Has Your Firm Safeguarded Customer Information
The Gramm-Leach-Bliley Act of 1999 and the subsequent Regulation S-P require that certain financial institutions, such as investment advisors, safeguard the privacy of non-public customer information. Under this regulation, financial institutions must provide clients with the opportunity to opt out (or avert) the disclosure of their non-public information to non-affiliated parties other than as required or allowed by law. At this juncture, you are probably familiar with this requirement and already provide a copy of your privacy policy to all new clients upon establishing the client relationship and existing clients on an annual basis.
While your firm may have prepared a written privacy policy, have you designed safeguards within your firm to protect client information? Since the introduction of Regulation S-P, the SEC has emphasized the significance of protecting client information by developing and implementing safeguards to secure client information.
Some of the suggestions that have been provided by regulators include keeping client files in locked rooms or locked cabinets. The files should only be accessible to those individuals within the firm that need the information to perform their jobs. Does your firm shred old documents and files, or are they simply thrown in the waste basket? Measures should be taken to ensure that client information is regularly shredded prior to discarding. Other suggestions include making sure all computers are password protected and screen savers are automatically set to display after inactivity.
Another important component of a privacy policy is conducting tests to ensure its viability. This could include retaining an information technology consultant to try to break through your network's firewall, or testing employee passwords to determine if they can be easily guessed. Ultimately, the key to any good policy is testing the procedures that have been designed around the policy.
If you have any questions concerning the privacy obligations of an investment advisor, please give us a call.
While your firm may have prepared a written privacy policy, have you designed safeguards within your firm to protect client information? Since the introduction of Regulation S-P, the SEC has emphasized the significance of protecting client information by developing and implementing safeguards to secure client information.
Some of the suggestions that have been provided by regulators include keeping client files in locked rooms or locked cabinets. The files should only be accessible to those individuals within the firm that need the information to perform their jobs. Does your firm shred old documents and files, or are they simply thrown in the waste basket? Measures should be taken to ensure that client information is regularly shredded prior to discarding. Other suggestions include making sure all computers are password protected and screen savers are automatically set to display after inactivity.
Another important component of a privacy policy is conducting tests to ensure its viability. This could include retaining an information technology consultant to try to break through your network's firewall, or testing employee passwords to determine if they can be easily guessed. Ultimately, the key to any good policy is testing the procedures that have been designed around the policy.
If you have any questions concerning the privacy obligations of an investment advisor, please give us a call.
Labels: Privacy
posted by bhill at 9:29 PM
The 5 Most Common Investment Advisor Deficiencies in 2005
Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, recently gave a speech at the Investment Adviser Compliance Summit and provided some interesting insights into the current SEC examination process and lessons learned from exams completed in 2005. Based on the approximately 1500 SEC examinations completed last year, these five items were cited as the most common regulatory deficiencies of investment advisors.
1. Lack of Disclosure – This category of deficiencies involved failures to provide proper disclosures within the ADV such as the following: (a) undisclosed conflicts of interest; (b) inaccurate descriptions of a firm's business operations; (c) lack of an explanation that directed brokerage may not result in best execution for the client; and (d) omitted or inaccurate statements regarding the exercise of discretionary authority and custody of client funds and/or securities.
2. Portfolio Management - Issues discovered by the SEC included the failure to implement internal controls intended to ensure investments selected for clients are suitable and meet the client's objectives. Failure to properly document and keep records concerning portfolio management was also frequently cited.
3. Personal Trading by Advisor Employees - The SEC noted that failing to implement a code of ethics is still a major weakness for many advisor firms even though it is required under a specific SEC rule. Investment advisors were also cited for failing to implement procedures to monitor employee personal trading and preventing employees from placing their personal trading interests ahead of the firm's clients.
4. Performance Calculations - Investment advisors must implement procedures designed to calculate and present past investment performance in an accurate and honest fashion. Problems cited by the SEC included overstated performance results, not disclosing how performance results were calculated, using testimonials, and advertising in a misleading manner.
5. Brokerage Arrangements & Execution – Investment advisor firms were cited for not implementing or having inadequate procedures designed to ensure the firm obtains best execution for its clients. Other issues included not disclosing that client money was used to pay referral parties and other goods and services that benefited the firm.
These findings are an excellent roadmap for issues that every investment advisor firm should address in 2006. Please let us know if your firm is interested in retaining RIA Compliance Consultants to conduct a mock regulatory examination or assist your firm with its new annual review obligation.
1. Lack of Disclosure – This category of deficiencies involved failures to provide proper disclosures within the ADV such as the following: (a) undisclosed conflicts of interest; (b) inaccurate descriptions of a firm's business operations; (c) lack of an explanation that directed brokerage may not result in best execution for the client; and (d) omitted or inaccurate statements regarding the exercise of discretionary authority and custody of client funds and/or securities.
2. Portfolio Management - Issues discovered by the SEC included the failure to implement internal controls intended to ensure investments selected for clients are suitable and meet the client's objectives. Failure to properly document and keep records concerning portfolio management was also frequently cited.
3. Personal Trading by Advisor Employees - The SEC noted that failing to implement a code of ethics is still a major weakness for many advisor firms even though it is required under a specific SEC rule. Investment advisors were also cited for failing to implement procedures to monitor employee personal trading and preventing employees from placing their personal trading interests ahead of the firm's clients.
4. Performance Calculations - Investment advisors must implement procedures designed to calculate and present past investment performance in an accurate and honest fashion. Problems cited by the SEC included overstated performance results, not disclosing how performance results were calculated, using testimonials, and advertising in a misleading manner.
5. Brokerage Arrangements & Execution – Investment advisor firms were cited for not implementing or having inadequate procedures designed to ensure the firm obtains best execution for its clients. Other issues included not disclosing that client money was used to pay referral parties and other goods and services that benefited the firm.
These findings are an excellent roadmap for issues that every investment advisor firm should address in 2006. Please let us know if your firm is interested in retaining RIA Compliance Consultants to conduct a mock regulatory examination or assist your firm with its new annual review obligation.
Labels: Regulatory Inspections
posted by bhill at 10:22 AM
Is your Firm Meeting the SEC's Proxy Voting Rule?
Does your firm vote proxies on the behalf of its clients? If so, you need to have a full understanding of the SEC’s rule, Proxy Voting by Investment Advisers, issued in 2003. The days of being able to simply fill out the proxy voting paper work and drop it in the mail are long over. According to the SEC, it is fraudulent under Investment Advisers Act to exercise proxy voting authority without (1) adopting and implementing written policies and procedures that are reasonably designed to ensure that all proxy votes are done in the best interest of the client, (2) describing your firm’s proxy voting policy to clients and providing copies of the policy upon client request, and (3) disclosing to clients how they may obtain information on how the adviser voted their proxies.
What does an advisor firm need to do to ensure compliance with this rule? The first step is to consider the cost/benefit of voting client proxies. It is a significant undertaking for an investment advisor to engage in proxy voting and can be very expensive and time consuming regardless of the size of the firm. Consequently, it’s a responsibility that should be undertaken only if an advisor firm is committed to spending the time and money to do it correctly.
If your firm has determined that it is necessary to vote proxies, the next step is to develop a client- focused approach to voting proxies and then develop written policies and procedures reflecting your firm’s proxy voting practices. A committee should be established to discuss and review each proxy issue and decide as to how the respective proxies should be voted. In order to meet the SEC requirements, many advisor firms have elected to subscribe to a third-party vendor that provides research, analysis and recommendations regarding each vote. A few of the more popular services appear to be Institutional Shareholder Services and PROXY Governance, Inc. You can visit their websites at www.issproxy.com and www.proxygovernance.com. These companies offer research services and ancillary programs for tracking votes, record keeping, and reporting to clients.
An advisor firm must also provide a summary of its proxy voting policy in its Form ADV along with disclosure on how a client can review a copy of the entire policy. It’s recommended that the summary of the policy be included in the firm’s client advisory agreement. The firm needs to document all proxy votes along with the reasoning for those votes. This is important for not only when a client requests to view how their proxies were voted, but also to meet the SEC’s books and records and examination requirements.
After fully understanding the requirements of the proxy voting rule, many investment advisor firms have elected to avoid proxy voting and leave it to their clients. Even in these cases, a firm should have a written policy stating it does not vote client proxies. The policy must be in the firm’s compliance manual, but should also be in the disclosure brochure and client agreement. This is especially true if the firm maintains discretionary authority over client accounts. In fact, the SEC has stated that a firm that maintains discretionary authority with a disclosure brochure that's silent on the proxy voting issue is assumed to vote client proxies.
If you need assistance preparing your firm’s proxy voting policy, RIA Compliance Consultants is available to assist you.
What does an advisor firm need to do to ensure compliance with this rule? The first step is to consider the cost/benefit of voting client proxies. It is a significant undertaking for an investment advisor to engage in proxy voting and can be very expensive and time consuming regardless of the size of the firm. Consequently, it’s a responsibility that should be undertaken only if an advisor firm is committed to spending the time and money to do it correctly.
If your firm has determined that it is necessary to vote proxies, the next step is to develop a client- focused approach to voting proxies and then develop written policies and procedures reflecting your firm’s proxy voting practices. A committee should be established to discuss and review each proxy issue and decide as to how the respective proxies should be voted. In order to meet the SEC requirements, many advisor firms have elected to subscribe to a third-party vendor that provides research, analysis and recommendations regarding each vote. A few of the more popular services appear to be Institutional Shareholder Services and PROXY Governance, Inc. You can visit their websites at www.issproxy.com and www.proxygovernance.com. These companies offer research services and ancillary programs for tracking votes, record keeping, and reporting to clients.
An advisor firm must also provide a summary of its proxy voting policy in its Form ADV along with disclosure on how a client can review a copy of the entire policy. It’s recommended that the summary of the policy be included in the firm’s client advisory agreement. The firm needs to document all proxy votes along with the reasoning for those votes. This is important for not only when a client requests to view how their proxies were voted, but also to meet the SEC’s books and records and examination requirements.
After fully understanding the requirements of the proxy voting rule, many investment advisor firms have elected to avoid proxy voting and leave it to their clients. Even in these cases, a firm should have a written policy stating it does not vote client proxies. The policy must be in the firm’s compliance manual, but should also be in the disclosure brochure and client agreement. This is especially true if the firm maintains discretionary authority over client accounts. In fact, the SEC has stated that a firm that maintains discretionary authority with a disclosure brochure that's silent on the proxy voting issue is assumed to vote client proxies.
If you need assistance preparing your firm’s proxy voting policy, RIA Compliance Consultants is available to assist you.
Labels: Proxy Voting
posted by bhill at 1:39 PM
