

section, we utilize data and intelligence from our own examinations, as well as from regulatory filings, to identify

registrants that appear to have elevated risk profiles. A few of our initiatives that leverage our capabilities in the

area of data analytics include:

~ Recidivist Re resentatives and their Km io ers. We will continue to use our analytic capabilities

to identify individuals with a track record of misconduct and examine the firms that employ them.

For example, we will assess the compliance oversight and controls of investment advisers that have

employed such individuals after they have been disciplined or barred from a broker-dealer.

See OCIE Risk Alert, 'OCIE's 2015 Cybersecurity Examinations Initiative, " Sept. 15, 2015, ~btt s// ~s. . / / . t/c t -20~/s-c b sec i~earn t -»t t~df.

For the definitions of 'SCI entities" and "SCI systems" see Regulation Systems Compliance and Integrity, Release No. 34-37639, 11 // /rules/finai/2014/34-73~639. df.

~ Anti-Mone Launderin "AML" . We will continue to examine clearing and introducing broker-

dealers' AML programs, using our analytic capabilities to focus on firms that have not filed the

number of suspicious activity reports ("SARs") that would be consistent with their business models or

have filed incomplete or late SARs. We will also continue to assess broker-dealers' AML programs,

with a particular emphasis on (1) the adequacy of the independent testing obligation, to ensure that

these programs are robust and are targeted to each firm's specific business model, and (2) the extent

to which firms consider and adapt, as appropriate, their programs to current money laundering and

terrorist financing risks.

~ Microca Fraud. We will continue to examine the operations of broker-dealers and transfer agents

for activities that indicate they may be engaged in, or aiding and abetting, pump-and-dump schemes

or market manipulation. We will also assess whether broker-dealers are complying with their

obligations under the federal securities laws when publishing quotes for or trading securities in the

over-the-counter markets.

~ Excessive Tradin . We will continue to analyze data, including data obtained Irom clearing brokers,

to identify and examine firms and their registered representatives that appear to be engaged in

excessive or otherwise potentially inappropriate trading.

~ Product Promotion. We will focus on detecting the promotion of new, complex, and high risk

products and related sales practice issues to identify potential suitability issues and potential breaches

of fiduciary obligations.

Through collaborative efforts with the Division of Economic and Risk Analysis, we will continuously enhance

our analytic approach and capabilities in these areas through the use of new technologies and risk-based

initiatives.

V. Other Initiatives

In addition to examinations related to the themes described above, we expect to allocate examination

resources to other priorities, including:

~ Munici al Advisors. We will continue to conduct examinations of newly-registered municipal

advisors to assess their compliance with recently adopted SEC and Municipal Securities Rulemaking

Board rules. This initiative will continue to include industry outreach and education. '

~ Private Placements. We will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program ("EB-5 Program" )' to evaluate

whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.

See OCIE's Industry Letter for the Municipal Advisor Examination Initiative, August 19, 2014, /ttt s:llwww. sec. ovlaboutlo tceslocielmuni-advisor-letter-0819/4. d.

The EB-5 Program is a federal visa initiative, administered by United States Citizenship and Immigration Services. It provides a path to legal U. S. residency for foreign investors who make a qualifying investment in a commercial enterprise in the United States that creates or preserves at least ten permanent full-time jobs for qualified U. S. workers. See EB-5 Immigrant Investor Program description at htt://www. uscis. ov/eb-5.

~ Never-Before-Examined Investment Advisers and Investment Com anies. We will continue

conducting focused, risk-based examinations of selected registered investment advisers and

investment company complexes that we have not yet examined. "

~ Private Fund Advisers. We will examine private fund advisers, maintaining a focus on fees and

expenses and evaluating, among other things, the controls and disclosure associated with side-by-side

management of performance-based and purely asset-based fee accounts.

~ Transfer A ents. In addition to our examinations of transfer agents' timely turnaround of items and

transfers, recordkeeping and record retention, and safeguarding of funds and securities, we will

examine transfer agents providing paying agent services for their issuers, focusing on the

safeguarding of security-holder funds.

VI. Conclusion

This description of OCIE priorities is not exhaustive. While we expect to allocate significant resources

throughout 2016 to the examination issues described herein, our staff will also conduct examinations focused on

risks, issues, and policy matters that arise Irom market developments, new information learned from examinations

or other sources, including tips, complaints, and referrals, and coordination with other regulators.

OCIE welcomes comments and suggestions about how we can better fulfill our mission to promote

compliance, prevent Iraud, monitor risk, and inform SEC policy. If you suspect or observe activity that may

violate the federal securities laws or otherwise operates to harm investors, please notify us at

htt://www. sec. ov/com laint/info ti scorn laint. shtml.

See OCIE's Letter to Never-Before Examined Investment Advisers, February 20, 2014, ~htt://www. sec. ov/about/offices/ocie/nbe-final-letter-022014. f. See also OCIE Risk Alert, "OCIE's Never-Before-Examined Registered Investment Company Initiative, ' April 20, 2015, http: //www. sec. ov/about/offices/ocie/ocie-never-before-examined- ~ ~ t d-i t t-co ~~i'tiati . df.

UNITED STATES OF AMERICA Before the

SECURITIES AND EXCHANGE COMMISSION

INVESTMKNT ADVISERS ACT OF 1940 Release No. 4273/ November 19, 2015

ADMINISTRATIVE PROCEEDING File No. 3-16223

In the Matter of

SANDS BROTHERS ASSET MANAGEMENT, LLC, STEVEN SANDS, MARTIN SANDS, AND CHRISTOPHER KELLY,

Respondents.

ORDER MAKING FINDINGS AND IMPOSING PENALTIES, REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f) AND 203(k) OF THK INVESTMENT ADVISERS ACT OF 1940 AGAINST SANDS BROTHERS ASSET MANAGEMENT, LLC, STEVEN SANDS AND MARTIN SANDS

The Securities and Exchange Commission (" Commission" ) instituted public administrative and cease-and-desist proceedings on October 29, 2014, pursuant to Sections 203(e), 203(f) and

203(k) of the Investment Advisers Act of 1940 (" Advisers Act"), against Sands Brothers Asset Management, LLC ("SBAM"), Steven Sands ("S. Sands" ), Martin Sands ("M. Sands, " and together with SBAM and S. Sands, the "Respondents" ) and Christopher Kelly (" Kelly" ).

On August 31, 2015, the Hearing Officer issued an Order on Motions for Summary Disposition pursuant to Rule of Practice 250(b), 17 C. F. R. ) 201. 250(b) (the "Order on Summary Disposition" ), partially granting the motion of the Division of Enforcement (" Division" ) for summary disposition against Respondents. The Order on Summary Disposition denied the Division's motion for summary disposition as to sanctions and ordered additional proceedings to determine what civil penalties and remedial sanctions pursuant to Sections 203(e), 203(f), 203(i) and 203(k) of the Advisers Act against Respondents are in the public interest.

In anticipation of those proceedings, Respondents have submitted an Offer of Settlement (" Offer" ), which the Commission has determined to accept. Solely for the purpose of these

proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the

Commission's jurisdiction over them, the subject matter of these proceedings, and the findings

contained in Sections III. 10, 11 and 12 below, which are admitted, Respondents consent to the

entry of this Order Making Findings and Imposing Penalties, Remedial Sanctions and a Cease-and-

Desist Order Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (" Order" ), as set forth below.

On the basis of this Order and Respondent's Offer, the Commission finds' that

1. For the fiscal years 2010, 2011 and 2012, SBAM failed to timely distribute

audited financial statements to the investors of the pooled investment vehicles managed by SBAM in violation of the "custody rule" — Rule 206(4)-2 under Section 206(4) of the Advisers Act — and without regard to an Order issued by the Commission in October 2010 requiring

SBAM, S. Sands and M. Sands to cease and desist &om violating or causing any future

violations of that rule.

2. S. Sands and M. Sands, the two co-chairmen of SBAM, aided, abetted and caused SBAM's custody rule violations, and were not in compliance with the Commission's 2010 Cease-And-Desist Order when they failed to implement any procedures or safeguards to ensure

compliance. In fact, none of the Respondents made adequate efforts to ensure that SBAM met

its custody rule obligations, either by disseminating the audited financial statements that

investors in certain of SHAM's-managed funds were entitled to receive, or alternatively by submitting to a surprise examination to verify client assets.

3. SBAM is a New York limited liability company formed in June 1998, and has

been registered with the Commission as an investment adviser since July of that year. SHAM maintains offices in New York, Connecticut and California, and provides investment advisory services to various pooled investment vehicles. As of July 2014, SBAM had approximately $64 million under management. SBAM is owned by the Julios and Targhee Trusts, which are set up for the benefit of the families of M. Sands and S. Sands, SBAM's principals.

4. S. Sands, age 56, resides in Locust Valley, New York. He is a principal, co- founder, and controlling person of SBAM, and acts as a senior portfolio manager. He is also a controlling person or director of the managing members / general partners for the pooled investment vehicles that SHAM advises. S. Sands held Series 7, 24 and 63 licenses while

previously employed at a number of broker dealers.

The findings herein are made pursuant to Respondents' Offer of Settlement and are not binding

on any other person or entity in this or any other proceeding.

5. M. Sands, age 54, resides in Greenwich, Connecticut. He is a principal, co- founder, and controlling person of SBAM, and acts as a senior portfolio manager. He is also a controlling person or director of the managing members / general partners for the pooled investment vehicles that SBAM advises. M. Sands held Series 3, 7, 8, 24, 63 and 65 licenses while previously employed at a number of broker dealers.

The Custod Rule

6. Rule 206(4)-2, promulgated under Section 206(4) of the Advisers Act (the "custody rule" ), is designed to protect investor assets. The custody rule requires that advisers who have custody of client assets put in place a set of procedural safeguards to prevent loss, misuse or misappropriation of those assets.

7. An adviser has "custody" of client assets if it holds, directly or indirectly, client funds or securities, or if it has the ability to obtain possession of those assets. 17 C. F. R. ) 275. 206(4)-2(d)(2).

8. An adviser who has custody must, among other things: (i) ensure that a qualified custodian maintains the client assets; (ii) have a reasonable basis for believing that the qualified custodian sends quarterly account statements to clients; and (iii) ensure that client funds and securities are verified by actual examination each year by an independent public accountant. Id.

) 275. 206(4)-2(a)(1), (3), (4).

9. The custody rule provides an alternative for advisers to pooled investment vehicles. In relevant part, the rule prescribes that an adviser "shall be deemed to have complied with" the independent verification requirement if the adviser "distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year. " Id. ) 275. 206(4)-2(b)(4)(i). The accountant performing the audit must be an independent public accountant that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board. Id. ) 275. 206(4)-2(b)(4)(ii). An adviser that takes this approach is also not required to satisfy the account statements delivery requirement described above. Id. ) 275. 206(4)-2(b)(4).

The Order on Summar Dis osition

10. In the Order on Summary Disposition, the Hearing Officer determined that SBAM willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder by failing to distribute to investors the fiscal year 2010, 2011 and 2012 audited financial statements of ten funds as to which SBAM acted as Investment Adviser within the period provided for in Rule 206(4)-2.

11. The Hearing Officer further determined that M. Sands caused and willfully aided and abetted SBAM's violations as to the late distribution of five of the funds' fiscal year 2010 audited financial statements.

12. The Hearing Officer further determined that S. Sands and M. Sands caused and

willfully aided and abetted SBAM's violations as to the late distribution of ten of the funds' fiscal year 2011 and 2012 audited financial statements.

SBAM's Histo of Non-Com liance with the Custod Rule

13. SBAM provides investment advisory services to a number of pooled investment vehicles. At all times relevant hereto, SBAM served as investment adviser to the following pooled investment vehicles: Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital II LLC, Sands Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC, Katie X Adam Bridge Partners LP, Granite Associates, LLC, 280 Ventures LLC, Genesis Merchant Partners LP, Genesis Merchant Partners II LP, Vantage Point Partners LP, Select Access LLC, Select Access (Institutional) LLC, Select Access III LLC, and SB Opportunity Technology Associates Institution LLC.

14. In 1999, the staff of the Commission's Office of Compliance Inspection and

Examinations ("OCIE") performed an examination of SBAM. As a result of that examination, a deficiency letter was issued that concluded, among other things, that SBAM wrongly stated in its Form ADV that it does not have custody of client assets. To the contrary, by virtue of the relationship of the Adviser to its pooled investment vehicles, and the relationship between S. Sands and M. Sands and the managing members / general partners of those vehicles, SBAM did in fact appear to have custody of client assets. '

15. The deficiency letter, addressed to M. Sands, went on to spell out some of the requirements that SBAM had to meet as a custodian of investor assets.

16. In 2010, as a result of subsequent OCIE examinations in 2004 and 2009 and an investigation by the Division of Enforcement, SBAM, M. Sands and S. Sands consented, without admitting or denying the findings therein, to the entry of an Order Instituting Administrative and

All but one of the funds at issue in the 1999 deficiency letter were different from the

funds that SBAM advises today. Nonetheless, the arrangements cited in 1999 leading the staff to conclude that SBAM had custody over client assets exist with respect to SBAM's current funds. As to the one fund that SBAM still advises that was addressed in the 1999 deficiency letter- Katie and Adam Bridge Partners, L. P. — the exam staff concluded that SBAM appeared to have custody of investor assets because a provision in the Limited Partnership Agreement provided that the General Partner, controlled by S. Sands and M. Sands, had authority to "open, maintain, and close bank accounts and draw checks or other orders for the payment of monies. . . . " That arrangement remained the same.

Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (the "2010 Order" ).

17. Among other findings, the Commission's 2010 Order found that SBAM willfully violated the custody rule by improperly relying on the pooled investment vehicle alternative, which allowed for the distribution of audited financial statements in lieu of submitting to a surprise examination by an independent public accountant to verify custody of assets, among other requirements. In particular, SBAM: (i) failed to submit to an adequate audit performed in accordance with generally accepted standards; and (ii) did not timely distribute audited financial statements. The Commission's 2010 Order further found that SBAM continued to state in its Forms ADV that it did not have custody over client funds when, in fact, it did. ' (2010 Order $$ 7-11. )

18. The Commission's 2010 Order concluded that, as the lead principals primarily responsible for the relevant SBAM actions, S. Sands and M. Sands willfully aided and abetted and caused SBAM's violations of the custody rule. (Id. $$ 4, 13(e). )

19. In light of these and other violations of the Advisers Act, the Commission's 2010 Order ordered that: (i) SBAM, S. Sands and M. Sands cease and desist from committing or causing violations or future violations of, among other things, the custody rule; (ii) SBAM, S. Sands and M. Sands be censured; and (iii) SBAM pay a civil money penalty of $60, 000. (Id. ) IV(A)-(C). )

SBAM Continued to Violate the Custod Rule After the 2010 Order

20. The 2010 Order notwithstanding, SBAM failed to comply with the custody rule in

the years that followed. SBAM neither submitted to a surprise examination, nor distributed its audited financials in the 120-day window imposed by the rule. Indeed, SBAM took no remedial action in response to the 2010 Order to implement policies or procedures aimed at ensuring

compliance with the custody rule.

21. For the period 2010 through 2012, SBAM had custody of client assets within the meaning of Rule 206(4)-2(d)(2). At no time from 2010 through the present has SBAM submitted to a surprise examination by an independent public accountant.

22. SBAM distributed its funds' audited financial statements for the fiscal years 2010 — 2012 after the 120-day custody rule deadline.

In addition to the custody rule deficiencies, the 2010 Order found violations of Advisers Act Section 204 and Rule 204-2 for failing to make, keep and furnish copies of certain books and records to the Commission, and Sections 204 and 207 and Rule 204-1 for making inaccurate statements in, and failing to properly file, its Forin ADV.

a. Audited financial statements for the fiscal year 2010 were distributed at least 40 days late for the following funds: Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital II LLC, Sands Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC, Katie k, Adam Bridge Partners LP, Granite Associates, LLC, 280 Ventures LLC, Genesis Merchant Partners LP, Genesis Merchant Partners II LP and Vantage Point Partners LP (collectively, the "Ten Funds" );

b. Audited financial statements for the fiscal year 2011 were distributed at least 191 days (over 6 months) late and up to 242 days (nearly 8 months) late for the Ten Funds; and

c. Audited financial statements for the fiscal year 2012 were distributed at least 84 days and up to 93 days (approximately 3 months) late for the Ten Funds.

23. The circumstances that led the audits to be delayed were pr'edictable and not unforeseeable. As SBAM's auditors noted with respect to the audit for the fiscal year 2012, "[t]here was a delay in the timely receipt from [SBAM] management of the information

supporting the valuation of non-performing loans. . . which significantly affected the completion of the audit and the timely issuance of the financial statements. " The conditions underlying that

delay "were known or identifiable before the commencement of the audits, " and therefore "a more proactive timely approach by your valuation staff in identifying these situations and

obtaining the necessary documentation. . . could alleviate most of the audit issues. " Indeed, the auditors had repeated difficulty obtaining the information they needed to value the same portfolio companies year over year. This was so even though for some of those companies, S. Sands and/or M. Sands served on the company's board, and for one such portfolio company, Kelly acted as President and Chief Executive Officer.

24. S. Sands and M. Sands knew or were reckless in not knowing about, and substantially assisted, SBAM's violations of the custody rule. In the wake of the 2010 Order— which specifically found that S. Sands and M. Sands aided, abetted and caused SBAM's custody rule violations — S. Sands and M. Sands were aware of the custody rule requirements; indeed, S. Sands and M. Sands executed a notarized offer of settlement to enter into the 2010 Order. And, they knew about SBAM's failure to timely distribute audited financial statements because they regularly communicated with the auditors during the audit process and signed representation letters immediately prior to the completion of each year's audit. Further, as the principals and

founders of SBAM, S. Sands and M. Sands were responsible for ensuring that SBAM's compliance personnel has the authority to implement whatever procedures and policies are necessary to ensure that SBAM complied with the Advisers Act. Additionally, as subjects of the 2010 Order, they were responsible for ensuring that SBAM did not engage in future violations of the custody rule.

Violations

25. As a result of the conduct described above, SBAM willfully violated Section 206(4) of the Advisers Act, which prohibits a registered investment adviser &om engaging in

fraudulent, deceptive or manipulative conduct, and Rule 206(4)-2 thereunder, which requires an

adviser to take certain enumerated steps to safeguard client assets over which it has custody.

26. As a result of the conduct described above, S. Sands and M. Sands willfully aided

and abetted and caused SBAM's violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder.

Respondents have undertaken to:

27. Inde endent Monitor.

a. Within thirty (30) days of the date of this Order, S. Sands and M. Sands shall cause SBAM to engage an Independent Monitor which is not unacceptable to the Commission staff (the "Monitor" ), for a period running from the date of the Monitor's retention through November 30, 2018, to oversee Respondents' compliance with all applicable securities laws, rules and

regulations, including but not limited to the Advisers Act and the Undertakings in this Order. The Monitor's compensation and expenses shall be borne exclusively by Respondents and without

direct or indirect reimbursement &om any of the funds for which SBAM acts as investment adviser

(the "Funds" ).

b. Respondents shall require that the Monitor perform annual reviews of SBAM (" Reviews" ), within 60 (sixty) days of the last day of each applicable year, for its compliance with

applicable securities laws, rules and regulations, with the first review as of December 31, 2015, the

second review as of December 31, 2016, and the final review, as of December 31, 2017.

c. Respondents shall provide to the Commission staff, within thirty (30) days of retaining the Monitor, a copy of the engagement letter detailing the Monitor's responsibilities,

which shall include the Reviews to be made by the Monitor as described in this Order.

d. Respondents shall require that, within forty-five (45) days from the end of each

annual review, the Monitor shall submit a written and dated report of its findings to SBAM and to the Commission staff (the "Repoit"). Respondents shall require that each Report include a description of the review performed, the names of the individuals who performed the review, the

conclusions reached, the Monitor's recommendations for changes in or improvements to SBAM's policies and procedures and/or practices, and a procedure for implementing the recommended

changes in or improvements to SBAM's policies and procedures and/or practices.

e. Respondents shall adopt all recommendations contained in the Report within sixty (60) days of the date of the receipt of the Report, rovided however, that within forty-five (45) days after the date of the applicable Report, Respondents shall in writing advise the Monitor and the Commission staff of any recommendations that SBAM considers to be unduly burdensome, impractical, or inappropriate. With respect to any recommendation that Respondents consider unduly burdensome, impractical or inappropriate, SBAM need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose as that recommended by the Monitor. As to any recommendation with respect to SBAM policies and procedures and/or practices on which Respondents and the Monitor do not agree, Respondents and the Monitor shall attempt in good faith to reach an agreement within sixty (60) days after the date of the applicable Report. Within seventy-five (75) days after the date of the applicable Report, Respondents shall require that the Monitor inform Respondents and the Commission staff in writing of the Monitor's final determination concerning any recommendation that Respondents consider to be unduly burdensome, impractical or inappropriate. Respondents shall abide by the determinations of the Monitor and within sixty (60) days after final agreement between Respondents and the Monitor or final determination by the Monitor, whichever occurs first, Respondents shall adopt and implement all of the recommendations that the Monitor deems appropriate.

f. Within ninety (90) days of Respondents' adoption of all of the recommendations in a Report that the Monitor deems appropriate, as determined pursuant to the procedures set forth herein, M. Sands and S. Sands shall certify in writing to the Monitor and the Commission staff that Respondents have adopted and implemented all of the Monitor's recommendations in the applicable Report. Unless otherwise directed by the Commission staff, all Reports, certifications, and other documents required to be provided to the Commission staff shall be sent to Wendy Tepperman, Assistant Regional Director, Securities and Exchange Commission, 200 Vesey Street, New York, New York 10281, or such other address as the Commission staff may provide.

g. Respondents shall cooperate fully with the Monitor and shall provide the Monitor with access to such of SBAM's files, books, records, and personnel as are reasonably requested by the Monitor for review, including, if requested by the Monitor, access by on-site inspection.

h. To ensure the independence of the Monitor, Respondents: (1) shall not have the authority to terminate the Monitor or substitute another independent monitor for the initial Monitor, without the prior written approval of the Commission staff; and (2) shall compensate the Monitor and persons engaged to assist the Monitor for services rendered pursuant to this Order at their reasonable and customary rates.

i. Respondents shall require the Monitor to enter into an agreement that provides that for the period of engagement and for two (2) years after the completion of the period of engagement pursuant to this Order has ended, the Monitor shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with SHAM, or any of its current or former affiliates (including any of its managed funds), directors, officers, employees, or agents acting in their capacity as such.

j. Respondents shall not be in, and shall not have an attorney-client relationship with the Monitor and shall not seek to invoke the attorney-client privilege or any other doctrine or privilege to prevent the Monitor from transmitting any information, reports, or documents to the staff of the Commission.

k. The Commission staff may extend any of the procedural dates relating to the undertakings in Paragraphs (27)(b) through (f) for good cause shown as determined in the sole discretion of the Commission staff.

28. Evidence of SBAM's Com liance with the Custod Rule b Deliverin Audited Financial Statements or Submittin to a Su rise Examination.

a. Satisfacto evidenceofdelive ofaudited financialstatementsto investors.

1. By no later than 5:30 p. m. Eastern Time on May 10, 2016, Respondents shall provide to the Monitor, with a copy to the Commission staff, satisfactory evidence of SBAM's delivery to each of the Ten Funds' investors, by no later than 120 days after the end of each Fund's 2015 fiscal year, of each of the Ten Funds' fiscal year 2015 audited financial statements, prepared in accordance with generally accepted accounting principles, and audited by a PCAOB-registered independent public accountant, which has rendered an unqualified opinion as to each of the Ten Funds' financial statements.

2. By no later than 5:30 p. m. Eastern Time on May 10, 2017, Respondents shall provide to the Monitor, with a copy to the Commission staff, satisfactory evidence of SBAM's delivery to each of the Ten Funds' investors, by no later than 120 days after the end of each of the Ten Funds' 2016 fiscal year, of each of the Ten Funds' fiscal year 2016 audited financial statements, prepared in accordance with generally accepted accounting principles, and audited by a PCAOB-registered independent public accountant, which has rendered an unqualified opinion as to each of the Ten Funds' financial statements.

3. By no later than 5:30 p. m. Eastern Time on May 10, 2018, Respondents shall provide to the Monitor, with a copy to the Commission staff, satisfactory evidence of SBAM's delivery to each of the Ten Funds' investors, by no later than 120 days after the end of each of the Ten Funds' 2017 fiscal year, of each of the Ten Funds' fiscal year 2017 audited financial statements, prepared in accordance with generally accepted accounting principles, and audited by a PCAOB-registered independent public accountant, which has rendered an unqualified opinion as to each of the Ten Funds' financial statements. 4

b. Satisfacto evidence of com letion of su rise examination.

Should any of the Ten Funds' fiscal year end change from December 31, then the date by which Respondents must provide satisfactory evidence of delivery pursuant to this Paragraph 28 shall be the 131st day after the last day of that fund's new fiscal year end.

1. For any year, and for any of the Ten Funds, that Respondents elect to comply with the custody rule by undergoing a surprise examination, during that calendar year, by a PCAOB-registered independent public accountant in compliance with Rule 206(4)-2(a)(4) of the Advisers Act, SBAM shall notify the Monitor within thirty (30) days of engaging an independent public accountant to perform such surprise examination, and provide the Monitor with the terms of such engagement.

2. If Respondents comply with the obligations of Paragraph 28(b)(1), they are relieved of their obligation to provide satisfactory evidence of SBAM's delivery of audited financial statements as set forth in Paragraph 28(a) as to each fiscal year and as to each of the Ten Funds for which a certificate on Form ADV-E (17 C. F. R. ) 279. 8) has been filed within 120 days of the time chosen by the accountant engaged in paragraph 28(b)(1) above for such surprise examination.

c. Failure to corn 1 . Respondents agree to make a payment of $15, 000 per each fund for each day that either (i) Respondents fail to provide the Monitor with satisfactory evidence of SBAM's delivery of each of the Ten Funds' audited financial statements to each of the Ten Funds' investors by the dates set out in Paragraph 28(a), unless relieved of such obligation under Paragraph 28(b)(2); or (ii) SBAM fails to deliver each of the Ten Funds' audited financial statements to each of the Ten Funds' investors by 120 days of each of the Ten Funds' fiscal year end, unless relieved of such obligation under Paragraph 28(b)(2). Such additional payments are in lieu of the Commission seeking a civil monetary penalty for Respondents' violation of this Order pursuant to Section 209(e)(4) of the Advisers Act. If Respondents fail to comply with either obligation set out in Paragraph 28(a), unless relieved of such obligations under Paragraph 28(b)(2), Respondents agree to make the $15, 000 payment per day for each of the Ten Funds as to which they have failed to comply.

Payment shall be made to the Commission for transfer to the general fund of the United States Treasury in accordance with Section 21F(g)(3) of the Securities Exchange Act of 1934. If timely payment is not made, additional iriterest shall accrue pursuant to 31 U. S. C. $ 3717. Payment must be made in one of the following ways:

(1) Respondents may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;

(2) Respondents may make direct payment from a bank account via Pay. gov through the SEC wehsite at ~htt://www~sec. ov/shout/offices/ofm. htm; or

(3) Respondents may pay by certified check, bank cashier's check, or United States postal money order, made payable to the Securities and Exchange Commission and hand-delivered or mailed to:

10

Enterprise Services Center Accounts Receivable Branch HQ Bldg. , Room 181, AMZ-341 6500 South MacArthur Boulevard Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying SBAM, S. Sands, and M. Sands as Respondents in these proceedings, and the file number of these proceedings; a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, New York Regional Office, Brookfield Place, 200 Vesey Street, New York, NY 10281.

29. Provide to the Commission, within 30 days after the end of the twelve (12) month suspension period described below, an affidavit that they have complied fully with the sanctions described in Section IV below.

30. Certify, in writing, compliance with the undertaking(s) set forth in paragraphs 27 and 28(a) and (b) above. The certification shall identify the undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable requests for further evidence of compliance, and Respondents agree to provide such evidence. The certification and

supporting material shall be submitted to Sanjay Wadhwa, Senior Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, New York Regional Office, Brookfield Place, 200 Vesey Street, New York, NY 10281, with a copy to the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the date of the completion of the undertakings.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the penalties, remedial sanctions, and cease-and-desist order agreed to in Respondents' Offer.

Accordingly, it is hereby ORDERED that:

A. Pursuant to Section 203(k) of the Advisers Act, Respondents SHAM, M. Sands, and S. Sands shall cease and desist fiom committing or causing any violations and any future violations of Section 206(4) and Rule 206(4)-2 promulgated thereunder.

B. Pursuant to Sections 203(e) and 203(f) of the Advisers Act, Respondents SBAM, M. Sands, and S. Sands be, and hereby are, suspended Irom acting as an investment adviser to any new clients or raising any monies or assets on behalf of the Funds Irom any new or existing investors, for a period of twelve (12) months after the entry of this Order.

11

C. Pursuant to Section 203(i) of the Advisers Act, Respondents SBAM, M. Sands, and S. Sands on a joint and several basis shall, within 14 days of the entry of this Order, pay a civil money penalty in the total amount of $1, 000, 000 to the Commission for transfer to the general fund of the United States Treasury in accordance with Section 21F(g)(3) of the Securities Exchange Act of 1934. If timely payment is not made, additional interest shall accrue pursuant to 31 U. S. C. ) 3717. Payment must be made in one of the following ways:

(1) Respondents may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;

(2) Respondents may make direct payment from a bank account via Pay. gov through the SEC website at htt://www. sec. ov/about/offices/ofm. htm; or

(3) Respondents may pay by certified check, bank cashier's check, or United States postal money order, made payable to the Securities and Exchange Commission and hand-delivered or mailed to:

Enterprise Services Center Accounts Receivable Branch HQ Bldg. , Room 181, AMZ-341 6500 South MacArthur Boulevard Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying SBAM, M. Sands, and S. Sands as Respondents in these proceedings, and the file number of these proceedings; a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, New York Regional Office, Brookfield Place, 200 Vesey Street, New York, NY 10281.

D. Pursuant to Section 203(k) of the Advisers Act, Respondents SBAM, M. Sands, and S. Sands shall comply with their undertakings contained in Section III, paragraphs 27 and

28(a) and (b), above.

12

It is further Ordered that, for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U. S. C. ) 523, the findings in this Order are true and admitted by Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Respondents under this Order or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Respondents of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U. S. C. ) 523(a)(19).

By the Commission.

Brent J. Fields Secretary

UNITED STATES OF AMERICA Before the

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940 Release No. 4116 / June 15, 2015

ADMINISTRATIVE PROCEEDING File No. 3-16591

ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, PURSUANT TO SECTIONS 203(e), 203(f), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS, AND IMPOSING A CEASE-AND- DESIST ORDER

The Securities and Exchange Commission (" Commission" ) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (" Advisers Act") against SFX Financial Advisory Management Enterprises, Inc. ("SFX") and

Eugene S. Mason (" Mason" and, collectively, "Respondents" ).

In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the "Offers" ) which the Commission has determined to accept. Solely for the

purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings

herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, and except as provided herein in Section V as to Mason, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing a Cease-and-Desist Order (" Order" ), as set forth below.

On the basis of this Order and Respondents' Offers, the Commission finds' that:

From 2006 through 2011, Brian Ourand ("Ourand"), while SFX's Vice President and President, misappropriated at least $670, 000 in assets from three client accounts. During this time, SFX failed to supervise Ourand and also committed compliance failures. In particular, SFX failed to adopt policies and procedures reasonably designed to prevent the misappropriation of client assets, failed to implement the policies it did have, violated the custody rule, and falsely stated in its Form ADV that it reviewed client accounts used for bill-paying services. SFX also failed to conduct its annual compliance review in 2011. Mason, SFX's Chief Compliance Officer ("CCO"), caused SFX's failure to implement its compliance policies, conduct an annual review and is responsible for a material misstatement in a Form ADV filing.

1. SFX Financial Advisory Management Enterprises, Inc. is a Delaware corporation headquartered in Washington, District of Columbia. SFX became registered with the Commission as an investment adviser on September 21, 1992, but withdrew its registration on September 12, 2012. SFX is currently registered in the District of Columbia. In its most-recent Form ADV filing in March 2014, SFX disclosed that it managed $15 million on a discretionary basis.

2. Eugene S. Mason, age 51, is a resident of Dayton, Maryland. Mason has been SFX's CCO since 2004.

Related Individual

3. Brian Ourand, age 53, is a resident of Miami, Florida. Ourand was SFX's Vice President &om 2003 to 2007 and President until August 2011, when he was terminated. Ourand is named as a respondent in a separate administrative proceeding relating to his conduct described in this Order.

4. SFX specializes in providing advisory and financial management services to high net-worth individuals, primarily current and former professional athletes. SFX provides clients with a range of services including management of investment portfolios, bill payment, financial planning, and tax consultation and support.

5. Several of SFX's clients had bank and brokerage accounts over which SFX had the power to withdraw and deposit assets. Ourand had discretionary authority to trade in client

The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

2

accounts as well as authority over client bank accounts to pay bills, transfer money, and deposit checks. As a result, SFX had custody over the assets in the client accounts.

6. From 2006 to 2011, Ourand misappropriated at least $670, 000 from three clients. During this time, Ourand wrote unauthorized checks &om client bank accounts payable to "cash" or himself, and wired unauthorized amounts to himself for his own personal use. He also wired money using client credit cards for unauthorized amounts to others for their personal use.

7. In July 2011, Mason learned that Ourand had misappropriated assets when a client complained that he could not use one of his credit cards. SFX and Mason promptly conducted an internal investigation. Ultimately, SFX terminated Ourand and reported his conduct to the criminal authorities.

8. Individuals at SFX, including Ourand, had full signatory power over client bank accounts relating to SFX's bill-paying services. Therefore, there was a significant risk that those individuals could misappropriate client funds. SFX's compliance policies and procedures were not reasonably designed, and were not effectively implemented, to prevent the misappropriation of client funds. As CCO, Mason was responsible under the policies and procedures for implementation of the policies and procedures.

9. In particular, SFX's policies were not reasonably designed to prevent the person authorizing payments that SFX made &om client accounts &om circumventing secondary review of those payments. Thus, Ourand was able to circumvent secondary review of the payments he authorized from client accounts,

10. In addition, SFX's compliance policy required, among other things, that there be a review of "cash flows in client accounts. " SFX and Mason did not effectively implement this provision for the client accounts used for bill-paying services. In addition, SFX did not have a reasonable basis to believe, after due inquiry, that custodians were providing clients with bank statements.

11. SFX's Form ADV, Part 2 brochure filed on March 31, 2011, disclosed that "Client's cash account used specifically for bill paying is reviewed several times each week by senior management for accuracy and appropriateness. " This statement was untrue because a review for "appropriateness" indicates a review by senior management other than the person responsible for the relevant transactions, yet no one other than Ourand reviewed the bill-paying accounts over which he had signing authority and &om several of which he misappropriated funds. Mason executed Part 1 of the brochure filed concurrently with Part 2.

12. In the midst of an internal investigation following the discovery of Ourand's

misappropriation, SFX did not conduct an annual review of its compliance program in 2011. Mason was responsible for ensuring the annual review was completed and was negligent in failing to conduct the annual review.

Violations

13. As a result of the conduct described above, SFX willfully' violated Section 206(2) of the Advisers Act, which prohibits fraudulent conduct by an investment adviser.

14. As a result of the conduct described above, SFX failed reasonably to supervise Ourand, within the meaning of Section 203(e)(6) of the Advisers Act.

15. As a result of the conduct described above, SFX willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, which requires that an investment adviser have a reasonable basis, after due inquiry, for believing that the qualified custodian sends an account statement, at least quarterly, to each of its clients for which it maintains funds or securities.

16. As a result of the conduct described above, SFX willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require, among other things, that a registered investment adviser adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by the adviser and its supervised persons, and review, no less &equently than annually, the adequacy of the policies and

procedures.

17. As a result of the conduct described above, Mason caused SFX's violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

18. As a result of the conduct described above, SFX and Mason willfully violated Section 207 of the Advisers Act, which makes it "unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the Commission. . . or willfully to omit to state in any such application or report any material fact which is required to be stated therein. "

Res ondents' Remedial Efforts

In determining to accept the Offers, the Commission considered remedial acts promptly undertaken by Respondents and cooperation afforded the Commission staff.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondents' Offers.

Accordingly, pursuant to Sections 203(e), 203(f), and 203(k) of the Advisers Act, it is hereby ORDERED that:

A willful violation of the securities laws means merely "'that the person charged with the duty knows what he is doing. '" 8'onsover v. SEC, 205 F. 3d 408, 414 (D. C. Cir. 2000) (quoting Hughes v. SEC, 174 F. 2d 969, 977 (D. C. Cir. 1949)). There is no requirement that the actor "'also be aware that he is violating one of the Rules or Acts. '" Id. (quoting Gearhart Ck Otis, Irte. v. SEC, 348 F. 2d 798, 803 (D. C. Cir. 1965)).

A. Respondent SFX cease and desist Irom committing or causing any violations and

any future violations of Sections 206(2), 206(4) and 207 of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereimder.

B. Respondent Mason cease and desist Irom committing or causing any violations and

any future violations of Sections 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder.

C. Respondents are censured.

D. Respondent SFX shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $150, 000 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3). Respondent Mason shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $25, 000 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U. S. C. ) 3717. Payment must be made in one of the following ways:

(1) Respondents may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;

(2) Respondents may make direct payment &om a bank account via Pay. gov through the SEC website at h://www. sec. ov/about/offices/ofm. htm; or

(3) Respondents may pay by certified check, bank cashier's check, or United States postal money order, made payable to the Securities and Exchange Commission and hand-delivered or mailed to:

Enterprise Services Center Accounts Receivable Branch

HQ Bldg. , Room 181, AMZ-341 6500 South MacArthur Boulevard Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying the

relevant party as a Respondent in these proceedings, and the file number of these proceedings; a copy of the cover letter and check or money order must be sent to C. Dabney O'Riordan, Asset Management Unit, Division of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd. , 11th Floor, Los Angeles, California 90036.

It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U. S. C. )523, the findings in this Order are true and admitted by Respondent Mason, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Respondent Mason under this Order or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Respondent Mason of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U. S. C. $523(a)(19).

By the Commission.

Brent J. Fields Secretary

UNITED STATES OF AMERICA Before the

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940 Release No. 4065 / April 20, 2015

INVESTMKNT COMPANY ACT OF 1940 Release No. 31558 / April 20, 2015

ADMINISTRATIVE PROCEEDING File No. 3-16501

ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, PURSUANT TO SECTIONS 203(e) AND

203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTIONS 9(b) and 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE- AND-DESIST ORDER

The Securities and Exchange Commission (" Commission" ) deems it appropriate and in the

public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (" Advisers Act") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (" Investment

Company Act") against BlackRock Advisors, LLC ("BlackRock" ), and pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act against Bartholomew A. Battista ("Battista") (together "Respondents" ).

In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the "Offers" ) which the Commission has determined to accept. Solely for the

purpose of these proceedings and any other proceedings brought by or on behalf of the

Commission, or to which the Commission is a party, and without admitting or denying the findings

herein, except as to the Commission's jurisdiction over them and the subject matter of these

proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (" Order" ), as set forth below.

On the basis of this Order and Respondents' Offers, the Commission finds that:

1. This matter concerns investment adviser BlackRock's failure to disclose a conflict of interest involving the outside business activity of one of its portfolio managers. Daniel J. Rice, III was a well-known, long-standing top-performing energy sector portfolio manager. Rice joined BlackRock in 2005 and managed BlackRock energy-focused registered funds, private funds, and

separate accounts. In 2007, Rice founded Rice Energy, L. P. — a Rice family-owned-and-operated oil and natural gas production company. Rice was the general partner of Rice Energy and

personally invested approximately $50 million in the company. Rice's three sons were the CEO, CFO, and VP of Geology of Rice Energy. In February 2010, Rice Energy formed a joint venture with Alpha Natural Resources, Inc. ("ANR"), a publicly-traded coal company held in the BlackRock funds and accounts managed by Rice. By June 30, 2011, ANR stock was the largest holding (9. 4'/o) in the Rice-managed $1. 7 billion BlackRock Energy k, Resources Portfolio, primarily as a result of ANR acquiring two other public companies held in that portfolio. BlackRock knew of Rice's involvement with and investment in Rice Energy as well as the joint venture with ANR, but failed to disclose Rice's conflict of interest to the BlackRock funds' boards of directors or to BlackRock advisory clients.

2. BlackRock also failed to adopt and implement written compliance policies and

procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, as required by Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, concerning the outside activities of its employees, including how they should be assessed and monitored for conflict purposes, and when an employee's outside activity should be disclosed to the BlackRock funds' board of directors or to BlackRock advisory clients. BlackRock's chief compliance officer ("CCO"), Bartholomew A. Battista, caused BlackRock's compliance-related violations.

3. BlackRock and Battista also caused the registered funds' failure to have the funds'

chief compliance officer report to the funds' boards of directors — in violation of Rule 38a- 1(a)(4)(iii)(B) under the Investment Company Act of 1940 — Rice's violations of BlackRock's private investment policy. BlackRock and Battista knew about Rice's violations, and knew or should have known that they were not reported to the funds' boards.

4. BlackRock Advisors, LLC, a Delaware limited liability company headquartered in

Wilmington, Delaware, is an investment adviser registered with the Commission. According to its

Form ADV filed in June 2014, BlackRock has assets under management of approximately $452 billion. BlackRock is a subsidiary of BlackRock, Inc. , an investment management firm with assets under management of approximately $4. 3 trillion as of December 31, 2013.

5. Bartholomew A. Battista, age 56 and a resident of Sicklerville, New Jersey, was the CCO of BlackRock during the relevant period. Battista joined BlackRock in 1998.

Other Relevant Individual and Entities

6. Daniel J. Rice III was a managing director at BlackRock and a co-portfolio manager of approximately $4. 5 billion in energy sector assets held in BlackRock registered and

private funds as well as separately managed accounts. Rice joined BlackRock in January 2005 and

separated Irom the firm in December 2012.

7. Rice Energy, LP (" Rice Energy" ) was a Delaware limited partnership headquartered in Canonsburg, PA. Rice Energy was founded by Rice in February 2007. During the relevant period, Rice Energy was a Rice family-owned-and-operated oil and gas exploration and production company that focused on drilling oil and natural gas wells. In January 2014, Rice Energy, Inc. , a Rice Energy affiliate, completed its $1 billion initial public offering of 50 million shares of common stock, at a price of $21 per share (NYSE: RICE).

Facts

A. Rice's Outside Business Activity Created a Conflict of Interest at BlackRock

8. In late 2004, BlackRock recruited Rice to join BlackRock. Rice joined BlackRock in January 2005 as a managing director and co-portfolio manager of energy sector assets held in BlackRock registered funds, private funds, and separately managed accounts. As an incentive to join the company, BlackRock agreed to pay Rice a portion of the annual investment advisory fees earned on the Rice-managed funds and separate accounts — as a result, Rice was one of BlackRock's most highly compensated portfolio managers.

9. In December 2006 and while employed at BlackRock, Rice formed and funded the Rice Energy Irrevocable Trust (the "Rice Energy Trust" ) to hold interests in "Rice Energy,

" which referred to energy companies that Rice intended to create in the future and be managed by his adult

children. Rice funded the trust with approximately $2. 4 million in gifts as well as $23. 5 million in term loans.

10. In February 2007 and while employed at BlackRock, Rice formed Rice Energy, Rice Energy Management, LLC ("REM"), and a Rice Energy drilling subsidiary. In February 2008, Rice formed another Rice Energy drilling subsidiary, Rice Drilling B, LLC (" Rice Drilling B"). Rice was the 100% owner of REM, which was the sole general partner of Rice Energy. Due to his ownership interest, Rice had the ability to exercise broad power and authority over Rice Energy. Through REM, Rice was not only the general partner of Rice Energy, but he also owned 1% of Rice Energy, and the remaining 99% was owned by the Rice Energy Trust.

11. Between 2007 and mid-2010, Rice had invested in and loaned to Rice Energy a total of approximately $50 million.

l owned 1%

general partner

12. Rice's three sons, who were Rice Energy's Chief Executive Officer, Chief Financial Officer, and Vice President of Geology, routinely shared information regarding Rice Energy operational issues with Rice, and sought and received direction and advice from Rice. Rice also was a manager at two Rice Energy drilling subsidiaries, including Rice Drilling B. Rice and his sons exercised their power and authority to manage the business and affairs of the companies and made decisions on their behalf.

13. Rice used his BlackRock email address for Rice Energy related communications during which Rice discussed the company. For example, Rice used his industry connections to solicit business partnerships through which Rice Energy would gain access to land on which to drill.

14. During Rice's tenure as a BlackRock portfolio manager, Rice Energy solicited a joint venture with Foundation Coal, a public company held in the Rice-managed funds and separate accounts. In mid-2008, Rice Energy started exploring a potential joint venture, and by early 2009 substantive discussions between the two companies had begun, but final plans were placed on hold until after the merger of Foundation Coal and ANR was completed in July 2009. Shortly after the merger, Rice formed a third Rice Energy drilling subsidiary to hold Rice Energy's interest in its anticipated joint venture with ANR. In October 2009, Rice — in his role as general partner and on behalf of Rice Energy — signed a letter of intent to form the joint venture with ANR. In February 2010, Rice Energy finalized the joint venture with ANR.

15. By the end of the first quarter of 2010 and after the formation of the joint venture with ANR, the Rice-managed funds and separate accounts together held over two million shares of ANR stock, with the largest fund — the $1. 2 billion BlackRock Energy X Resources Portfolio— maintaining a 3. 5% position in ANR, making it one of the fund's top ten largest holdings. By the end of the second quarter of 2011 and after ANR acquired Massey Energy, a second public company already held in the Rice-managed funds and separate accounts, the number of shares held in ANR stock increased to over eight million, with the largest fund — the $1. 7 billion BlackRock Energy &, Resources Portfolio — maintaining a 9. 4% position in ANR, making it the fund's largest holding.

B. BlackRock Approved Rice's Outside Business Activity

16. By no later than January 2007, BlackRock learned that Rice had formed and funded the Rice Energy Trust in violation of BlackRock's private investment policy. By at least that time, certain BlackRock senior executives, including Battista, were told that Rice intended to form and fund Rice Energy. BlackRock's Legal and Compliance Department, including Battista, reviewed and discussed the matter and allowed Rice to form Rice Energy. BlackRock concluded that it did not see any conflict of interest with regard to Rice Energy. By no later than January 2010, BlackRock learned that Rice had made additional loans of approximately $14 million to a Rice Energy subsidiary in violation of BlackRock's private investment policy.

17. BlackRock did not report the formation or funding of the Rice Energy Trust or Rice Energy to the boards of directors of the Rice-managed registered funds or to advisory clients. BlackRock also did not advise the funds' boards of Rice's violations of BlackRock's private investment policy. BlackRock did not monitor or reassess Rice's outside business activity and the conflicts associated therewith between January 2007 and January 2010.

18. In January 2010, Rice told BlackRock that he wanted to serve on the board of directors of the joint venture between Rice Energy and ANR. At that time, BlackRock's Legal and

Compliance Department did not recall its review of Rice Energy in early 2007. Incorrectly believing this was the first time it was learning about Rice Energy, BlackRock's Legal and

Compliance Department conducted several fact-gathering discussions with Rice that resulted in a February 2010 memorandum addressed to Rice (" February 2010 memorandum").

19. Because the Rice-managed funds and separate accounts held ANR stock, the February 2010 memorandum stated the following with respect to conflicts:

There are potential conflicts of interest in entering joint ventures with companies that you hold in your BlackRock client portfolios and funds. By participating in a personal joint venture with an issuer that you invest in on behalf of your clients, you may create the appearance of a conflict, with respect to whose interests are being placed first (yours or the client's). Additionally, by investing with a company that you hold in your portfolios you raise the concern that you may have access to ANR specific information which you could use for your benefit instead of for your client's.

20. Despite BlackRock's acknowledgement of potential conflicts of interest and the concern that Rice may have access to ANR-specific information that Rice could use for his personal benefit to the detriment of his clients, BlackRock allowed Rice to continue his involvement with and financial investment in Rice Energy while continuing to serve as a BlackRock portfolio manager. As stated in the February 2010 memorandum, to which Rice agreed, BlackRock further allowed Rice to continue managing the ANR stock positions held in the Rice-managed funds and separate accounts, provided that he: (i) not participate in any decisions with respect to the joint venture; (ii) not become a board member of the joint venture; (iii) not receive material information about the joint venture that could restrict Rice's ability to trade in

ANR; and (iv) pre-clear with BlackRock any future Rice Energy-related board seats intended to be taken by Rice. BlackRock did not provide any disclosure about Rice Energy or the February 2010 memorandum to the funds' boards or to advisory clients.

21. BlackRock did not follow-up with Rice about Rice Energy thereafter. Instead, BlackRock expected Rice to report back to BlackRock. BlackRock did not monitor or initiate any reassessment of Rice's involvement with Rice Energy. BlackRock did not verify whether certain steps specified in its February 2010 memorandum were taken by Rice, such as removing references to BlackRock from the Rice Energy website — and, ultimately, those references were not removed until after the June 2012 press articles about Rice's involvement with Rice Energy raised questions about the related conflicts of interest.

22. From time to time, Rice discussed other Rice Energy matters with certain BlackRock senior executives. For example, in May 2010 BlackRock approved Rice's sale of certain of his personal securities holdings so that he could make a $10 million loan to Rice Energy. In another instance, in May 2011 Rice received approval from a senior executive in BlackRock's Legal and Compliance Department to participate in a private placement debt offering by Rice Drilling B. The Rice Drilling B private placement memo (the "PPM") described Rice's role at Rice Energy — namely, as founder and managing general partner, as well as co-manager with his son of Rice Drilling B — and his role as managing director and portfolio manager at BlackRock. Rice also made the opening remarks on the offering's internet video roadshow used to solicit potential investors and stated his affiliation with Rice Energy and BlackRock, although at the direction of the BlackRock senior executive, Rice also noted that BlackRock did not have an

equity interest or an implied interest in Rice Energy. In December 2011, Rice also notified certain BlackRock senior executives that, in connection with an investment by a private equity family of funds in Rice Energy, Rice's prior loans to a Rice Energy subsidiary would be converted to a direct equity interest in a newly formed Rice Energy subsidiary.

C. BlackRock Breached Its Fiduciary Duty by Failing to Disclose the Conflict of Interest

23. BlackRock did not inform the boards of directors of the Rice-managed registered funds or advisory clients about Rice's involvement with and investment in Rice Energy. Although senior executives in BlackRock's Legal and Compliance Department considered the disclosure issue in privileged communications, no disclosure was made. On June 1, 2012, The Wall Street Journal published the first of three articles detailing Rice's connection to Rice Energy, and his simultaneous role as an energy sector portfolio manager at BlackRock.

24. As an investment adviser, BlackRock has a fiduciary duty to exercise the utmost good faith in dealing with its clients — including to fully and fairly disclose all material facts and to employ reasonable care to avoid misleading its clients. It is the client, not the investment adviser, who is entitled to determine whether a conflict of interest might cause a portfolio manager— consciously or unconsciously — to render advice that is not disinterested.

25. BlackRock breached its fiduciary duty by failing to disclose to the funds' boards and advisory clients the conflict of interest created when BlackRock permitted Rice to form, invest, and participate in an energy company while Rice was also managing several billion dollars in

energy sector assets held in BlackRock funds and separate accounts. The conflict of interest became more acute once Rice Energy finalized its joint venture with ANR, as the Rice-managed funds and separate accounts held significant positions in ANR stock.

D. BlackRock Failed to Adopt and Implement Policies and Procedures Regarding Outside Activities

26. BlackRock did not have any written policies and procedures regarding the outside activities of its employees. BlackRock only required pre-approval for an employee to serve on a board of directors and had a general conflicts of interest provision in its Code of Business Conduct

and Ethics (" Code" ) that addressed conflicts or potential conflicts that could arise from the personal activities or interests of BlackRock employees. Pursuant to the Code, BlackRock required all conflicts and potential conflicts to be reported to a supervisor, manager, or a member of BlackRock's Legal and Compliance Department.

27. BlackRock failed, however, to adopt and implement policies and procedures that

addressed how the outside activities of BlackRock employees were to be assessed for conflicts purposes, as well as who was responsible for deciding whether the outside activity should be permitted.

28. BlackRock also failed to adopt and implement policies and procedures to monitor those employees with BlackRock-approved outside activities, so that BlackRock would stay informed about any changes in the employee's outside activity and re-evaluate it, if necessary.

29. As BlackRock's CCO, Battista was responsible for the design and implementation of BlackRock's written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. Battista knew and approved of numerous outside activities engaged in

by BlackRock employees (including Rice), but did not recommend written policies and procedures to assess and monitor those outside activities and to disclose conflicts of interest to the funds'

boards and to advisory clients. As such, Battista caused BlackRock's failure to adopt and

implement these policies and procedures.

30. In January 2013, BlackRock subsequently adopted new written policies and

procedures addressing the outside activities of BlackRock employees.

K. Respondents Caused the Funds' Failure to Report Rice's Policy Violations to the Funds' Boards of Directors

31. BlackRock had a private investment policy that, among other things, required

employees to receive BlackRock's approval before making any private investments.

32. Rice violated BlackRock's private investment policy by not obtaining pre-approval to: (i) form and fund the Rice Energy Trust; and (ii) make approximately $14 million in loans to a Rice Energy subsidiary.

33. BlackRock and Battista knew about Rice's violations of its private investment

policy, and also knew or should have known that these violations were "material compliance matters" under Rule 38a-1 and, hence, were required to be reported to the boards of directors of the Rice-managed registered funds. BlackRock and Battista also knew or should have known that the funds did not, in fact, report Rice's violations to the funds' boards.

Violations

34. As a result of the conduct described above, BlackRock willfully' violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a &aud or deceit upon a client or prospective client. ' BlackRock breached its fiduciary duty by failing to disclose a conflict of interest — namely Rice's involvement with and investment in Rice Energy — to the BlackRock funds' boards of directors or to advisory clients.

35. As a result of the conduct described above, BlackRock willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. BlackRock failed to adopt and implement written policies and procedures to assess and monitor the outside activities of its employees and to disclose conflicts of interest to the funds' boards and to advisory clients. Battista caused B1ackRock's compliance-related violations.

36. As a result of the conduct described above, BlackRock and Battista caused certain BlackRock funds' violations of Rule 38a-1(a) under the Investment Company Act. Rule 38a-1(a)(4)(iii)(B) requires registered investment companies, through their chief compliance officer, to provide a written report at least annually to the fund's board of directors that addresses each material compliance matter that occurred since the date of the last report. Rule 38a-l, in pertinent part, defines a "material compliance matter" as any compliance matter about which the fund's board of directors would reasonably need to know to oversee fund compliance, and that involves, without limitation, a violation of the policies and procedures of its investment adviser. BlackRock and Battista caused the failures by certain BlackRock funds to report all material compliance matters — namely Rice's violations of BlackRock's private investment policy — to their boards of directors.

BlackRock undertakes to complete the following actions:

37. Inde endent Com liance Consultant. BlackRock shall retain, within thirty (30) days of the issuance of this Order, an Independent Compliance Consultant (" Consultant" ) not unacceptable to the staff of the Commission, and provide a copy of this Order to the Consultant. The Consultant's compensation and expenses shall be borne exclusively by BlackRock. BlackRock shall require the Consultant to conduct a comprehensive review of BlackRock's written compliance policies and procedures regarding the outside activities of BlackRock

A willful violation of the securities laws means merely "'that the person charged with the duty knows what he is doing. '" Wonsover v. SEC, 205 F. 3d 408, 414 (D. C. Cir. 2000) (quoting Hughes v. SEC, 174 F. 2d 969, 977 (D. C. Cir. 1949)). There is no requirement that the actor "'also be aware that he is violating one of the Rules or Acts. '" Id. (quoting Gearhart Ck

Otis, Inc. v. SEC, 348 F. 2d 798, 803 (D. C. Cir. 1965)).

A violation of Section 206(2) of the Advisors Act does not require scienter, but, rather, may rest on a finding of simple negligence. SEC v. Steadman, 967 F. 2d 636, 643 n. 5 (D. C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau, Inc. , 375 U. S. 180, 195 (1963)).

employees and any conflicts of interest derived therefrom to ensure that they comply with Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and Rule 38a-I under the Investment Company Act, as appropriate.

a. BlackRock shall provide to the Commission staff, within thirty (30) days of retaining the Consultant, a copy of an engagement letter detailing the Consultant's responsibilities, which shall include the review described above in paragraph 37.

b. At the end of the review, which in no event shall be more than one hundred twenty (120) days after the date of the entry of this Order, BlackRock shall require the Consultant to submit a Report to BlackRock and the staff of the Commission (" Report" ). The Report shall address the issues described above in paragraph 37, and shall include a description of the review performed, the conclusions reached, the Consultant's recommendations for changes in or improvements to BlackRock's policies and procedures, and a procedure for implementing the recommended changes in or improvements to those policies and procedures.

c. BlackRock shall adopt aH recommendations contained in the Report within ninety (90) days of receipt; provided, however, that within thirty (30) days of BlackRock's receipt of the Report, BlackRock shall, in writing, advise the Consultant and the Commission staff of any recommendations that it considers unnecessary, unduly burdensome, impractical, or inappropriate. With respect to any such recommendation, BlackRock need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose. As to any recommendation on which BlackRock and the Consultant do not agree, such parties shall attempt in good faith to reach an agreement within thirty (30) days after BlackRock provides the written notice described above. In the event that BlackRock and the Consultant are unable to agree on an alternative proposal, BlackRock and ihe Consultant shaH jointly confer with the Commission staff to resolve the matter. In the event that, after conferring with the Commission staff, BlackRock and the Consultant are unable to agree on an alternative proposal, BlackRock will abide by the recommendations of the Consultant.

d. Within thirty (30) days of BlackRock's adoption of aH of the recommendations in the Consultant's Report, as determined pursuant to the procedures set forth herein, BlackRock shall certify in writing to the Consultant and the Commission staff that it has adopted and implemented aH of the Consultant's recommendations in the Report. Unless otherwise directed by the Commission staff, aH Reports, certifications, and other documents required to be provided to the Commission staff shall be sent to Jeffrey B. FinneH, Assistant Director, Asset Management Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St. , N. E. , Washington, DC 20549-5010, or such other address as the Commission's staff may provide.

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e. BlackRock shall cooperate fully with the Consultant and shall provide the Consultant with access to files, books, records, and personnel as are reasonably requested by the Consultant for review.

f. To ensure the independence of the Consultant, BlackRock (i) shall not have the authority to terminate the Consultant or substitute another independent compliance consultant for the initial Consultant, without the prior written approval of the Commission's staff; (ii) shall compensate the Consultant and persons engaged to assist the Consultant for services rendered pursuant to this Order at their reasonable and customary rates; and (iii) shall not invoke the attorney-client or any other doctrine or privilege to prevent the Consultant from communicating with or transmitting any information, reports, or documents to the Commission's staff.

g. BlackRock shall require the Consultant to enter into an agreement providing that for the period of the engagement and for a period of two years from completion of the engagement, the Consultant shall not enter into any employment, consultant, attorney- client, auditing, or other professional relationship with BlackRock, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Consultant in the performance of his/her duties under this Order shall not, without prior written consent of the staff of the Commission, enter into any employment, consultant, attorney-client, auditing or other professional relationship with BlackRock, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.

years from December 31, 2014, the first two (2) years in an easily accessible place, any record of its compliance with the undertakings set forth in this Order.

39. Notice. BlackRock shall promptly revise its Form ADV to disclose the existence of the Order in accordance with such Form and its instructions, and deliver the amended Form ADV to its clients to the extent required by and in accordance with the requirements of the Advisers Act and the rules thereunder.

40. Deadlines. For good cause shown, the Commission staff may extend any of the procedural dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar days, except that if the last day falls on a weekend or federal holiday, the next business day shall be considered to be the last day.

41. Certification of Com liance. BlackRock shall certify, in writing, compliance with the undertakings set forth above. The certification shall identify the undertakings, provide written evidence of compliance with the undertakings in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable requests for further evidence of compliance, and BlackRock agrees to provide such evidence.

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The certification and supporting material shall be submitted to Jeffrey B. Finnell, Assistant Director, Asset Management Unit, Division of Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-5010, or such other address as the Commission staff may provide, with a copy to the Office of Chief Counsel of the Enforcement Division, no later than thirty (30) days from the date of the completion of the undertaking.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondents' Offers.

Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act and Sections 9(b) and 9(f) of the Investment Company Act with respect to BlackRock, and pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act with respect to Battista, it is hereby ORDERED that:

A. Respondent BlackRock cease and desist &om committing or causing any violations and any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder, and Rule 38a-1 under the Investment Company Act.

B. Respondent Battista cease and desist f'rom committing or causing any violations and

any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder, and Rule 38a-1 under the Investment Company Act.

C. Respondent BlackRock is censured.

D. Respondent BlackRock shall, within thirty (30) calendar days of the entry of this Order, pay a civil money penalty in the amount of $12 million to the Securities and Exchange Commission. Respondent Battista shall, within thirty (30) calendar days of the entry of this Order,

pay a civil money penalty in the amount of $60, 000 to the Securities and Exchange Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U. S. C. 3717. Payment must be made in one of the following ways:

(1) Respondents may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;

(2) Respondents may make direct payment Irom a bank account via Pay. gov through the SEC website at h://www. sec. ov/about/offices/ofm. htm; or

(3) Respondents may pay by certified check, bank cashier's check, or United States postal money order, made payable to the Securities and Exchange Commission and hand-delivered or mailed to:

Enterprise Services Center Accounts Receivable Branch

HQ Bldg. , Room 181, AMZ-341 6500 South MacArthur Boulevard Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying the relevant entity or individual as a Respondent in these proceedings, and the file number of these proceedings; a copy of the cover letter and check or money order must be sent to Julie M. Riewe, Co-Chief, Asset Management Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St. , NE, Washington, DC 20549-5010.

E. Respondent BlackRock shall comply with the undertakings enumerated in Section III above.

By the Commission.

Brent J. Fields Secretary