Spitzer Alleges Fraud in Lawsuit Against UBS for Fee Based Brokerage Accts.
New York Attorney General Elliot Spitzer announced a filing of a lawsuit against UBS Financial Services, Inc. for allegedly defrauding its customer through its fee-based brokerage program. Spitzer's action alleges that fee-based brokerage accounts are inappropriate for investors who rarely trade securities or hold significant amounts of cash.
Although this lawsuit is focused upon a brokerage account, it raises interesting questions for investment advisors. Will the SEC and state regulators start questioning individuals that are dually licensed under an investment advisor and a broker-dealer whether an asset should have been held in a wrap account versus a commission-based account? If assets within an account are managed under an investment advisory agreement subject to an asset management fee but have few transactions, will the SEC challenge whether the fee is appropriate?
There doesn't appear to be formal guidance with respect to these scenarios. However, it's clear that an investment advisor can only charge a "reasonable" fee. Many commentators have interpreted this to mean that investment advisory fees above 3% of the account value on an annual basis are typically unreasonable (and receive intense regulatory scrutiny) and advisory fees above 2% will be subject to increased regulatory scrutiny. When charging a fee of 2% or higher, it's recommended that an advisor disclose to the client that similar services can be attained for lower fees. The investment advisor must also be able to support/justify such a charge.
Although this lawsuit is focused upon a brokerage account, it raises interesting questions for investment advisors. Will the SEC and state regulators start questioning individuals that are dually licensed under an investment advisor and a broker-dealer whether an asset should have been held in a wrap account versus a commission-based account? If assets within an account are managed under an investment advisory agreement subject to an asset management fee but have few transactions, will the SEC challenge whether the fee is appropriate?
There doesn't appear to be formal guidance with respect to these scenarios. However, it's clear that an investment advisor can only charge a "reasonable" fee. Many commentators have interpreted this to mean that investment advisory fees above 3% of the account value on an annual basis are typically unreasonable (and receive intense regulatory scrutiny) and advisory fees above 2% will be subject to increased regulatory scrutiny. When charging a fee of 2% or higher, it's recommended that an advisor disclose to the client that similar services can be attained for lower fees. The investment advisor must also be able to support/justify such a charge.
Labels: Enforcement
posted by bhill at 12:25 PM
Financial Statements
This entry of "Year-End Compliance Tips" focuses on the updating of financial information. If your advisor firm is registered with one or more states, you may be required to submit certain financial statements to the state regulators on an annual basis. Many states have certain net worth or net capital requirements. Some states also have surety bond requirements. Most states that have these provisions require advisor firms to substantiate they are in compliance with the rules by submitting financial statements. In some cases the financial statements must be submitted at the end of the firm's fiscal year and in some states the financial records must be submitted at the end of the calendar year. In addition to any forms the firm may have to submit directly to regulators, it is essential the firm has updated all of its financial records under the regulatory books and records requirements. This is true for state and SEC registered advisor firms. For example, SEC registered firms are required to keep the following as part of their books and records (Investment Advisers Act of 1940, Rule 204-2):
- A journal or journals, including cash receipts and disbursements,
records, and any other records or original entry forming the basis of
entries in any ledger.
- General and auxiliary ledgers (or other comparable records) reflecting
asset, liability, reserve, capital, income and expense accounts.
- All check books, bank statements, cancelled checks and cash
reconciliations of the investment adviser.
- All trial balances, financial statements, and internal audit working
papers relating to the business of such investment adviser.
While many states have requirements similar to that of the SEC, it is important to check with your home state's specific financial recordkeeping requirements. If you have questions or concerns regarding your regulatory obligations, please call our firm for a confidential discussion today.
- A journal or journals, including cash receipts and disbursements,
records, and any other records or original entry forming the basis of
entries in any ledger.
- General and auxiliary ledgers (or other comparable records) reflecting
asset, liability, reserve, capital, income and expense accounts.
- All check books, bank statements, cancelled checks and cash
reconciliations of the investment adviser.
- All trial balances, financial statements, and internal audit working
papers relating to the business of such investment adviser.
While many states have requirements similar to that of the SEC, it is important to check with your home state's specific financial recordkeeping requirements. If you have questions or concerns regarding your regulatory obligations, please call our firm for a confidential discussion today.
Labels: Financial Statements, Record Keeping
posted by bhill at 12:20 PM
Compliance Training
Our next installment of the "Year-End Compliance Tips" series is a reminder to advisors about compliance training. This time of year is a great time to hold compliance training for all employees and representatives. This is because many firms implement new policies or advisory programs set to take effect at the beginning of the year. Any time a new rule or program is implemented, it is imperative that proper training be provided so all employees are aware of the changes. While we recommend more frequent training sessions or meetings, an annual process is essential in today's regulatory landscape.
While we are trying to focus on items all advisor firms are required to complete, it is important that you refer to your regulatory authority to ensure you have an all inclusive list of the requirements your firm must meet. If you would like suggestions about training topics or are interested in having RIA Compliance Consultants provide training to your firm, please give us a call.
While we are trying to focus on items all advisor firms are required to complete, it is important that you refer to your regulatory authority to ensure you have an all inclusive list of the requirements your firm must meet. If you would like suggestions about training topics or are interested in having RIA Compliance Consultants provide training to your firm, please give us a call.
Labels: Compliance Training
posted by bhill at 12:10 PM
Annual Assessment of Written Compliance Programs
The end of the year is a great time to complete a written review of your investment advisor firm's compliance and procedures program. In fact, if your firm is registered with the SEC and you have not done a written analysis of your compliance program within the last 12 months, you need to complete such a review as soon as possible. While we believe that a written compliance program should be reviewed continuously and updated whenever needed, SEC registered firms are required to review and update their compliance programs at least annually. The key is to document these reviews and maintain them as part of the firm's master books and records. Previous versions of the firm's written policies and procedures must also be maintained under the books and records rules. Issues identified during the review must be documented and a plan of action formulated to take corrective action.
When changes are made to a compliance policy and/or procedure, employees should be made aware of the changes and required to sign off on their understanding and acknowledgement of the policies. Even if no changes are made, we suggest that all employees agree to their understanding and acknowledgement of the firm's policies and procedures, in writing, each year.
If your firm has questions or concerns about the firm's compliance programs annual assessment, please give us a call to discuss how we can help your firm meet its regulatory obligations.
When changes are made to a compliance policy and/or procedure, employees should be made aware of the changes and required to sign off on their understanding and acknowledgement of the policies. Even if no changes are made, we suggest that all employees agree to their understanding and acknowledgement of the firm's policies and procedures, in writing, each year.
If your firm has questions or concerns about the firm's compliance programs annual assessment, please give us a call to discuss how we can help your firm meet its regulatory obligations.
Labels: Compliance Program
posted by bhill at 11:46 AM
Code of Ethics Training and Acknowledgment
In our series "Year-End Compliance Tips," we are next focusing on investment advisor codes of ethics.
The SEC and many state securities regulators require investment advisor firms to create and implement a code of ethics. All SEC firms must require all employees to read and agree to abide by the firm's original code of ethics and any amendments made to the code. RIA Compliance Consultants recommends requiring an annual acknowledgment of the code of ethics. In addition, advisor firms should also consider implementing an annual training program focused on the code of ethics. As quoted from Rule 204A-1 of the Advisors Act, an SEC advisor's code of ethics must include, at a minimum:
(1) A standard (or standards) of business conduct that you require of your supervised persons, which standard must reflect your fiduciary obligations and those of your supervised persons;
(2) Provisions requiring your supervised persons to comply with applicable Federal securities laws;
(3) Provisions that require all of your access persons to report, and you to review, their personal securities transactions and holdings periodically as provided below;
(4) Provisions requiring supervised persons to report any violations of your code of ethics promptly to your chief compliance officer or, provided your chief compliance officer also receives reports of all violations, to other persons you designate in your code of ethics; and
(5) Provisions requiring you to provide each of your supervised persons with a copy of your code of ethics and any amendments, and requiring your supervised persons to provide you with a written acknowledgment or their receipt of the code and any amendments.
The code of ethics needs to be reviewed by the firm on an annual basis and, if needed, updated. It is important to document any changes to the code of ethics and document each employee's agreement to abide by the code.
While many states do not have detailed requirements similar to that of the SEC, RIA Compliance Consultants recommends state firms follow the SEC parameters as a proactive measure.
If your firm has questions or concerns about the code of ethics requirements, please give us a call to discuss how we can help your firm meet its regulatory obligations.
The SEC and many state securities regulators require investment advisor firms to create and implement a code of ethics. All SEC firms must require all employees to read and agree to abide by the firm's original code of ethics and any amendments made to the code. RIA Compliance Consultants recommends requiring an annual acknowledgment of the code of ethics. In addition, advisor firms should also consider implementing an annual training program focused on the code of ethics. As quoted from Rule 204A-1 of the Advisors Act, an SEC advisor's code of ethics must include, at a minimum:
(1) A standard (or standards) of business conduct that you require of your supervised persons, which standard must reflect your fiduciary obligations and those of your supervised persons;
(2) Provisions requiring your supervised persons to comply with applicable Federal securities laws;
(3) Provisions that require all of your access persons to report, and you to review, their personal securities transactions and holdings periodically as provided below;
(4) Provisions requiring supervised persons to report any violations of your code of ethics promptly to your chief compliance officer or, provided your chief compliance officer also receives reports of all violations, to other persons you designate in your code of ethics; and
(5) Provisions requiring you to provide each of your supervised persons with a copy of your code of ethics and any amendments, and requiring your supervised persons to provide you with a written acknowledgment or their receipt of the code and any amendments.
The code of ethics needs to be reviewed by the firm on an annual basis and, if needed, updated. It is important to document any changes to the code of ethics and document each employee's agreement to abide by the code.
While many states do not have detailed requirements similar to that of the SEC, RIA Compliance Consultants recommends state firms follow the SEC parameters as a proactive measure.
If your firm has questions or concerns about the code of ethics requirements, please give us a call to discuss how we can help your firm meet its regulatory obligations.
Labels: Code of Ethics
posted by bhill at 11:22 AM
Personal Securities Holdings and Transactions
Over the next several weeks, our electronic newsletter will be focusing upon some of those compliance requirements that every investment advisor firm should consider at the end of the year. Although we will attempt to identify some of the most common investment advisor requirements, it is important to recognize that there are different requirements among the various securities regulators.
This issue addresses an SEC registered investment advisor firm's duty to collect or prepare updated personal securities holdings reports from all access persons. The information on the report must be current as of a date no more than 45 days before the report is submitted. The annual report does not need to be prepared at the end of the calendar year; however, the timing of the report must be consistent from year to year. The holdings report is in addition to the review of fourth quarter transaction reports. As part of the Code of Ethics rule, all SEC registered firms are required to review the activity of their access persons' securities holdings. Quarterly transaction reports must be submitted no later than 30 days after the end of each calendar quarter.
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 of when the interests of the firm or its associated persons are placed ahead of the interests of the clients.
Most states also require investment advisor firms to maintain, as part of their books and records, a record of every transaction within a personal account. Most states require the transaction to be reported within 10 days after the end of the calendar quarter in which the transaction occurred. State firms must also implement policies restricting insider trading.
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 discuss how we can help your firm meet its regulatory obligations.
This issue addresses an SEC registered investment advisor firm's duty to collect or prepare updated personal securities holdings reports from all access persons. The information on the report must be current as of a date no more than 45 days before the report is submitted. The annual report does not need to be prepared at the end of the calendar year; however, the timing of the report must be consistent from year to year. The holdings report is in addition to the review of fourth quarter transaction reports. As part of the Code of Ethics rule, all SEC registered firms are required to review the activity of their access persons' securities holdings. Quarterly transaction reports must be submitted no later than 30 days after the end of each calendar quarter.
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 of when the interests of the firm or its associated persons are placed ahead of the interests of the clients.
Most states also require investment advisor firms to maintain, as part of their books and records, a record of every transaction within a personal account. Most states require the transaction to be reported within 10 days after the end of the calendar quarter in which the transaction occurred. State firms must also implement policies restricting insider trading.
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 discuss how we can help your firm meet its regulatory obligations.
Labels: PST
posted by bhill at 2:10 PM
Nebraska Requests that IA Firms Prohibit IARs from Using Senior Designations & Cautions Against “Free Lunch” Seminars to Seniors
The Nebraska Securities Bureau recently issued a special notice to all federally covered and state registered investment advisors in Nebraska requesting that “firms prohibit the use of all professional designations that state or imply a specialized knowledge of the needs of senior investors by their … investment adviser representatives registered in Nebraska. This prohibition should cover all mass mailings, advertising, business cards and letterhead of the … representative.” (The Nebraska securities regulator noted that the CFA, CFP, ChFC or CPFS are still acceptable professional designations.) This effort appears to be aimed directly at barring designations such as the Certified Senior Advisor ("CSA"). Although this special notice is crafted as a request instead of a rule, the Nebraska Securities Bureau is warning investment advisors that it will pursue enforcement actions if an investment advisor representative uses a professional designation in a manner misleading to investors.
Also within this special notice, Nebraska announced that each investment advisor must report all the “free-lunch” sales seminars that its investment advisor reps have offered or plan to offer to seniors. The Bureau specifically urged investment advisors to exercise care when offering complex products to seniors. RIA Compliance Consultants believes it’s likely that those investment advisor reps (even when acting in their capacity as insurance agents) marketing equity indexed annuities through such seminars will be subject to intense scrutiny from the Nebraska Securities Bureau, which very well could include field examiners attending client seminars and subsequently interviewing clients sold equity indexed annuities. As a result, investment advisor firms in Nebraska should carefully review the insurance activities of their investment advisor reps.
Also within this special notice, Nebraska announced that each investment advisor must report all the “free-lunch” sales seminars that its investment advisor reps have offered or plan to offer to seniors. The Bureau specifically urged investment advisors to exercise care when offering complex products to seniors. RIA Compliance Consultants believes it’s likely that those investment advisor reps (even when acting in their capacity as insurance agents) marketing equity indexed annuities through such seminars will be subject to intense scrutiny from the Nebraska Securities Bureau, which very well could include field examiners attending client seminars and subsequently interviewing clients sold equity indexed annuities. As a result, investment advisor firms in Nebraska should carefully review the insurance activities of their investment advisor reps.
Labels: Advertising
posted by bhill at 9:23 PM
