SEC Extends Certain Provisions of Broker-Dealer Exemption Rule
Earlier this month, the SEC announced that it is extending the compliance date for certain provisions under the Certain Broker-Dealers Deemed Not to be Investment Advisers rule. Under the controversial rule, the SEC is allowing broker-dealers to continue to provide fee-based brokerage accounts without registering as an advisor. However, the SEC did rule that broker-dealers cannot use discretion in the management of fee-based accounts. In addition, financial planning services are no longer considered solely incidental to providing brokerage services. In other words, if you are a broker-dealer or registered representative of a broker-dealer and manage accounts on a discretionary basis; hold yourself out as a financial planner or as providing financial planning services; deliver financial plans to clients or represent financial planning services in any way; you need to cease such activity by January 31, 2006, or register as an advisor. Originally, broker-dealers had to be in compliance with these provisions by October 24, 2005.
The change in compliance dates was made at the request of several industry trade organizations. By extending the compliance dates, the SEC is allowing an additional three months for broker-dealers and registered representatives of broker-dealers to register as investment advisors and investment advisor representatives. Broker-dealers that intend to continue providing discretionary and/or financial planning services will need to complete and file the Form ADV, establish written compliance procedures, register with either the SEC or state regulators, and come into full compliance with the advisor rules and regulations. All of these steps must be taken by January 31, 2006.
The change in compliance dates was made at the request of several industry trade organizations. By extending the compliance dates, the SEC is allowing an additional three months for broker-dealers and registered representatives of broker-dealers to register as investment advisors and investment advisor representatives. Broker-dealers that intend to continue providing discretionary and/or financial planning services will need to complete and file the Form ADV, establish written compliance procedures, register with either the SEC or state regulators, and come into full compliance with the advisor rules and regulations. All of these steps must be taken by January 31, 2006.
Labels: SEC
posted by bhill at 11:20 PM
SEC Sets National CCO Outreach Seminar for November
According to a September 26 press release, the first CCOutreach Program National Seminar will take place on November 8, 2005. The seminar is open on a first come, first serve basis and all Chief Compliance Officers of mutual funds and investment advisors are welcome to attend. However, the one day event is limited to the first 500 individuals that register with CCOs.
If you are the CCO for your advisor firm, this could be a great opportunity to interact with other CCOs from around the country and get questions answered directly from the SEC staff. In light of the increased emphasis on advisor compliance programs and the increasing mountain of regulations, this program should help bridge the gap between the SEC and the industry.
If you are the CCO for your advisor firm, this could be a great opportunity to interact with other CCOs from around the country and get questions answered directly from the SEC staff. In light of the increased emphasis on advisor compliance programs and the increasing mountain of regulations, this program should help bridge the gap between the SEC and the industry.
Labels: SEC
posted by bhill at 11:13 PM
First Internal Audit
Has your investment advisor firm completed its first annual review or internal audit of its compliance program?
In February 2004, the SEC adopted Rule 206(4)-7 requiring all investment advisor firms to design and implement written compliance policies and procedures. The compliance date was October 5, 2004. Additionally, this rule requires a documented annual audit of the firm's compliance program and any necessary updates and revisions. The first review must be performed within 18 months of when the firm implemented its compliance program as described above. In other words, the first review must be performed at the latest by April 5, 2006 (depending upon your firm's implementation date of its policies and procedures).
If you would like RIA Compliance Consultants to conduct such an examination of your firm's policies and procedures, please give us a call.
In February 2004, the SEC adopted Rule 206(4)-7 requiring all investment advisor firms to design and implement written compliance policies and procedures. The compliance date was October 5, 2004. Additionally, this rule requires a documented annual audit of the firm's compliance program and any necessary updates and revisions. The first review must be performed within 18 months of when the firm implemented its compliance program as described above. In other words, the first review must be performed at the latest by April 5, 2006 (depending upon your firm's implementation date of its policies and procedures).
If you would like RIA Compliance Consultants to conduct such an examination of your firm's policies and procedures, please give us a call.
Labels: Compliance Program
posted by bhill at 6:22 PM
Custody Requirements for Advisors to Hedge Funds
If you are an advisor to a private fund (i.e. hedge fund or pooled investment vehicle) do you know if you are deemed to have custody? If so, is your Form ADV Part I completed correctly?
According to SEC Rule 206(4)-2(c)(1)(iii), the definition of custody includes an investment advisor with “any capacity (such as a general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.” In other words, if your investment advisor firm is the general partner (or similar status) of a hedge fund that it also manages, the advisor firm is deemed to have custody.
Investment advisor firms that fall under the definition of custody must meet a number of additional requirements. Under SEC Rule 206(4)-2, “it is a fraudulent, deceptive, or manipulative act, practice or course of business . . . for you to have custody of client funds or securities unless" the following are satisfied:
1. A qualified custodian maintains those funds and securities in a separate account for each client or in accounts that contain your clients’ funds and securities, under your name as agent or trustee for the clients;
2. You notify your clients in writing of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained, when the account is opened and when any changes to this information occur;
3. You verify the delivery and accuracy of account statements prepared by the qualified custodian, or, if you send account statements to clients, an independent public accountant must conduct a surprise audit of those funds and securities at least once each calendar year (please keep in mind that account statements must be sent to each limited partner, member or other beneficial owner); and
4. A client may designate an independent representative to receive, on her behalf, notices and account statements.
The Rule 206(4)-2 does allow for some exceptions of “certain privately offered securities”. According to the Rule, advisors “are not required to comply with this section with respect to securities that are:
A. acquired from the issuer in a transaction or chain of transaction not involving any public offering;
B. uncertificated, and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and
C. transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.
While these exceptions do provide some relief for advisors to hedge funds, they are only available if the advisor is audited at least annually and then distributes the audit findings to all limited partners, members, or beneficial owners. The audit findings must be distributed within 120 days (or 180 days in the case of an advisor to a fund of funds) of the advisor’s fiscal year end. In addition, an advisor may satisfy its obligation to deliver account information (as described under number three above) to investors by distributing the audited financial statements to investors.
Finally, advisors need to ensure their ADV Part I is completed correctly. Item 9.A. and 9.B. require advisors to disclose if they maintain custody of cash or bank accounts and securities.
For many newly registered advisor firms, the custody rules seem intimidating and overwhelming. However, the SEC views these rules as extremely important and are sure to be reviewed during a regulatory examination. If you have questions on how to meet these requirements or would like us to conduct a mock exam, please give us a call today.
According to SEC Rule 206(4)-2(c)(1)(iii), the definition of custody includes an investment advisor with “any capacity (such as a general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.” In other words, if your investment advisor firm is the general partner (or similar status) of a hedge fund that it also manages, the advisor firm is deemed to have custody.
Investment advisor firms that fall under the definition of custody must meet a number of additional requirements. Under SEC Rule 206(4)-2, “it is a fraudulent, deceptive, or manipulative act, practice or course of business . . . for you to have custody of client funds or securities unless" the following are satisfied:
1. A qualified custodian maintains those funds and securities in a separate account for each client or in accounts that contain your clients’ funds and securities, under your name as agent or trustee for the clients;
2. You notify your clients in writing of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained, when the account is opened and when any changes to this information occur;
3. You verify the delivery and accuracy of account statements prepared by the qualified custodian, or, if you send account statements to clients, an independent public accountant must conduct a surprise audit of those funds and securities at least once each calendar year (please keep in mind that account statements must be sent to each limited partner, member or other beneficial owner); and
4. A client may designate an independent representative to receive, on her behalf, notices and account statements.
The Rule 206(4)-2 does allow for some exceptions of “certain privately offered securities”. According to the Rule, advisors “are not required to comply with this section with respect to securities that are:
A. acquired from the issuer in a transaction or chain of transaction not involving any public offering;
B. uncertificated, and ownership thereof is recorded only on books of the issuer or its transfer agent in the name of the client; and
C. transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.
While these exceptions do provide some relief for advisors to hedge funds, they are only available if the advisor is audited at least annually and then distributes the audit findings to all limited partners, members, or beneficial owners. The audit findings must be distributed within 120 days (or 180 days in the case of an advisor to a fund of funds) of the advisor’s fiscal year end. In addition, an advisor may satisfy its obligation to deliver account information (as described under number three above) to investors by distributing the audited financial statements to investors.
Finally, advisors need to ensure their ADV Part I is completed correctly. Item 9.A. and 9.B. require advisors to disclose if they maintain custody of cash or bank accounts and securities.
For many newly registered advisor firms, the custody rules seem intimidating and overwhelming. However, the SEC views these rules as extremely important and are sure to be reviewed during a regulatory examination. If you have questions on how to meet these requirements or would like us to conduct a mock exam, please give us a call today.
Labels: Custody, Hedge Funds
posted by bhill at 7:15 PM
IARD Renewals for 2006
Now is the time to start planning for the 2006 renewal season. The NASD recently released its 2006 IARD Annual Renewal Program Calendar. While the 2006 Renewal Bulletin and full instructions have not been released yet, investment advisor firms should refer to the calendar now in order to begin planning for the upcoming renewals. According to the calendar, Preliminary Renewal Statements will be available on November 21 and payment must be submitted no later than December 12. The full amount of the Preliminary Renewal Statement must be paid at that time. Firm and representative licensing changes that take place after November 21 and before the system shutdown date of December 21 will be reflected on the Final Renewal Statement.
We suggest you use the next two months to ensure your firm is properly registered or notice filed in all states. Make sure your client lists are accurate. Has a client moved to a state in which your firm needs to be registered or notice filed? Likewise, is your firm registered or notice filed in states where you no longer have clients? Don’t forget to make sure your advisor representatives are properly registered in all states that require registration. Stay tuned to RIA Compliance Consultants for more information on the 2006 renewals season as it becomes available.
We suggest you use the next two months to ensure your firm is properly registered or notice filed in all states. Make sure your client lists are accurate. Has a client moved to a state in which your firm needs to be registered or notice filed? Likewise, is your firm registered or notice filed in states where you no longer have clients? Don’t forget to make sure your advisor representatives are properly registered in all states that require registration. Stay tuned to RIA Compliance Consultants for more information on the 2006 renewals season as it becomes available.
Labels: IARD
posted by bhill at 6:58 PM
Client Referral Sources: Don’t Forget About the Regulations
A recent article in Investment Advisor magazine discussed the benefit of using clients as referral sources and the growing practice of using other professionals, such as CPAs and attorneys, to help land clients as well. This article brings to mind the importance of understanding SEC Rule 206(4)-3. (A state registered investment advisor should refer to the state rule on the subject.)
While the SEC does not generally have an issue with using employees or outside sources for client referrals, the Commission has clearly taken the position that a line is crossed upon payment for such referrals. When fees are paid by an SEC registered advisor for client referrals, Rule 206(4)-3 requires a formal agreement between the two parties and disclosures to be provided to the client. The referring party must provide a copy of the advisor firm’s disclosure brochure and a solicitor’s disclosure statement, which must indicate the amount received for the referral. In addition, due diligence must be performed on the referring party to ensure the person or company has not violated any SEC rules as spelled out under Rule 206(4)-3 or has been disqualified from advisor registration.
In addition to the Rule 206(4)-3, SEC registered firms must give attention to state rules as well. The majority of state regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state; all prior to soliciting the first client for a fee. Some states even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state.
Finally, it's important to consult with the state accounting board or bar association to determine whether a solicitor fee is permissible when working with accountants or lawyers. Special precautions need to be taken for referral arrangements involving ERISA covered accounts or plan fiduciaries. Please see our earlier postings.
If you have specific questions about any solicitor/referral arrangements you have or would like to discuss the rules in more detail, please give us a call.
While the SEC does not generally have an issue with using employees or outside sources for client referrals, the Commission has clearly taken the position that a line is crossed upon payment for such referrals. When fees are paid by an SEC registered advisor for client referrals, Rule 206(4)-3 requires a formal agreement between the two parties and disclosures to be provided to the client. The referring party must provide a copy of the advisor firm’s disclosure brochure and a solicitor’s disclosure statement, which must indicate the amount received for the referral. In addition, due diligence must be performed on the referring party to ensure the person or company has not violated any SEC rules as spelled out under Rule 206(4)-3 or has been disqualified from advisor registration.
In addition to the Rule 206(4)-3, SEC registered firms must give attention to state rules as well. The majority of state regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state; all prior to soliciting the first client for a fee. Some states even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state.
Finally, it's important to consult with the state accounting board or bar association to determine whether a solicitor fee is permissible when working with accountants or lawyers. Special precautions need to be taken for referral arrangements involving ERISA covered accounts or plan fiduciaries. Please see our earlier postings.
If you have specific questions about any solicitor/referral arrangements you have or would like to discuss the rules in more detail, please give us a call.
Labels: Solicitors
posted by bhill at 12:25 PM
