Anti-Money Laundering Procedures
You may have heard that anti-money laundering (AML) reviews have become a routine part of regulatory examinations for broker/dealers. However, are you aware that as an investment advisor, your AML procedures (or lack thereof) may be reviewed as well?
This appears to be the case even though the SEC and most states have not passed formal rules requiring advisor firms to establish AML procedures. In fact, there is a recent report of a state-registered investment advisor firm in Texas cited for having inadequate AML policies and procedures by the Texas State Securities Board. This action by the State of Texas was surprising due to the fact that Texas has not passed a rule requiring an advisor to establish AML policies.
There's talk within the industry that the SEC may soon pass a rule requiring investment advisor firms to create and implement procedures regarding AML. We recommend that all advisor firms be proactive in this area and implement AML procedures now as a best practice.
Until the SEC passes a formal rule for advisor firms, we encourage you to visit this NASD website page as it serves as an excellent start for formulating your own procedures. If you need further guidance, RIA Compliance Consultants is available to help you understand all of the issues surrounding AML so you can institute sufficient policies and procedures.
This appears to be the case even though the SEC and most states have not passed formal rules requiring advisor firms to establish AML procedures. In fact, there is a recent report of a state-registered investment advisor firm in Texas cited for having inadequate AML policies and procedures by the Texas State Securities Board. This action by the State of Texas was surprising due to the fact that Texas has not passed a rule requiring an advisor to establish AML policies.
There's talk within the industry that the SEC may soon pass a rule requiring investment advisor firms to create and implement procedures regarding AML. We recommend that all advisor firms be proactive in this area and implement AML procedures now as a best practice.
Until the SEC passes a formal rule for advisor firms, we encourage you to visit this NASD website page as it serves as an excellent start for formulating your own procedures. If you need further guidance, RIA Compliance Consultants is available to help you understand all of the issues surrounding AML so you can institute sufficient policies and procedures.
Labels: Compliance Program
posted by bhill at 8:27 AM
Emails Are Under Scrutiny
Is your firm keeping its emails? Have these records been kept in an electronic, searchable format? Can you promptly retrieve an email from five years ago? These are questions that investment advisors are now facing during routine exams by the SEC. As you prepare for your next exam, here are few items to consider.
First, an SEC registered investment advisor is required under SEC Rule 204-2 to maintain certain books and records for specified periods, including those specified records that are in the form of emails. (There's a similar requirement under state regulations for state registered advisors.) In particular, this retention requirement includes all emails to and from a client or prospective client, all internal email regarding a client (including those concerning documentation, instructions, contracts, disclosures, receipt of disclosures, suitability information and investment recommendations), and numerous business related (addressing internal governance, finances and operations, transactions, and marketing) emails. For a complete listing of the documents subject to retention requirements, the actual retention periods and appropriate storage mediums, please refer to the actual rule.
Second, please understand that an investment advisor's emails will be reviewed as part of your firm's next SEC examination. The most recent focus has been on the top four officials of the firm. Examiners have been asking for all emails of the top four executives for the past 6 months to 2 years. Keep in mind that emails fall under the 5 year books and records requirement.
Third, examiners have indicated that the produced emails should be in their original electronic format. It appears that firm producing hard copies face greater scrutiny. Moreover, examiners have indicated that the emails need to be produced promptly, which has been defined by the examiners as a few hours. This is a change from the previous practice of allowing 24 hours to produce such requested documents.
With this in mind, your firm needs to make sure that it has carefully established a comprehensive written policy regarding email. This policy should be communicated to your staff and representatives and integrated into your employee and rep continuing education/training program. Next, the firm needs to establish procedures/systems for reviewing its email and devise internal controls to detect whether any employees or reps are using emails outside such a review system. Depending upon your firm's situation, it's possible that your firm will want to utilize specialized software designed for surveillance and supervision of email.
If you have any questions or need assistance in preparing your firm's policies and supervisory procedures related to email usage, please do not hesitate to contact RIA Compliance Consultants.
First, an SEC registered investment advisor is required under SEC Rule 204-2 to maintain certain books and records for specified periods, including those specified records that are in the form of emails. (There's a similar requirement under state regulations for state registered advisors.) In particular, this retention requirement includes all emails to and from a client or prospective client, all internal email regarding a client (including those concerning documentation, instructions, contracts, disclosures, receipt of disclosures, suitability information and investment recommendations), and numerous business related (addressing internal governance, finances and operations, transactions, and marketing) emails. For a complete listing of the documents subject to retention requirements, the actual retention periods and appropriate storage mediums, please refer to the actual rule.
Second, please understand that an investment advisor's emails will be reviewed as part of your firm's next SEC examination. The most recent focus has been on the top four officials of the firm. Examiners have been asking for all emails of the top four executives for the past 6 months to 2 years. Keep in mind that emails fall under the 5 year books and records requirement.
Third, examiners have indicated that the produced emails should be in their original electronic format. It appears that firm producing hard copies face greater scrutiny. Moreover, examiners have indicated that the emails need to be produced promptly, which has been defined by the examiners as a few hours. This is a change from the previous practice of allowing 24 hours to produce such requested documents.
With this in mind, your firm needs to make sure that it has carefully established a comprehensive written policy regarding email. This policy should be communicated to your staff and representatives and integrated into your employee and rep continuing education/training program. Next, the firm needs to establish procedures/systems for reviewing its email and devise internal controls to detect whether any employees or reps are using emails outside such a review system. Depending upon your firm's situation, it's possible that your firm will want to utilize specialized software designed for surveillance and supervision of email.
If you have any questions or need assistance in preparing your firm's policies and supervisory procedures related to email usage, please do not hesitate to contact RIA Compliance Consultants.
Labels: Compliance Program
posted by bhill at 12:10 PM
Texas Proposes Written Supervisory Procedures Rule
In light of the SEC's new rule requiring federally registered investment advisor firms to adopt and implement written compliance programs, many state registered firms are wondering if state regulators will require written supervisory systems too.
Such a rule was proposed recently in Texas and could be effective as early as the end of the year. Several states that already require written compliance procedures include Missouri, Wisconsin, Indiana, Maryland, North Carolina, and New Hampshire. In our opinion, it's simply a matter of time before all states require written compliance and supervisory procedures for investment advisors.
If you are unsure of your state's requirements or would like to develop a written compliance program, RIA Compliance Consultants is available to help make sure your firm is in full compliance.
Such a rule was proposed recently in Texas and could be effective as early as the end of the year. Several states that already require written compliance procedures include Missouri, Wisconsin, Indiana, Maryland, North Carolina, and New Hampshire. In our opinion, it's simply a matter of time before all states require written compliance and supervisory procedures for investment advisors.
If you are unsure of your state's requirements or would like to develop a written compliance program, RIA Compliance Consultants is available to help make sure your firm is in full compliance.
Labels: Compliance Program
posted by bhill at 8:41 PM
Form ADV Part 2 - Still on Hold
The approval of the highly anticipated new Form ADV Part 2 is on hold once again. Apparently, the form is ready for implementation through the IARD system, and all that is necessary is final approval. In fact, the IARD system was updated earlier this year to accommodate the new form once it is formally approved. However the latest word is that with the departure of Paul Roye as Director of the Division of Investment Management, the SEC is waiting to approve the form until a permanent replacement has been named. In addition, the recent resignation announcement of SEC Chairman Donaldson may delay the release even further because Paul Roye's replacement may not be announced until Rep. Christopher Cox is formally confirmed and appointed as the new SEC Chairman.
Originally proposed in 2000, the new Part 2 is intended to read like a brochure. It will be written in a narrative, plain-English format and replace the current fill-in-the-blank, yes/no format. This new version will be completed and filed on-line directly with regulators through the IARD system. Notwithstanding electronic filing with regulators, investment advisors will still need to provide it to clients. The SEC hopes that this approach will provide advisory clients with easier to understand disclosures.
In the meantime, advisors must continue to complete and file the current Form ADV Part II and Schedule F. Once the SEC leadership changes are completed, your firm should be prepared for the likelihood that there will be an announcement of a new Form ADV Part 2 requirement.
Originally proposed in 2000, the new Part 2 is intended to read like a brochure. It will be written in a narrative, plain-English format and replace the current fill-in-the-blank, yes/no format. This new version will be completed and filed on-line directly with regulators through the IARD system. Notwithstanding electronic filing with regulators, investment advisors will still need to provide it to clients. The SEC hopes that this approach will provide advisory clients with easier to understand disclosures.
In the meantime, advisors must continue to complete and file the current Form ADV Part II and Schedule F. Once the SEC leadership changes are completed, your firm should be prepared for the likelihood that there will be an announcement of a new Form ADV Part 2 requirement.
Labels: Form ADV
posted by bhill at 8:17 PM
Advisors to Hedge Funds Need to Start Preparing for Registration As Investment Advisors
Is your firm an advisor to a hedge fund? If so, your firm must register (if it hasn't already done so) as an investment advisor by February 1, 2006.
Earlier this year, the SEC passed several rule amendments that require hedge fund advisors to register as investment advisors. In essence, the SEC is aiming to improve its knowledge and control of this growing segment of the financial industry. In its rule release, the SEC states in the last five years, hedge fund assets have grown 260%. Some have predicted that by the end of 2005 the amount of hedge fund assets will exceed $1 trillion. Hedge fund assets are growing faster than mutual fund assets and already equal just over one fifth of the assets of mutual funds that invest in equity securities.
However, more than just the recent boom in hedge fund activity, it is the number of fraud enforcement cases that is the driving force behind the registration requirements. In the last five years, the number of cases brought by the SEC against hedge fund advisors represented over 10% of its cases against investment advisors during the same period. The SEC also states that because hedge funds themselves are not registered, no governmental agency has any reliable data on even the number of hedge funds or the amount of their assets. By requiring the registration of hedge fund advisors, the SEC can begin to collect solid data on this industry.
So what does this all mean? It means that if your firm is an advisor to a hedge fund and not currently registered or cannot claim an exemption to registration, it will need to complete the Form ADV, implement written compliance controls, create a code of ethics, designate a chief compliance officer, and follow all of the other rules and regulations under the Investment Advisers Act of 1940.
The Act does exempt an advisor from registration if (1) it had less than 15 clients during the previous 12 months, (2) does not hold itself out to the public, and (3) is not an advisor to any registered investment company. Therefore, you may be asking, "Does my firm need to be registered since it is only an advisor to one hedge fund and does not hold itself out to the public?" In anticipation of that situation, the SEC specifically requires advisors to "look through" the hedge fund and include all investors within the fund when counting clients. For example, an advisor cannot evade registration by claiming that the limited partnership set up to run the hedge fund equals just one client. You need to "look through" the limited partnership and count the actual investors as your advisory clients. If that number is greater than 14 and your assets under management is greater than $25 million, your firm will need to register with the SEC. Firms will assets under management less than $25 million are required to register at the state level.
We suggest advisors to hedge funds begin implementing procedures to comply with the new rules now as opposed to waiting until the last minute. While the SEC can take up to 45 days to approve a registration, some firms have been approved in as little as two weeks. Keep in mind that once you are approved, you need to be in full compliance with the Investment Advisers Act of 1940. Therefore, filing the Form ADV should be the last step you take. Our recommendation is that you submit your Form ADV by no later than early December 2005.
If you need assistance with meeting these new requirements, please do not hesitate to give RIA Compliance Consultants a call today.
Earlier this year, the SEC passed several rule amendments that require hedge fund advisors to register as investment advisors. In essence, the SEC is aiming to improve its knowledge and control of this growing segment of the financial industry. In its rule release, the SEC states in the last five years, hedge fund assets have grown 260%. Some have predicted that by the end of 2005 the amount of hedge fund assets will exceed $1 trillion. Hedge fund assets are growing faster than mutual fund assets and already equal just over one fifth of the assets of mutual funds that invest in equity securities.
However, more than just the recent boom in hedge fund activity, it is the number of fraud enforcement cases that is the driving force behind the registration requirements. In the last five years, the number of cases brought by the SEC against hedge fund advisors represented over 10% of its cases against investment advisors during the same period. The SEC also states that because hedge funds themselves are not registered, no governmental agency has any reliable data on even the number of hedge funds or the amount of their assets. By requiring the registration of hedge fund advisors, the SEC can begin to collect solid data on this industry.
So what does this all mean? It means that if your firm is an advisor to a hedge fund and not currently registered or cannot claim an exemption to registration, it will need to complete the Form ADV, implement written compliance controls, create a code of ethics, designate a chief compliance officer, and follow all of the other rules and regulations under the Investment Advisers Act of 1940.
The Act does exempt an advisor from registration if (1) it had less than 15 clients during the previous 12 months, (2) does not hold itself out to the public, and (3) is not an advisor to any registered investment company. Therefore, you may be asking, "Does my firm need to be registered since it is only an advisor to one hedge fund and does not hold itself out to the public?" In anticipation of that situation, the SEC specifically requires advisors to "look through" the hedge fund and include all investors within the fund when counting clients. For example, an advisor cannot evade registration by claiming that the limited partnership set up to run the hedge fund equals just one client. You need to "look through" the limited partnership and count the actual investors as your advisory clients. If that number is greater than 14 and your assets under management is greater than $25 million, your firm will need to register with the SEC. Firms will assets under management less than $25 million are required to register at the state level.
We suggest advisors to hedge funds begin implementing procedures to comply with the new rules now as opposed to waiting until the last minute. While the SEC can take up to 45 days to approve a registration, some firms have been approved in as little as two weeks. Keep in mind that once you are approved, you need to be in full compliance with the Investment Advisers Act of 1940. Therefore, filing the Form ADV should be the last step you take. Our recommendation is that you submit your Form ADV by no later than early December 2005.
If you need assistance with meeting these new requirements, please do not hesitate to give RIA Compliance Consultants a call today.
Labels: Hedge Funds
posted by bhill at 5:01 PM
SEC & DOL Provide Plan Fiduciaries with Questions for Pension Consultants
If your firm serves as a pension plan consultant, then you should be prepared to answer the questions recently offered by the SEC and Dept. of Labor (DOL) to plan fiduciaries.
As explained by the SEC, investment advisors that provide consulting services to pension plans have a fiduciary duty to offer "disinterested" advice and fully disclose any material conflicts. Last month the SEC released a report noting that based on the results of a sweep of pension consultants, there are serious concerns that some investment advisors are not appropriately disclosing potential conflicts, which may effect their objectivity.
With this in mind, the SEC and DOL are encouraging better disclosure of the conflicts within the pension consulting business. As we mentioned earlier, every investment advisor working with pensions should engage in a thorough review of its practices and disclosures in order to ensure that they are in compliance with the Investment Adviser Act of 1940 and Employee Retirement Income Security Act (ERISA).
As explained by the SEC, investment advisors that provide consulting services to pension plans have a fiduciary duty to offer "disinterested" advice and fully disclose any material conflicts. Last month the SEC released a report noting that based on the results of a sweep of pension consultants, there are serious concerns that some investment advisors are not appropriately disclosing potential conflicts, which may effect their objectivity.
With this in mind, the SEC and DOL are encouraging better disclosure of the conflicts within the pension consulting business. As we mentioned earlier, every investment advisor working with pensions should engage in a thorough review of its practices and disclosures in order to ensure that they are in compliance with the Investment Adviser Act of 1940 and Employee Retirement Income Security Act (ERISA).
Labels: Pensions
posted by bhill at 7:03 PM
Has Your Firm Completed Its Required Review of Compliance Policies & Procedures?
Has your registered investment advisor firm implemented written compliance procedures? Has your Chief Compliance Officer signed off on those procedures? Have the procedures been reviewed and updated since October 5, 2004, the date they were required to be in effect? These are all questions that the SEC will be asking during an examination.
Under Rule 206(4)-7 of the Investment Advisers Act, all SEC registered advisor firms are required to review their compliance and supervisory policies and procedures at least annually. In fact, the Rule states it is unlawful to conduct advisory business unless (1) the firm has established written compliance programs, (2) annually reviews the programs, and (3) has designated a CCO.
Investment advisory firms can conduct internal reviews on their own or hire outside experts to audit their procedures. In either case, an official review needs to be done at least once a year. The review must address the adequacy of the firm's policies and procedures, and whether these policies and procedures are being effectively implemented. In other words, are the policies and procedures reasonably likely to prevent a violation of SEC rules? Or, is your firm's policy/procedure actually being followed by the investment advisory rep or supervisory staff?
We suggest continuous monitoring of a firm's compliance and supervisory policies/procedures and updating as needed. A best practice is for the firm to establish in advance a schedule of different areas that will receive review each month or quarter.
Finally, the SEC has also added the documentation of the reviews to the Books and Records requirements for investment advisors. Therefore, it is imperative that your firm keep the documentation of your reviews for the required 5 year time frame.
If you have questions about your firm's compliance policies and procedures, RIA Compliance Consultants can help. Please give us a call at your convenience.
Under Rule 206(4)-7 of the Investment Advisers Act, all SEC registered advisor firms are required to review their compliance and supervisory policies and procedures at least annually. In fact, the Rule states it is unlawful to conduct advisory business unless (1) the firm has established written compliance programs, (2) annually reviews the programs, and (3) has designated a CCO.
Investment advisory firms can conduct internal reviews on their own or hire outside experts to audit their procedures. In either case, an official review needs to be done at least once a year. The review must address the adequacy of the firm's policies and procedures, and whether these policies and procedures are being effectively implemented. In other words, are the policies and procedures reasonably likely to prevent a violation of SEC rules? Or, is your firm's policy/procedure actually being followed by the investment advisory rep or supervisory staff?
We suggest continuous monitoring of a firm's compliance and supervisory policies/procedures and updating as needed. A best practice is for the firm to establish in advance a schedule of different areas that will receive review each month or quarter.
Finally, the SEC has also added the documentation of the reviews to the Books and Records requirements for investment advisors. Therefore, it is imperative that your firm keep the documentation of your reviews for the required 5 year time frame.
If you have questions about your firm's compliance policies and procedures, RIA Compliance Consultants can help. Please give us a call at your convenience.
Labels: Compliance Program
posted by bhill at 4:15 PM
