Disciplinary History Disclosures
The SEC and state regulators require registered investment advisor firms to disclose disciplinary history on the Form ADV. Specifically Item 11 on the Form ADV Part I requires certain criminal, regulatory, and civil proceedings to be disclosed. SEC advisor firms may limit their disclosure of any event to ten years following the date of the event's resolution. Depending on the question, state registered firms must disclose events that took place longer than ten years ago. Item 11 not only requires the disclosure of settled events, but it also requires events that are currently on-going to be disclosed. State registered firms are held to an even higher standard of disclosure as they are required to disclose certain financial (such as judgments and liens), arbitration and additional civil proceedings.
In some cases, disclosure of certain financial and disciplinary history may also need to be provided directly to advisory clients. The parameters of these disclosures are set out under Rule 206(4)-4 of the Investment Advisers Act of 1940. Basically, the intent of the SEC is to require advisors to disclose financial and disciplinary history that may materially affect a client's decision to contract with the advisor. In lieu of providing a stand alone disclosure document, most advisor firms choose to disclose these events in the firm's Disclosure Brochure or Form ADV Part II.
Many registered investment advisor firms overlook the fact that not only does the firm's financial and disciplinary history need to be disclosed, but so does the disciplinary history of all advisory affiliates. According to the SEC advisory affiliates include officers, partners, directors, and employees (not including clerical, administrative or support employees). The definition also includes other persons/firms that control or are controlled by the advisor firm.
Disclosure events are considered material updates and therefore the Form ADV must be updated promptly (usually within 30 days of the event). Does your registered investment advisor firm's ADV accurately report all disclosure events? Do you have proper procedures in place to ensure the ADV is updated promptly? If you have any questions on what events should be reported on the ADV, please give us a call.
In some cases, disclosure of certain financial and disciplinary history may also need to be provided directly to advisory clients. The parameters of these disclosures are set out under Rule 206(4)-4 of the Investment Advisers Act of 1940. Basically, the intent of the SEC is to require advisors to disclose financial and disciplinary history that may materially affect a client's decision to contract with the advisor. In lieu of providing a stand alone disclosure document, most advisor firms choose to disclose these events in the firm's Disclosure Brochure or Form ADV Part II.
Many registered investment advisor firms overlook the fact that not only does the firm's financial and disciplinary history need to be disclosed, but so does the disciplinary history of all advisory affiliates. According to the SEC advisory affiliates include officers, partners, directors, and employees (not including clerical, administrative or support employees). The definition also includes other persons/firms that control or are controlled by the advisor firm.
Disclosure events are considered material updates and therefore the Form ADV must be updated promptly (usually within 30 days of the event). Does your registered investment advisor firm's ADV accurately report all disclosure events? Do you have proper procedures in place to ensure the ADV is updated promptly? If you have any questions on what events should be reported on the ADV, please give us a call.
Labels: Form ADV
posted by bhill at 9:03 AM
Written Policies for Block Trades
Does your firm implement transactions on an aggregate (a/k/a bunching or block trade) basis? If so, have you established written policies and procedures laying out your firm's aggregate trading activities? Do you disclose those procedures in your firm's Form ADV or disclosure brochure?
The SEC has provided guidance for this type of activity and is mainly concerned that allocations are done in a fair and equitable manner. Basically, an advisor firm needs have procedures that ensure no client accounts are systematically disadvantaged.
In 1995, the SEC provided a no-action letter to SMC Capital, Inc. In its letter, the SEC provided the following guidance on how to implement and execute orders done on an aggregate basis.
We strongly encourage all advisor firms that aggregate client orders to follow these minimum guidelines. If you have any questions on what constitutes aggregating client orders or if your written policies and procedures are accurate, please give us a call.
The SEC has provided guidance for this type of activity and is mainly concerned that allocations are done in a fair and equitable manner. Basically, an advisor firm needs have procedures that ensure no client accounts are systematically disadvantaged.
In 1995, the SEC provided a no-action letter to SMC Capital, Inc. In its letter, the SEC provided the following guidance on how to implement and execute orders done on an aggregate basis.
Clients must receive equal treatment.
Each client participating in an aggregated order must receive the average share price for all of the advisor's transactions in that security on any given day, with transaction costs shared pro rata based on participation.
The firm's procedures need to be spelled out in the compliance and supervisory procedures manual. The policies also need to be disclosed in the Form ADV, provided to each affected client, and to the broker/dealers through which the orders are placed.
Properly completed trade ticket for the order must be prepared.
Partially filled orders must be filled pro rata based on the written aggregation statement.
Advisor must not receive additional compensation due to an aggregated order.
The firm's books and records must reflect securities held by, or bought or sold for, participating client accounts.
If an order is filled in a manner different from the written policies, all clients must receive equal treatment and the written rationale for the departure must be approved by the CCO.
Client funds and securities must be deposited with custodians and will not be held collectively any longer than is necessary to settle the transaction.
We strongly encourage all advisor firms that aggregate client orders to follow these minimum guidelines. If you have any questions on what constitutes aggregating client orders or if your written policies and procedures are accurate, please give us a call.
Labels: Compliance Program
posted by bhill at 6:24 PM
Reportable Securities under the Codes of Ethics Rule
In an earlier blog posting, we discussed the fact that investment advisor firms must determine their access persons and ensure appropriate procedures are implemented to review all access persons' household accounts. In their efforts to meet this requirement, many advisor firms have been asking exactly which types of securities holdings and transactions need to be reviewed.
In their final rule release, the SEC provided specific requirements under the Codes of Ethics rule. While an advisor firm may require access persons to report all securities, the SEC did provide an exception for five types of securities. According to the rule, the following types of securities are not required to be reported by access persons:
a. Transactions and holdings in direct obligations of the Government of the United States.
b. Money market instruments - bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
c. Shares of money market funds.
d. Transactions and holdings in shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund. This exception includes
e. Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds. (This exception is designed to also cover the sub-accounts organized as unit investment trusts of a seperate account of a variable insurance contract.)
It is important to note that the rule does requires access persons to report shares of mutual funds advised by the advisor firm or one of its affiliates. The SEC obviously believes that this is necessary so advisor firms and the SEC, during routine examinations, can detect abusive trading by employees who have access to information about the mutual fund's portfolio.
Does your firm have sufficient procedures in place to identify improper trades or patterns of trading by access persons? Is your CCO reviewing the personal securities transaction reports or have you designated another person to conduct the review? RIA Compliance Consultants is available to answer your questions on the review and supervision of personal accounts.
In their final rule release, the SEC provided specific requirements under the Codes of Ethics rule. While an advisor firm may require access persons to report all securities, the SEC did provide an exception for five types of securities. According to the rule, the following types of securities are not required to be reported by access persons:
a. Transactions and holdings in direct obligations of the Government of the United States.
b. Money market instruments - bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
c. Shares of money market funds.
d. Transactions and holdings in shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund. This exception includes
e. Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds. (This exception is designed to also cover the sub-accounts organized as unit investment trusts of a seperate account of a variable insurance contract.)
It is important to note that the rule does requires access persons to report shares of mutual funds advised by the advisor firm or one of its affiliates. The SEC obviously believes that this is necessary so advisor firms and the SEC, during routine examinations, can detect abusive trading by employees who have access to information about the mutual fund's portfolio.
Does your firm have sufficient procedures in place to identify improper trades or patterns of trading by access persons? Is your CCO reviewing the personal securities transaction reports or have you designated another person to conduct the review? RIA Compliance Consultants is available to answer your questions on the review and supervision of personal accounts.
Labels: Code of Ethics, PST
posted by bhill at 8:33 AM
When Should My Firm Update Its Form ADV?
Regardless of a firm's registration (SEC or state), the Form ADV needs to be updated, at a minimum, on an annual basis and whenever a material change to the document occurs. The annual amendment to the Form ADV Part I must be filed within 90 days of the firm's fiscal year end through the IARD system. The annual amendment is used to update items such as assets under management, number of clients, number of accounts, and number of employees. These items must be updated with information current as of a firm's fiscal year end. At this time, the ADV Part II is not filed through the IARD system, but advisors need to review and update it as part of the annual amendment as well.
While the annual amendment is pretty straight forward, many advisor firms seem to forget about the "material change" requirement and fail to amend their documents in a timely fashion. Material events must be filed promptly with regulators, which, for the SEC and most states, means within 30 days. The following are some of the items on the ADV Part I that, when change, are considered material events: the firm's name; firm's legal organization; and disclosure events. Changes to the ADV Part II that are considered material include revisions to advisory programs, fees and structure. The addition or removal of a director, officer, or investment advisor representative and any changes to the firm's or its affiliates' outside business activities would also be considered a material change.
Under SEC Rule 206(4)-4, an investment advisor must make prompt disclosure to clients when an advisor's financial condition is likely to impair its ability to meet contractual commitments to clients or when there's a legal or disciplinary event material to the evaluation of an advisor's integrity or ability to meet contractual commitments to clients. This disclosure is in addition to amending ADV Part I and usually is in the form of an updated ADV Part II delivered promptly to new and existing clients.
Does your firm have good internal procedures in place to ensure material changes are made within 30 days? Due to the complexity of these questions and the need to fully consider your firm's specific circumstances, we highly recommend that you consult with an expert when confronted with a question about whether and how to update the Form ADV.
While the annual amendment is pretty straight forward, many advisor firms seem to forget about the "material change" requirement and fail to amend their documents in a timely fashion. Material events must be filed promptly with regulators, which, for the SEC and most states, means within 30 days. The following are some of the items on the ADV Part I that, when change, are considered material events: the firm's name; firm's legal organization; and disclosure events. Changes to the ADV Part II that are considered material include revisions to advisory programs, fees and structure. The addition or removal of a director, officer, or investment advisor representative and any changes to the firm's or its affiliates' outside business activities would also be considered a material change.
Under SEC Rule 206(4)-4, an investment advisor must make prompt disclosure to clients when an advisor's financial condition is likely to impair its ability to meet contractual commitments to clients or when there's a legal or disciplinary event material to the evaluation of an advisor's integrity or ability to meet contractual commitments to clients. This disclosure is in addition to amending ADV Part I and usually is in the form of an updated ADV Part II delivered promptly to new and existing clients.
Does your firm have good internal procedures in place to ensure material changes are made within 30 days? Due to the complexity of these questions and the need to fully consider your firm's specific circumstances, we highly recommend that you consult with an expert when confronted with a question about whether and how to update the Form ADV.
Labels: Form ADV
posted by bhill at 10:23 PM
Does My Firm Need to Submit the Form ADV Part II to Regulators?
A common question asked by many advisors during the registration process is whether the firm needs to file the Form ADV Part II with the appropriate regulator.
As you know, the IARD system went live in early 2001. Initial plans were that the entire Form ADV would be filed online through the IARD system; however, to date, it is capable of only accepting the Part I. The Part II is expected to go online at some point in the future.
With this in mind, the SEC currently requires advisors under its jurisdiction to keep the ADV Part II current and have a master copy as part of its books and records. The Part II does not need to be filed with the SEC, but firms must be prepared to provide it to the SEC upon request. Most state regulators have followed the SEC's lead and do not require notice filed SEC firms to submit the Part II unless requested.
When it comes to state registered firms, the rules are different. All states require that the Part II and client agreements be filed during the registration process and any time an amendment is made. In fact, the State of California now requires an updated Part II to be accompanied with a State Registered Investment Advisor Execution Page. In addition, some states require additional documents to be filed as well. New Hampshire requires state-registered firms to submit a copy of their compliance and procedures manual during the registration process.
If your firm has a question about where to send advisory documents or exactly which documents must be filed with your state, please let us know.
As you know, the IARD system went live in early 2001. Initial plans were that the entire Form ADV would be filed online through the IARD system; however, to date, it is capable of only accepting the Part I. The Part II is expected to go online at some point in the future.
With this in mind, the SEC currently requires advisors under its jurisdiction to keep the ADV Part II current and have a master copy as part of its books and records. The Part II does not need to be filed with the SEC, but firms must be prepared to provide it to the SEC upon request. Most state regulators have followed the SEC's lead and do not require notice filed SEC firms to submit the Part II unless requested.
When it comes to state registered firms, the rules are different. All states require that the Part II and client agreements be filed during the registration process and any time an amendment is made. In fact, the State of California now requires an updated Part II to be accompanied with a State Registered Investment Advisor Execution Page. In addition, some states require additional documents to be filed as well. New Hampshire requires state-registered firms to submit a copy of their compliance and procedures manual during the registration process.
If your firm has a question about where to send advisory documents or exactly which documents must be filed with your state, please let us know.
posted by bhill at 9:31 PM
Create a Culture of Compliance Through On-Going Training and Education
Regulators have been emphasizing the need for investment advisors to develop and maintain a culture of compliance. Of course, one of the best ways to implement a culture of compliance is for the firm to establish adequate training and continuing education programs.
We recommend that advisor firms hold some form of compliance training or meetings on a monthly basis. These could come in the form of department meetings, on-line continuing education programs, or company-wide teleconferences or web-casts. Each session should be documented and a list kept of those in attendance or those that completed the training.
In light of the SEC's Code of Ethics rule, a special emphasis needs be given to training employees and advisor representatives on the firm's Code of Ethics, which would include the firm's insider trading and personal securities transactions policies. Further topics for compliance meetings and training could cover other policies and procedures of the firm, recent regulatory changes and current compliance hot topics.
Another important requirement is to ensure all employees and advisor representatives read and acknowledge their understanding of the firm's compliance and supervisory procedures manual(s). This should be done on at least an annual basis. In addition, any updates made throughout the year should be sent to every employee and advisory representative upon implementation.
Does your firm have a good continuing education program? Do you provide on-going compliance training? Maybe you do and just need a little guidance on what to cover next. Whatever the case may be, give us a call. We can help you identify and prioritize the issues that your advisor representatives need to know so your firm can achieve a culture of compliance.
We recommend that advisor firms hold some form of compliance training or meetings on a monthly basis. These could come in the form of department meetings, on-line continuing education programs, or company-wide teleconferences or web-casts. Each session should be documented and a list kept of those in attendance or those that completed the training.
In light of the SEC's Code of Ethics rule, a special emphasis needs be given to training employees and advisor representatives on the firm's Code of Ethics, which would include the firm's insider trading and personal securities transactions policies. Further topics for compliance meetings and training could cover other policies and procedures of the firm, recent regulatory changes and current compliance hot topics.
Another important requirement is to ensure all employees and advisor representatives read and acknowledge their understanding of the firm's compliance and supervisory procedures manual(s). This should be done on at least an annual basis. In addition, any updates made throughout the year should be sent to every employee and advisory representative upon implementation.
Does your firm have a good continuing education program? Do you provide on-going compliance training? Maybe you do and just need a little guidance on what to cover next. Whatever the case may be, give us a call. We can help you identify and prioritize the issues that your advisor representatives need to know so your firm can achieve a culture of compliance.
Labels: Code of Ethics, Compliance Program
posted by bhill at 10:12 PM
Is Your Firm Supervising Charges for Financial Plans?
The New Jersey Attorney General just announced a $5 million settlement to be paid by an investment advisor/broker-dealer for failing to supervise its representative.
The underlying wrongdoing apparently involved a rep forging client signatures on financial planning agreements and then mutual fund redemption forms in order to pay for fictional financial plans.
According to the consent order, the victims included an apartment manager (in her 60s earning $44,000 per year with $25,000 of assets at the advisory firm) that paid $11,000 for 6 financial plans during a two year time period. On the other end of the spectrum, there was a recent college graduate earning $24,000 annually with $35,000 of assets held at the advisory firm that was charged $8,000 for 4 financial plans in a two year period.
This unfortunate incident confirms again the need for invstment advisor firms to adopt and enforce thorough supervisory procedures related to preparation of financial plans and charging of financial planning fees.
The underlying wrongdoing apparently involved a rep forging client signatures on financial planning agreements and then mutual fund redemption forms in order to pay for fictional financial plans.
According to the consent order, the victims included an apartment manager (in her 60s earning $44,000 per year with $25,000 of assets at the advisory firm) that paid $11,000 for 6 financial plans during a two year time period. On the other end of the spectrum, there was a recent college graduate earning $24,000 annually with $35,000 of assets held at the advisory firm that was charged $8,000 for 4 financial plans in a two year period.
This unfortunate incident confirms again the need for invstment advisor firms to adopt and enforce thorough supervisory procedures related to preparation of financial plans and charging of financial planning fees.
Labels: Enforcement
posted by bhill at 3:14 PM
Does Your Investment Advisory Firm Need to Register with the SEC?
There are several criteria that qualify your firm for registration with the SEC as an investment advisor. For example, if your firm is registered with 30 or more states, you should rely on the multi-state rule and register with the SEC. If you are located in Wyoming, your firm must register with the SEC because the State of Wyoming does not regulate advisors. Investment advisors to investment companies must register with the SEC as well. To see a full listing of the SEC registration criteria, simply refer to your Form ADV Part 1. Item 2 details the different SEC registration criteria.
(Regardless of whether your firm is required to be registered with the SEC, all individuals serving as investment advisor representatives still must be registered with the applicable state regulators.)
By far, the most common determination for SEC registration is an advisor firm's assets under management (AUM). Rule 203A-1 of the Investment Advisors Act of 1940 states that all advisor firms with AUM over $30 million must be registered with the SEC. Firms with AUM below $25 million must register directly with state regulators (excluding Wyoming, of course). Regulators do provide a "buffer zone" so advisor firms can choose between the two sets of regulatory bodies when their AUM falls between $25 and $30 million.
Calculating your advisor firm's AUM can be complicated. While the ADV Part 1 does give instructions on how to calculate AUM, it can still be confusing. This is especially true when a firm has relationships with sub-advisors and/or third party money managers.
If your firm has questions on how to calculate its AUM or other questions about registering with the SEC or a particular state, please contact us. We can provide guidance on AUM calculations and help your firm meet the supervisory requirements expected of all SEC registered investment advisors.
(Regardless of whether your firm is required to be registered with the SEC, all individuals serving as investment advisor representatives still must be registered with the applicable state regulators.)
By far, the most common determination for SEC registration is an advisor firm's assets under management (AUM). Rule 203A-1 of the Investment Advisors Act of 1940 states that all advisor firms with AUM over $30 million must be registered with the SEC. Firms with AUM below $25 million must register directly with state regulators (excluding Wyoming, of course). Regulators do provide a "buffer zone" so advisor firms can choose between the two sets of regulatory bodies when their AUM falls between $25 and $30 million.
Calculating your advisor firm's AUM can be complicated. While the ADV Part 1 does give instructions on how to calculate AUM, it can still be confusing. This is especially true when a firm has relationships with sub-advisors and/or third party money managers.
If your firm has questions on how to calculate its AUM or other questions about registering with the SEC or a particular state, please contact us. We can provide guidance on AUM calculations and help your firm meet the supervisory requirements expected of all SEC registered investment advisors.
Labels: Registration
posted by bhill at 8:14 AM
