Navigating the Regulatory Maze for Registered Investment Advisors

SEC Publishes July 2008 ComplianceAlert

2008-07-22T14:38:00.001-05:00

Today, the U.S. Securities and Exchange Commission (SEC) released its July 2008 ComplianceAlert letter which identifies and describes common deficiencies and weaknesses that SEC examiners have found during compliance examinations of SEC registered investment advisers/mutual funds, broker-dealers, and transfer agents. The release, which is considered official comment from the SEC’s Office of Compliance Inspections and Examinations and other select SEC department staff, provides valuable guidance for registered investment advisors trying to navigate the regulatory maze. In the release, the SEC provides guidance on four major areas: (1) personal trading by advisory staff; (2) proxy voting and funds’ use of proxy voting services; (3) valuation and liquidity issues in high yield municipal bond funds; and (4) soft dollar practices of investment advisors.

The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.

Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.

SEC Initiates Charges for Insider Trading

2008-07-17T13:58:00.001-05:00

The SEC today announced that it is charging the mayor of Beaufort, South Carolina with insider trading on non-public information he obtained while doing consulting work for a California biotechnology firm. According to the SEC, the individual was given information about new technology. The information was provided in confidence and had not been made publicly available. Shortly after receiving the information, the individual purchased shares in the company that would have netted more than $20,000 had he sold out. The individual agreed to pay $20,708 in disgorgement, $2,576 in prejudgment interest, and a $20,708 penalty.

“This case underscores how important it is for consultants provided with non-public information to be mindful of the duties of confidentiality owed to companies that hire them," stated Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office, in the SEC press release.

RIA Compliance Consultants, Inc. would like to use this as an example for registered investment advisor firms which often have clients that are or work for publicly traded companies. Due to these types of client relationships, registered investment advisors can often find themselves in receipt of material, non-public information (i.e. inside information). Acting on inside information is a serious violation of federal securities laws. In fact, Section 204A of the Investment Advisers Act of 1940 requires all federally and state registered investment advisors to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the registered investment advisor or any person associated with the registered investment advisor. In other words, federal regulators require registered investment advisors to implement policies and procedures designed to prevent their associated persons from engaging in activities that the mayor of Beaufort, South Carolina was charged for. Further, registered investment advisors should have procedures designed to prevent the registered investment advisor from enabling a client to act on inside information.

RIA Compliance Consultants, Inc. can help your firm understand its responsibility to prevent insider trading. We also provide services designed to ensure compliance with the SEC’s Code of Ethics and personal securities transactions policies and procedures. Give us a call to learn more.

Proposed Changes To Forms U4 and U5 May Change Disclosure Requirements for Investment Adviser Representatives

2008-07-15T22:47:00.004-05:00

The Financial Industry Regulatory Authority (FINRA) has proposed revisions that would require that allegations of sales practice violations made in arbitration claims and civil lawsuits against registered persons who are not named as parties in those proceedings be reported as customer complaints. Current reporting requirements do not require a report to the Form U4 (Uniform Application for Securities Industry Registration or Transfer) or Form U5 (Uniform Termination Notice for Securities Industry Registration) of allegations of a sales practice violation against a registered person contained in the body of the lawsuit or arbitration claim unless the registered person is specifically named as a defendant or respondent in the lawsuit or arbitration claim.

In considering these proposed revisions, it is helpful to understand the relationship between the parties involved in the registration and disclosure systems. The Investment Adviser Registration Depository (IARD) is an electronic filing system for Investment Advisers that is sponsored by the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA). FINRA does not have regulatory authority over Investment Advisers; however, FINRA serves as the developer and operator of the IARD system. The IARD system collects and maintains the registration and disclosure information for Investment Advisers and their associated persons. The SEC has mandated that its Investment Adviser registrants use the IARD system. The IARD system also accommodates registration requirements for state-regulated Investment Advisers. The IARD Program provides for the registration of Investment Advisor Representatives using the Individual Form Filing Functionality in Web CRD. Web CRD enables firms to register their Investment Adviser Representatives online via the Web CRD system. This Representative Registration component of the IARD system uses the Uniform Forms U4 and U5.

If a registered person is identified in a written complaint as the person responsible for alleged sales practice violation(s), the matter is required to be reported on that persons Form U4 or U5. However, the regulatory interpretation has been that even if a registered person is identified in the body of an arbitration claim or lawsuit as the person responsible for the alleged sales practice violation(s), the matter is not required to be reported on that persons Form U4 or U5 if he or she was not named as a respondent or defendant in the arbitration or litigation. This interpretation has resulted in arbitration and litigation claims-- a form of "customer complaint"-which allege sales practice violations against a registered person not being reported via the Forms U4 and U5. The proposed revision is intended to address this inconsistent treatment regarding the reporting of alleged sales practice violations. The proposed revision would require alleged sales practice violations made by a customer against registered persons identified in the body of a complaint, litigation or arbitration claim to be reported even when the registered persons are not named as parties in the litigation or arbitration.

As a matter of procedure, before becoming effective, FINRA's proposed rule change must be authorized for filing with the SEC by the FINRA Board and then must additionally be approved by the SEC after publication for public comment in the Federal Register.
RIA Compliance Consultants, Inc. can help your registered investment adviser prepare and submit Form U4 and U5 or other IARD registration and disclosure filings. Please contact us at 877-345-4034 if you are interested in discussing such services.

The CFP Board's Revised Standards of Professional Conduct Impose New Requirements on CFP® Certificants Who Provide Financial Planning

2008-07-15T22:41:00.002-05:00

The Certified Financial Planner ("CFP") Board of Standards, Inc. has issued updated Code of Ethics and Professional Responsibility and Rules of Conduct, which are scheduled to become effective July 1, 2008. With these updates, all CFP certificants will be held to a higher duty of care standard and will be required to place the interest of their clients ahead of their own at all times. Additionally, the updates make distinctions for CFP® certificants who provide financial planning services.

For example, the duty of care for CFP® certificants who provide financial planning services has been raised from the duty to "act in the interest of the client" to the "duty of care of a fiduciary." See Code of Ethics and Professional Responsibility, Rules of Conduct, Rule 1.4. The CFP Board defines fiduciary as "One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client." Secondly, the updated standards require additional disclosures to both a client or prospective client, if the services to be provided include financial planning or material elements of the financial planning process. [See Rules 1.2 and 2.2.] Also, if services provided by a CFP® certificant include financial planning or material elements of the financial planning process, the certificant is required to have a written agreement with the client to govern the financial planning services. [See Rule 1.3.]

In the February 20, 2008, release, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, the CFP Board's Disciplinary and Ethics Commission ("Commission") provided guidelines to help CFP® certificants determine when their activities are financial planning or material elements of the financial planning process. According to the Commission, some of the primary criteria for determining "material elements" are: 1) The client's understanding and intent in engaging the certificant; 2) The degree to which multiple financial planning subject areas are involved; 3) The comprehensiveness of data gathering; and 4) The breadth and depth of recommendations. The CFP Board has stated that if a certificant is "unsure if a particular service or client relationship rises to the level of financial planning", then the certificant should "embrace the CFP Board's fiduciary standard and provide services in ways they believe are in the best interest of the client." Supra, Question 8, p.6.

Rule 2.2 lists the written disclosures required to be made to clients or prospective clients when CFP® certificants are involved in engagements that involve financial planning or material elements of the financial planning process. These disclosures include:
1) An accurate and understandable description of the compensation arrangements being offered; 2) A general summary of likely conflicts of interest between the client and the certificant, the certificant's employer or any affiliates or third parties; 3) Any information about the certificant or the certificant's employer that could reasonably be expected to materially affect the client's decision to engage the certificant or that the client might reasonably want to know in establishing the scope and nature of the relationship; and 4) Contact information for the certificant and if applicable, the certificant's employer.

In addition to the written disclosures required by Rule 2.2, Rule 1.2 outlines additional disclosure obligations to clients and prospective clients when a certificant's services include financial planning or material elements of the financial planning process. These additional disclosures include: 1) The obligations and responsibilities of each party, 2) Any compensation that may be related to the client agreement, 3) Any factors that determine costs, 4) The terms under which proprietary products may be offered, and 5) The terms under which other entities will be used to meet any services outlined in the agreement. Additionally, the certificant is instructed by Rule 1.2 to "encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have." See CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 12, p. 8.

The updated disclosure standards differ from the existing standards. For example, disclosures are now required to be made to prospective clients as well as existing clients. Disclosures must include material information that is relevant to the professional relationship, including compensation and conflicts of interest, as well as the CFP® certificant's credentials and business affiliations. Disclosures must include direct or indirect compensation to both the CFP® certificant and/or the certificant's employer. Also, in place of the standard for the certificant to advise clients that they can request updated information about compensation and conflicts of interest on an annual basis, the new standards impose a requirement that the certificant make timely disclosures to the client if previously disclosed information becomes outdated. Supra, Question 13, p.8. See also Rules 1.2 and 2.2.

It is a new requirement that for financial planning services, the certificant or certificant's employer shall enter into a written agreement which identifies 1) The parties to the agreement, 2) The date of the agreement and its duration, 3) How and on what terms each party can terminate the agreement, and 4) The services to be provided as part of the agreement. See Rule 1.3. The CFP Board has explained that "the written agreement requirement was designed to help ensure that CFP® certificants and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services." CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 14, p. 8.

The CFP Board has explained that its enforcement of the ethical standards for CFP® professionals is intended to instill confidence in the public that they can trust a CFP® practitioner to help them realize their life goals through proper management of financial resources. See CFP Board Strengthens Its Ethics Enforcement Policy, Message from David G. Strege, CFP®, CFA®, Chair of CFP Board's Board of Directors, p.3.

For further information regarding the new CFP standards, you may directly review the CFP Code of Ethics and Professional Responsibility, the CFP Rules of Conduct, the CFP Financial Planning Practice Standards, the CFP Disciplinary Rules and Procedures, and the CFP Board of Standards, Inc. release dated February 20, 2008, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions. If you are an investment advisor, RIA Compliance Consultants can assist you in complying with the new disclosure and agreement provisions of the CFP Board's Revised Standards of Professional Conduct. Please contact us if you would like to discuss the services that we can provide.

FINRA's Proposed Rule 3110 May Extend the Scope of Broker-Dealer Supervision of Investment Advisors

2008-07-15T22:33:00.002-05:00

FINRA's (The Financial Industry Regulatory Authority) proposed rule 3110 would expand the supervision responsibilities of broker-dealers by requiring broker-dealer principals to supervise business that the firm's registered representatives engage in, regardless of whether such activity requires registration as a broker-dealer. The current FINRA rules require broker-dealer firms to designate a registered principal to supervise each type of business that requires registration as a broker-dealer, and additionally require registered representatives to notify their broker-dealer and get written approval for outside business activities.

If the proposed rule is passed, the scope of broker-dealer supervisory responsibilities will go beyond written approval for the outside business activity and arguably will require supervision of all approved outside business activities. As a result, the offer of investment advisory services by representatives affiliated with a broker-dealer would be subject to supervision by broker-dealer principals. If this truly is the intent of proposed rule 3110, it is a significant departure from previous FINRA guidance on this issue. Notice to Members 94-44 had indicated that investment advisory activities that did not include the RR/IA's participation in the execution of a securities transaction would require notification of the investment advisory activity to the broker-dealer firm but would not require record keeping and supervision of the transactions. Notice to Members 96-33 again clarified that supervision of specific transactions by a FINRA member firm would be required only if the registered representative who is also an investment adviser ("RR/IA") "participates in the execution of a securities transaction such that his or her actions go beyond a mere recommendation, thereby triggering the record keeping and supervision requirements" for the broker-dealer firm. See NTM 96-33. It appears that the current version of the proposed rule may be an attempt to broaden the scope of the supervisory responsibility of broker-dealer firms in that it could require broker-dealer firms to supervise investment advisory activities at a level beyond notification and with such supervision to potentially include record keeping, and approval or disapproval at the transaction level. Consequently, investment advisors affiliated with a broker-dealer would be required to obtain prior written approval from their broker-dealer for investment advisory activities.

FINRA has accepted comments regarding the proposed rule and many in the financial industry have voiced concerns including that the language of the proposed rule is vague and that the proposed rule is too broad, overlaps with the jurisdiction of other regulators, and that the rule may conflict with rules which restrict the release of client information without client approval. Marc Menchel, executive vice president and general counsel of FINRA has commented that FINRA is not trying to expand its jurisdiction with this rule proposal and that FINRA believes that broker-dealer firms should be supervising the investment advisory business in which the representatives of their firm engage. See "Brokers, Advisers Blast FINRA Proposal", Investment News, June 30, 2008. In response to comments submitted, FINRA may amend the proposed rule or provide clarification related to the language of the proposed rule. Additionally, the Securities and Exchange Commission would need to approve FINRA's proposed rule before it could take effect. FINRA encouraged all interested parties to comment on the rule proposal by June 13, 2008. FINRA has not yet submitted the rule proposal to the SEC.

SEC Issues Cease-and-Desist Order for Failure to Disclose Conflicts of Interest and Misrepresentation of Its Research Process

2008-07-15T22:23:00.004-05:00

Recently, the U.S. Securities and Exchange Commission ("SEC") issued a cease-and-desist order, disgorgement to clients, prejudgment interest and penalties, among other sanctions against a registered investment adviser for its failure to disclose conflicts of interest in its selection of funds for discretionary clients and for providing misrepresentations to clients by stating that funds selected for model portfolios were chosen according to the firm's approved research process.

In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.

Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.

Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).

This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.

Single Family Office Not Required to Register with SEC

2008-07-09T14:26:00.004-05:00

The SEC recently granted an order under Section 202(a)(11)(G) of the Investment Advisers Act of 1940 (“Advisers Act”) declaring that a particular “family office” and its employees, when acting within the scope of their employment, are not required to register as investment advisers pursuant to Section 203(a) of the Advisers Act. The SEC granted this order because it found that the applicant and its employees are not within the intent of Section 202(a)(11) of the Advisers Act which defines the term “investment adviser”. Section 202(a)(11)(G) allows the SEC to designate by rule, regulation, or order that certain persons are not within the intent of the definition of an “investment adviser.”

This particular “family office” filed an application on behalf of itself and its employees for an order based on the following:

The applicant and its employees operate as a “family office” providing advisory services to family members only. This includes estate accounts, entities, trusts, and foundations all of which are wholly owned, funded, and for the benefit of the family and its lineal descendents.

The applicant is and will at all times be owned, directly or indirectly, exclusively by one or more family members and its Board of Directors will at all times be, at a minimum, made up by members of the family.

The applicant provides advice regarding various investments in addition to other services but does not and will not provide investment advice to any person that is not a family member.

The applicant only charges fees that are sufficient to cover its costs for providing services. The applicant’s fee structure is not designed to generate a profit.

The applicant will not hold itself out to the public as an investment adviser and will not be listed in the phone book or any other directory as an investment adviser.

The applicant will not engage in any advertising or conduct marketing activities and it will not solicit or accept as an investment advisory client any person that is not a family member.

The applicant also indicated that they were currently operating under the registration exemption provided in Section 203(b)(3) of the Advisers Act (also known as the private advisor exemption) because it only had eight clients but indicated that this number would continue to grow when children of the family are no longer minors and leave their childhood households. However, the applicant is not prohibited from registering with the SEC because it has assets under management of at least $25,000,000.

Based on the information provided by the applicant, the SEC granted an order declaring that the applicant and its employees are not persons within the intent of Section 202(a)(11) of the Advisers Act. This means that registration is not required.

SEC Publishes Proposed Rule 151A Under the Securities Act of 1933 - Clarifying Under What Circumstances an EIA Constitutes an Annuity or Security

2008-06-26T22:13:00.005-05:00

For those following the regulation of equity indexed annuities (also known as EIAs or fixed indexed annuities), the U.S. Securities and Exchange Commission ("SEC") has now posted to its website proposed Rule 151A under the Securities Act of 1933.

This 96 page proposed rule release provides background and details to the SEC proposal to clarify whether an equity indexed annuity constitutes a security under federal law. If adopted as proposed, Rule 151A would drastically change the regulatory licenses necessary for insurance agents to offer EIAs falling under the clarified definition of an annuity/security.

Insurance marketing organizations and insurance agents offering EIAs need to carefully review this proposed rule. The SEC is accepting public comments regarding proposed Rule 151A until September 10, 2008.

SEC Proposing Rule for Determining When Equity Indexed Annuities (EIA) Are Securities

2008-06-25T21:11:00.005-05:00

At today's open meeting of the Commissioners of the U.S. Securities and Exchange Commission ("SEC"), it was announced by Chairman Christopher Cox that the SEC is proposing a rule that would establish "...the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws." The proposed rule has yet to be posted on the SEC's website; however, RIA Compliance Consultants will prepare and post to its blog a summary of the SEC's proposed EIA rule once available.

SEC Revokes Investment Adviser's Registration Due to Improper Trade Allocations

2008-06-24T19:56:00.008-05:00

The U.S. Securities and Exchange Commission ("SEC") recently revoked the registration of an investment adviser located in Delray Beach, Florida as a result of improper allocation of trades.

In April 2005, the SEC filed a civil injunction action against the Delray Beach based investment adviser alleging the firm violated the anti-fraud provision of the Investment Advisers Act of 1940 by profiting, at the expense of its clients, from allocation of profitable trades to proprietary accounts of an affiliate of the investment adviser. The U.S. District Court for the Southern District of Florida found the investment adviser engaged in fraud upon the investment advisory clients by using discretionary authority over client accounts to allocate profitable trades to the proprietary accounts of an affiliate of the investment adviser. The Court noted that this cherry-picking netted the investment adviser's affiliate $4.5 million of gains and passed $9 million of losses to the investment adviser's clients. Based upon the Court's findings in the civil injunction action and the investment adviser's offer to settle the administrative proceeding, the SEC deemed it in the public interest to order the revocation of the investment adviser's registration.

In addition to this administrative proceeding, the SEC's Director of Compliance Inspections & Examinations, Lori Richards, recently noted in a public speech that SEC "[e]xaminers are looking for cherry-picking and favoritism in allocations [by investment advisers], to, for example, relatives, high profile clients, clients with performance–fee accounts, or other clients that the adviser may have an incentive to benefit."

This administrative proceeding and the informal guidance by the SEC staff clearly underscore the need for federally registered investment advisers to develop, maintain, disclose and test policies and procedures that prevent improper trading activity. If your investment adviser requires further guidance and support regarding its trading allocation policies and procedures, RIA Compliance Consultants is available to assist you.

One-Day Audits Being Conducted on Newly Registered SEC Investment Advisers

2008-05-22T14:22:00.003-05:00

The U.S. Securities and Exchange Commission (SEC) has been examining certain recently registered investment advisers by conducting limited scope, one-day examinations. According to the SEC’s cover letter sent in advance of these audits, “the purpose of these examinations is to assess and discuss important risk areas presented be the registered investment advisers’ operations and the related compliance policies and procedures implemented by the registered investment advisers to manage those risks.”

RIA Compliance Consultants, Inc. (RCC) has had first-hand experience with these limited scope examinations. A handful of RCC clients have been visited by their respective SEC regional offices this year. Specifically, RCC is aware of the Philadelphia Regional Office and the Atlanta Regional Office conducting these audits. To find out which SEC regional office has jurisdiction over your firm, click here. It appears the SEC is conducting visits of registered investment advisers that have been approved for approximately one year. The examinations appear to be an effort by the SEC to make sure registered investment advisers are on the right track.

As part of the one-day visit, the SEC expects to speak to at least one member of senior management and/or the Chief Compliance Officer to obtain an overall view of the registered investment adviser’s organization, business, control environment, and compliance culture. The following are some of the topics discussed during the visits: the adequacy of the firm’s compliance program; portfolio management decisions being consistent with client mandates; disclosures to clients; brokerage arrangements; allocations among client accounts; personal trading activities of access persons; fiduciary obligations; performance and other information in marketing and advertising; and the safety of client information. Special attention has been paid to firms that manage hedge funds and other pooled accounts.

In preparation of the examinations, the SEC has been requesting a limited list of books and records. The following includes some of the documents requested during these examinations: Form ADV Part II and Schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements.

If you are a newly registered investment adviser, give RCC a call to find out about our mock-regulatory examination and training visits. We can discuss how our consulting services can help you prepare for an examination as discussed in this article or a full-blown routine SEC examination.

First Quarter Personal Securities Transaction Reports

2008-05-05T09:58:00.001-05:00

With the end of first quarter 2008, RIA Compliance Consultants would like to remind SEC registered investment advisors of their requirement to collect or prepare updated personal securities transaction reports from all access persons. The information on the reports must reflect transactions that took place during first quarter of 2008 and must officially be reported to the firm no later than 30 days after the end of the quarter. Therefore, all reports must have been collected by April 30. As part of the SEC Code of Ethics rule, all SEC registered investment advisor firms are required to review the activity of their access persons' securities holdings at the end of every calendar quarter. The quarterly reports and documented review/approval of each report must be retained as part of a registered investment advisor firm's official books and records.

It is important for investment advisor firms to not only collect these reports, but to also establish a system of reviewing and documenting the reviews of all reports. In particular, the review of personal securities transactions should attempt to detect instances or patterns when the interests of the firm or its access persons are placed ahead of the interests of clients. Depending on your firm's specific procedures, reviews may focus on restricted lists, black-out periods, and other conditions placed on access persons trading activities.

If your firm has questions or concerns about your firm's requirements to monitor and review personal securities transactions, please give us a call to find out how we can develop a customized suite of compliance services designed specifically for your firm.

Lori Richards Provides Insight to SEC Exam Focus

2008-05-05T09:36:00.003-05:00

On March 20, Lori Richards, Director - SEC's Office of Compliance Inspections and Examinations, delivered a speech explaining the SEC's current registered investment advisor examination priorities. The speech highlights the "top 10" areas of focus during routine examinations. While not an official statement from the SEC, Ms. Richards' speech provides excellent insight into the current mindset of the SEC Office of Compliance Inspections and Examinations.

It is important to note that the focus of an SEC examination will largely depend on a registered investment advisor firm's actual business operations, services, arrangements, policies and procedures. However, all registered investment advisor firms can benefit from reading Ms. Richards' speech in its entirety so that the areas of emphasis are understood and your firm can be prepared. Registered investment advisor firms should make sure the following areas are covered in their written policies and procedures and analyzed during the firm's annual assessment. The following is the top 10 according to Ms. Richards with highlights provided by RIA Compliance Consultants. To read Ms. Richards' speech in its entirety, click here.

1. Controls Over Valuation. How does the firm value securities? Particularly illiquid, private and other hard-to-price securities.

2. Controls Over Non-Public Information/Personal Trading/Code of Ethics. The SEC is focusing on personal securities transactions during its reviews. Policies to protect client information is also a priority of the SEC.

3. Dealing with Senior Investors. This continues to be a hot topic for both the SEC and state regulators.

4. Compliance and Supervision. Does the program effectively manage and control various compliance risks? Are all advisor representatives and branch offices properly supervised?

5. Portfolio Management. Are management services consistent with client mandates? Are they consistent with client objectives and restrictions?

6. Brokerage Arrangements and Best Execution. Is the registered investment advisor seeking best execution? Does the firm document its best execution reviews? Are arrangements properly and fully disclosed to clients, including services received from broker/dealers?

7. Allocations of Trades. Are all clients treated fairly and investment opportunities allocating consistently?

8. Performance Advertising, Marketing, and Fund Distribution Activities. Are there proper controls to review and approve marketing materials? Can performance numbers be justified and supported? This is a historically hot topic during SEC examinations and an area that consistently results in deficiencies.

9. Safety of Clients' and Funds' Assets. This area includes a focus on the safeguarding of client assets from theft.

10. Information Processing and Protection (books and records, disclosures, and filings). Does the firm have all required books and records? Are those records properly maintained and protected in the event of a disaster? Are all potential conflicts of interest disclosed to clients? Has the firm complied with applicable regulatory filings?

Included in the many services offered by RIA Compliance Consultants, Inc. are mock regulatory examinations and annual compliance program assessments. These services are provided with a goal of assisting registered investment advisor firms comply with applicable rules and regulations and prepare for SEC examinations. If you are interested in these services, please give us a call today.

Summary of SEC's Newly Proposed Form ADV Part 2

2008-03-09T14:49:00.004-05:00

RIA Compliance Consultants, Inc. intends to submit formal comments to the U.S. Securities and Exchange Commission ("SEC") regarding proposed changes to Part 2 of Form ADV. The “re-proposed” changes were announced earlier this month after an initial attempt to change Part 2 of Form ADV was made in 2000. RIA Compliance Consultants is encouraging registered investment advisers to read the proposed rule release and provide their own comments. Comments must be received by the SEC on or before May 16, 2008. The proposed rule release can be viewed on the SEC’s website at http://www.sec.gov/rules/proposed.shtml. Clients of RIA Compliance Consultants can also forward their comments to us for inclusion into our comment letter. Comments should be sent to RIA Compliance Consultants by April 30, 2008.

A. Form ADV – Registration and Disclosure Document. The Form ADV is the registration document for investment adviser firms registered with the SEC and state securities authorities. The new Part 1 of Form ADV has been in effect since 2001 and is filed electronically through the Investment Adviser Registration Depository (IARD). Part 1 is a “check-the-box” form and while made publicly available through the IARD system, investment advisers are typically not required to provide the Part 1 to clients. The current Part 2 is provided to clients and is considered an investment adviser’s disclosure brochure. The SEC’s amendments to the Part 2 are intended to require investment advisers to provide regulators and clients with a brochure written in plain English. The brochure must describe the investment adviser’s services, fees, business practices, and conflicts of interest.

The new Part 2 brochures will need to be filed through the IARD system in PDF format. Investment advisers will prepare and make changes to their brochures using their own computers and then simply submit versions of the brochure through IARD. Currently, the SEC provides a standard form that must be used when preparing the Part 2. Under the proposed rules, the SEC will just provide instructions to complete the brochure, but will not provide a standard form that must be used. According to the proposed rule release, the SEC will implement a transition schedule requiring investment advisers to comply with the new Part 2 requirements by the date they must make their next annual updating amendment to Form ADV following the date the revised form becomes effective. Under SEC rules, investment advisers must submit an annual updating amendment within ninety (90) days after their fiscal year ends. However, investment advisers would not be required to comply with the new requirements no earlier than six (6) months after the rules become effective. State registered investment advisers will need to comply with the applicable state authority transition schedules.

B. Form ADV – Brochure Delivery Requirements. Proposed changes would also require investment advisers deliver a copy of the brochure within 120 days after the firm’s fiscal-year end. Currently, investment advisers are required to “offer” the brochure and the timing can be decided by the investment adviser as long as it is consistent from year to year.

According to Jarrod James, Senior Compliance Consultant of RIA Compliance Consultants, “the annual delivery requirements will be an additional burden for investment advisers that do not currently have similar procedures. However, the SEC originally proposed delivery requirements any time a material change is made. The SEC is seeking a middle ground on this issue by only requiring an annual delivery. It should be noted however, that an investment adviser’s fiduciary duty may require it to deliver updated brochures if there are material changes throughout the year.”

The SEC is also proposing changes to the timing of the initial delivery requirements to clients. Currently, investment advisers need to provide the brochure to clients at least 48 hours prior to entering into a contract with a client or at the time the contact is entered into. If the brochure is provided at the time the contract is signed, investment adviser’s must provide clients a five (5) day “free look” period whereby the client can cancel the contract without penalty. Under the proposed rules, the investment adviser would provide the brochure at or before the contract is signed and does not need to provide a “free look” period.

C. Form ADV – New Part 2. “The SEC should be commended for proposing updates to the new Part 2,” according to Tammy Emsick, Senior Compliance Consultant of RIA Compliance Consultants. “Changes are needed and long overdue. However, complying with the new rules will not be easy. Investment advisers are going to need to take time to fully understand new questions required which will also mean correctly interpreting the SEC’s intent for changing existing Part 2.”

The SEC has essentially overhauled the existing Part 2. No longer will the Part 2 contain questions in a check-the-box format. The new brochure will now entirely be a true brochure written in plain English. An outline of the proposed structure to the new Part 2 is provided below.

Item 1 – Cover Page. The brochure would have a cover page which must include a contact person and the firm’s website, if one has been created for public consumption.

Item 2 – Material Changes. The brochure would need to provide a summary of any material changes since the last update of the brochure. This is a significant change and may be viewed by investment advisers as burdensome.

Item 3 – Table of Contents. The brochure must have a table of contents. The SEC is not providing a standard table of contents and is leaving the construction of the table of contents to the discretion of the investment adviser.

Item 4 – Advisory Business. Among other things, an investment adviser must provide a description of its advisory business and describe if it specializes in any type of service. The SEC would allow instruct investment advisers to disclose the amount client assets it manages. Investment advisers would not be required to use the asset under management methodology on Part 1, but instead could include assets not counted on Part 1.

Item 5 – Fees and Compensation. Similar to the existing Part 2, this item would require an investment adviser to describe how it is compensated for services and the types of other costs a client can expect to incur in connection with the investment adviser’s services (e.g. brokerage, custody fees, and fund expenses).

Item 6 – Performance Fees and Side-by-Side Management. This “new” item specifically requires firms to describe performance fees charged and conflicts of interest relating to such charges.

Item 7 – Types of Clients. Similar to the current Part 2, a description of the firm’s types of clients would be required.

Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss. Similar to the existing Part 2, this section would require the investment adviser to describe its investment process and methodology. It would also require the firm to disclose to clients to potential risks associated with the investment adviser’s services.

Item 9 – Disciplinary Information. This section will require an investment adviser to disclose any legal or disciplinary event that is material to a client’s evaluation of the integrity of the investment adviser. Currently, investment advisers are required to provide written or oral disclosure to clients regarding these types of events under Rule 206(4)-4. According to the proposed changes, Rule 206(4)-4 will be rescinded and disclosure must be provided in the brochure. “The exact types of disciplinary events are still open for comment and consideration” according to Mr. James. “This proposal was controversial in 2000 and will likely prove to be controversial in 2008. I would think investment advisers with a reportable event on the Part 1 will have a special interest in this new requirement.”

Item 10 – Other Financial Industry Activities and Affiliations. Similar to the existing Part 2, material relationships or arrangements with related financial industry participants will need to be disclosed along with conflicts of interest regarding those relationships and how the adviser addresses the conflicts of interest.

Item 11 – Codes of Ethics, Participation or Interest in Client Transactions and Personal Trading. Similar to the existing Part 2, the new rule will require disclosure regarding the firm’s code of ethics, personal trading procedures, and conflicts regarding those procedures.

Item 12 – Brokerage Practices. Similar to the existing Part 2, this section will require the investment adviser to describe its brokerage arrangements. Specifically, soft dollar arrangements, client referrals from brokerage firms, trade aggregation, and client directed brokerage arrangements must be described.

Item 13 – Review of Accounts. Similar to the existing Part 2, this section would require an investment advice to disclose whether, and how often, it reviews clients’ accounts or financial plan, and identify who reviews the accounts.

Item 14 – Payment for Client Referrals. Similar to the existing Part 2, this section would require the investment adviser to describe arrangements it has for paying cash or other payment for client referrals.

Item 15 – Custody. This new section would require investment advisers to disclose if the client’s qualified custodian sends account statements or if the investment adviser generates and delivers account statements.

Item 16 – Discretion. Similar to the current Part 2, the investment advice would be required to describe its discretionary authority and arrangements.

Item 17 – Voting Client Securities. This new section would provide instructions on how to describe and disclose the firm’s proxy voting procedures.

Item 18 – Financial Information. Similar to Item 10 above, this section would require the investment adviser to disclose certain financial information about the adviser when material to clients. Adviser’s that require prepayment of more than $1,200 and six (6) or more months in advance, will still be required to provide a balance sheet to clients. Additional, the proposal would require disclosures of financial conditions reasonable likely to impair the investment adviser’s ability to meet contractual commitments to clients if the firm has discretion, custody or requires prepayment of more than $1,200 in fees per client and six months or more in advance. The proposal also seeks comments on requiring the disclosure of investment advisers subject to a bankruptcy petition during the past ten years.

Item 19 – Index. The SEC is proposing an index that must be submitted to the SEC, but does not need to be given to clients.

D. Form ADV – Supplements for Supervised Persons providing Investment Advice. Investment advisers will also be required to provide supplemental brochures for each supervised person that provides advice to clients. This is similar to the old Part I, Schedule D requirement. These supplements would not need to be submitted through IARD, but would need to be given to clients for which the supervised person provides advice. There are exceptions to when the supplement needs to be given and would not be included in the annual delivery of the firm brochure requirement. The content of the supplements would include business background, education background and disciplinary information.

E. Conclusion. RIA Compliance Consultants has attached a preliminary summary of the proposed new Form ADV Part 2 (Press%20Release.NewPart2.03.09.08.pdf), and we intend to post a more comprehensive summary and our comments by the end of the month.

Investment Advisers Should Review Insider Trading Policies & Procedures

2008-03-08T15:57:00.014-06:00

Although the recent report concerning possible insider trading by a public pension plan administrator conducted by the Division of Enforcement of the U.S. Securities and Exchange Commission ("SEC") involves an essentially unregulated money manager which is not subject to the Investment Advisers Act of 1940, it still offers an excellent opportunity for each registered investment adviser to review its policies and procedures regarding trading activity based upon material, non-public ("insider") information.

The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.

According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.

The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.

The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?

Here are some issues that should be considered by your registered investment adviser:

Has your registered investment adviser designated in writing a staff person, such as the chief compliance officer ("CCO"), to be responsible for establishing, implementing and enforcing written insider trading policies and procedures?
Does your registered investment adviser's insider trading policy require a supervised person to report acquisition of insider information or suspected insider information to the CCO and likewise require the CCO to determine and communicate the appropriate course of action for the supervised person?
Does your registered investment adviser's insider trading policy require the CCO to confidentially document such disclosure of the acquisition of insider information and the communicated course of action?
To the extent that the supervised person needs to communicate such insider information to other supervised person, doe your registered investment adviser have procedures to limit such disclosures and document such disclosures.
Has your registered investment adviser held training concerning its insider policy and procedures with its supervised persons? Can your supervised persons correctly identify what constitutes potentially insider information and how such situations should be handled?
Does your registered investment adviser have any clients that are a publicly traded company, a board director of publicly traded company, or a high level executives of a publicly traded company with significant concentrated positions within the company? If so, are the personal securities transaction by your supervised persons within such companies subject to an exception report, restricted securities list, pre-clearance procedure, or black-out period? Likewise, does the investment committee of your registered investment adviser use similar supervisory tools with respect to making investment recommendations or decisions for client accounts or proprietary funds or accounts?

RIA Compliance Consultants can help your registered investment adviser develop written insider trading policies and procedures so as to minimize the risk of its supervised person's misusing material, non-public information. Please contact us at 877-345-4034 if you're interested in discussing such services.

SEC Proposing to Permit the Release of Customer Contact Info. to Departing Reps

2008-03-05T21:13:00.006-06:00

The U.S. Securities and Commission ("SEC") released today a proposed rule amending Regulation S-P, which includes an exception from the privacy notice and opt-out requirements so as to permit the release of certain customer contact information to the customer's representative when departing his or her current SEC registered investment adviser or broker-dealer and joining a new firm.

According to the text of the proposed amendments, this exception for releasing limited customer information to a departing representative is based upon the following conditions:

The information is limited to a customer's name, a general description of the type of account and products held by the customer, and the customer’s contact information, including the customer’s address, telephone number, and email information;
The information does not include any customer's account number, social security number, or security positions; and
The departing representative must provide the departing investment adviser or broker-dealer, no later than the representative’s separation date from employment with the departing investment adviser or broker-dealer, a written record of the information that will be disclosed pursuant to this exception, and the departing investment adviser or broker-dealer must maintain and preserve such records.

In the proposing rule release, the SEC clarified that a representative could use this information to solicit only a departing firm's customers that were the representative’s clients. The SEC explained that "this condition recognizes that an investor might expect to be contacted by a representative with whom the investor has done business before, but not by another person at the representative’s new firm."

Finally, the SEC noted that a registered investment adviser or broker-dealer "may not require or expect a representative from another firm to bring more information than necessary for the representative to solicit former clients."

The SEC is seeking comments regarding the proposed rule. RIA Compliance Consultants will keep readers of our blog informed of the SEC's final action related to this amendment.

Form 13G Requirements – Is Your Investment Adviser a 5% Beneficial Owner?

2008-03-05T13:51:00.004-06:00

Many registered investment advisors are familiar with Form 13F requirements under the Securities and Exchange Act of 1934 (the 1934 Act). However, are you aware of an equally important requirement under Section 13(g) of the 1934 Act?

Section 13(g) applies to beneficial owners of more than 5% of a class of equity securities registered under the 1934 Act. Section 13(g) can only be relied upon if the beneficial owner is also a qualified institutional investor and/or a passive investor. Beneficial ownership is broadly defined. A registered investment advisor may be defined as a beneficial owner if it shares either of the following:

Voting power – includes the power to vote or direct the voting of the shares; or

Investment power – the power to dispose of direct the disposition of the security.

Registered investment advisors are considered qualified institutional investors (other examples include broker/dealers and mutual fund companies) and more likely subject to Section 13(g) as opposed to Section 13(d). Under Section 13(g), registered investment advisors must file Schedule 13G when they exceed 5% beneficial ownership of a class of outstanding registered equity securities. Schedule 13G may only be used if the registered investment advisor holds the securities due to its normal course of business and not to affect change or influence control of the issuer (i.e. a passive investor). If a registered investment advisor intends to affect or influence control of the issuer, the more stringent Section 13(d) requirements apply.

An initial Schedule 13G must be filed through the SEC’s EDGAR system within 45 days after the end of the calendar year when the registered investment advisor attains more than 5% beneficial ownership. If a registered investment advisor attains more than 10% beneficial ownership prior to the end of the calendar year, the initial Schedule 13G must be filed within 10 days after the end of the first month in which beneficial ownership exceeds 10% as computed on the last day of the month.

Amendments to Schedule 13G must be filed annually when there are changes. However, if the initial Schedule 13G reports ownership of more than 5% and the registered investment advisor exceeds 10% prior to the end of the year, an amendment must be filed 10 days after the month in which beneficial ownership exceeds 10%, as computed on the last day of the month. Thereafter, the registered investment advisor must file an amendment within 10 days after the month when ownership decreases or increases by 5%. Once an amendment has been filed showing change of ownership below 5%, no additional filings are needed.

To learn more about RIA Compliance Consultants, Inc.’s Section 13(g) consulting services, please give us call.

Proposed Amendments to Reg S-P Permits Limited Transfer of Information When IARs Change Firms

2008-03-04T19:52:00.005-06:00

At its open meeting today, the U.S. Securities and Exchange Commission ("SEC") voted to propose several amendments to Regulation S-P, which sets forth the privacy obligations of registered investment advisers and broker-dealers with respect to confidential client information.

Of particular interest to those investment adviser representatives and/or registered representatives that are considering the possibility of departing their existing registered investment adviser or broker-dealer and joining a new firm, the proposed amendments to Regulation S-P would apparently permit the transfer of limited information when such personnel change firms. Although the SEC has not issued the text of these proposed amendments, SEC Chairman Christopher Cox explained during the open meeting that "the proposed amendments would provide guidance on the responsibilities that a firm and its employees have to protect client privacy when employees move from one firm to another."

Upon the SEC's publication of the proposing release, RIA Compliance Consultants will provide a detailed summary of the proposed amendments to Regulation S-P to the readers of our blog.

SEC Releases Actual Text of Proposed Amendments to Form ADV Part 2

2008-03-03T20:40:00.004-06:00

The U.S. Securities and Exchange Commission ("SEC") published on its website today the actual text of the proposed amendments to the Form ADV Part 2 in SEC Release No. IA-2711. The proposed amendments to the Form ADV Part 2 and related SEC rules will be open for comment until May 16, 2008. Upon completing its analysis of this 169 page release, RIA Compliance Consultants will share its commentary with our readers of this blog.

Amendments to Regulation S-P - What Information May an IA Employee Take?

2008-03-02T15:31:00.004-06:00

The U.S. Securities and Exchange Commission ("SEC") announced that its Commissioners will consider at its open meeting scheduled for Tuesday, March 4, 2008, a recommendation by staff to propose amendments to Regulation S-P, which governs the privacy of customer financial information.

According to the SEC, the amendments would specify under Regulation S-P what information that may be transferred when employees of broker-dealers or investment advisers change firms.

Since the SEC's current interpretation of Regulation S-P, as evidenced by the SEC's enforcement action against the Next Financial, has resulted in significant challenges to investment adviser representatives departing their previous registered investment adviser firms, it will be interesting to learn whether the SEC will raise the requirements or provide some type of safe harbor for departing investment adviser representatives under Regulation S-P.

Form ADV Part 1 Annual Amendments for Fiscal Year Ended December 2007

2008-02-29T12:51:00.002-06:00

This is a reminder to all registered investment advisors with a fiscal year end of December 2007. Your Form ADV Part 1 Annual Amendment must be submitted through Web CRD/IARD system no later than ninety (90) days after your registered investment advisor firm’s fiscal year end. Because March 30th falls on a Sunday this year, in order to avoid any potential late filings, the Annual Amendment should be submitted on Friday, March 28.

An Annual Amendment to Part 1 of Form ADV is required under Rule 204-1 of the Investment Advisers Act of 1940 and similar state rules. The main item that must be updated on the Annual Amendment is the firm's assets under management (Form ADV Part 1A, Item 5.F.). Other items such as, but not limited to, the number of accounts, clients, employees, and advisor representatives should also be updated. The Annual Amendment can also be used to disclose any material changes. Keep in mind, however, that material changes need to be disclosed promptly, no matter when they take place. Material changes include items such as, but are not limited to, reportable disciplinary and financial disclosures, changes in advisory programs, changes in fee arrangements and changes in billing practices.

RIA Compliance Consultants, Inc. (RCC) provides various levels of Form ADV drafting and review services including assistance with the preparation and submission of the Form ADV Part 1 Annual Amendment. RCC can help you understand the information required on the Form ADV and provide an analysis of the adequacy of your registered investment advisor’s Form ADV disclosures. To read our free Form ADV drafting tips, please visit our website. If you are interested in retaining RCC for a Form ADV review, please give us a call.

SEC Bars Investment Advisor for Inflating AUM and Performance Advertising

2008-02-29T12:27:00.002-06:00

In January of this year, the SEC entered bar and cease and desist orders against a two member registered investment advisor firm. The firm was owned by a husband and wife with the wife serving strictly in an administrative capacity. The law judge in the case found that the registered investment advisor had willfully violated the Investment Advisers Act of 1940 because it falsely represented to the SEC that it had assets under management (AUM) exceeding $25 million in order to remain eligible for SEC registration. The inflated AUM numbers were reported on several Form ADV Part 1 amendments from 1996 through 2000. The SEC terminated the firm’s registration in 2002. However, the firm continued to hold itself out to the public as an investment advisor and reported its AUM numbers through several database services. The reporting of those numbers were also found to be intentionally inflated and therefore misleading. Further, the firm was not able to provide documentation substantiating its AUM and performance numbers. The firm claimed all paperwork and client files were lost in a fire and then claimed the paperwork was lost in flood. To read the entire order click here.

While this firm’s actions were found to be willful and were intentionally done to mislead potential clients and the public in general, the lessons learned can be applied to every registered investment advisor. This case illustrates the importance of disclosing accurate AUM on the Form ADV Part 1. If your firm does not meet an eligibility requirement for SEC registration, it must deregister with the SEC and register with the state regulators. Do not take the risk of over reporting or misreporting AUM simply to maintain SEC registration. This case also illustrates action the SEC is willing to take when a registered investment advisor presents misleading AUM and performance information to the public through advertising and other marketing channels. All performance numbers need to be substantiated, documented and maintained with the firm’s books and records. Finally, a registered investment advisor is required to maintain books and records under Rule 204-2 and other applicable regulations, even after the firm terminates its registration. Once termination is effective, a registered investment advisor must maintain all books and records for the time period required under Rule 204-2, typically not less than five years from the end of the fiscal year during which the last entry was made on such record.

SEC Considering a New Form ADV Part 2 at Its February 13th Meeting

2008-02-06T20:08:00.000-06:00

The U.S. Securities and Exchange Commission ("SEC") announced today that the SEC Commissioners will consider at the SEC's open meeting on February 13, 2008 whether to propose amendments to the Part 2 of the Form ADV under the Investment Advisers Act of 1940.

According to the SEC's announcement, "[t]he proposed amendments, if adopted, would require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The proposal also would require advisers to electronically file their brochures with the Commission, and the brochures would be available to the public through the Commission's Web site."

Upon the SEC's public release of this proposal, RIA Compliance Consultants will post a summary and analysis of the proposed amendments. Stay tuned.

SEC's Form 13F Filing Deadline Approaching for Investment Advisers Acting as Institutional Money Managers

2008-01-24T19:17:00.000-06:00

Registered investment advisors that file the Form 13F with U.S. Securities and Exchange Commission ("SEC") should remember that reports must be filed within 45 days of the end of each calendar quarter. Therefore, fourth quarter Form 13F reports must be submitted to the SEC via EDGAR by February 14, 2008. Under Section 13(f) of the Securities Exchange Act of 1934 and Rule 13f-1 thereunder, an institutional money manager which exercises investment discretion over $100,000,000 of Section 13(f) securities must submit quarterly 13F reports to the SEC. Registered investment advisors meet the definition of institutional money manager and are therefore subject to this rule when the firm exercises investment discretion over $100,000,000 of Section 13(f) securities.

If your registered investment advisor does not currently submit Form 13F reports with the SEC, your investment advisor needs to make sure it did not exceed the discretion threshold of $100,000,000 of Section 13(f) securities, which generally includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies, exchanged traded funds and certain convertible debt securities, but excludes open- end investment company mutual funds. On the SEC's website, there's an official list of Section 13(f) securities. If your registered investment advisor met the threshold as of December 31, 2007, it must file its first Form 13F by February 14, 2008. For more information about the reporting requirements of Sections 13(d) , 13(f) and 13(g) of the Securities Exchange Act of 1934, you can visit RIA Compliance Consultants' frequently asked questions webpage.

RIA Compliance Consultants' Form 13F services focus on helping registered investment advisors understand the Section 13(f) requirements and then help your investment advisor to determine whether your firm is required to file a Form 13F. We also provide the tools needed to establish an EDGAR account with the SEC and provide assistance with the preparation and submission of the Form 13F. Contact RIA Compliance Consultants to find out if our services can benefit your registered investment advisor.

SRO Supervision for Investment Advisers?

2008-01-14T07:30:00.000-06:00

In today's issue of Investment News, there's a report that an official of the Securities Industry and Financial Markets Association ["SIFMA"] is suggesting that "the SEC should consider whether investment-adviser-only firms should be subject to supervision by a self-regulatory organization [i.e. Financial Regulatory Authority or "FINRA"] so that customers are assured the high level of supervision and oversight that brokerage customers already have." These comments are apparently in response to the recent release of the recent report prepared by the Rand Corporation, which primarily concludes that experienced investors do not understand the difference between an investment adviser and a broker-dealer.

The comments by the SIFMA official are somewhat puzzling since the Rand Corporation did not evaluate whether the SEC's regulation of investment advisers under the Investment Advisers Act of 1940 was more or less effective than the FINRA's regulation of broker-dealers pursuant to the Securities and Exchange Act of 1934. An alternative perspective to SIFMA and interesting question to a concerned policymaker is whether investors would be better served by the SEC and/or Congress more broadly defining investment activity that falls under the jurisdiction of the Investment Advisers Act of 1940 and thereby obligating such firms to act as fiduciaries to their clients.

Investment advisers should stay tuned into this issue since this is undoubtedly the start of another round of the ongoing debate concerning how the SEC should regulate broker-dealers relative to investment advisers.