Implications of Deducting Advisory Fees for Nebraska Registered Advisors
The issue of custody over client funds and securities seems to be one of the most variant issues among regulators. One common form of custody is an advisor's authorization to have fees deducted directly from client accounts. While the SEC and most states consider this practice a custody situation, the procedures advisor firms must implement vary from regulator to regulator. Therefore it is important for all investment advisors to fully understand and comply with the custody requirements that apply to their firm.
For example, Nebraska state-registered advisors that deduct advisory fees directly from client accounts should be disclosing on Form ADV Part 1A that the firm has custody of client "cash and bank accounts" or "securities". Firms that deduct advisory fees from money market funds kept in client brokerage accounts should mark Item 9.A.(2) on Part 1A. Firms that deduct advisory fees from bank accounts or deduct fees from idle cash in a client brokerage account will need to mark Item 9.A.(1). The firm's authorization to deduct fees from client accounts does not affect the firm's net capital requirement as all state registered firms domiciled in Nebraska must maintain a net capital of $25,000. However, advisor firms that follow the safeguards set forth in Form ADV Part 1B, Item 2.1.(1) are provided a waiver from the Nebraska audited financial statement requirements. In order to avoid the audited financial statement requirements, the following safeguards must be met. Advisor firms must (1) attain the client's written authorization to have fees deducted from the account, (2) send a copy of the fee invoice to the custodian or trustee at the same time it is sent to the client, and (3) ensure the client's custodian sends quarterly statements indicating all disbursements from the account including the amount of the advisory fees. It is important to note that the invoice sent to a client must indicate the amount of the fee that will be deducted, the manner in which the fee was calculated, any adjustments to the fee and an explanation of such adjustment. It is vital that advisor firms actually implement procedures to fulfill these safeguards. Too many advisor firms mark the items under Form ADV Part 1B, but never follow through with sufficient procedures to ensure the safeguards are met and, therefore, are in violation of the Nebraska custody requirements.
If you have questions concerning Nebraska's requirements, your home state's custody regulations, or your firm's procedures regarding the deduction of advisory fees, please feel free to give us a call. Stay tuned to RIA Compliance Consultants as we try to stay on top of this ever-evolving issue.
For example, Nebraska state-registered advisors that deduct advisory fees directly from client accounts should be disclosing on Form ADV Part 1A that the firm has custody of client "cash and bank accounts" or "securities". Firms that deduct advisory fees from money market funds kept in client brokerage accounts should mark Item 9.A.(2) on Part 1A. Firms that deduct advisory fees from bank accounts or deduct fees from idle cash in a client brokerage account will need to mark Item 9.A.(1). The firm's authorization to deduct fees from client accounts does not affect the firm's net capital requirement as all state registered firms domiciled in Nebraska must maintain a net capital of $25,000. However, advisor firms that follow the safeguards set forth in Form ADV Part 1B, Item 2.1.(1) are provided a waiver from the Nebraska audited financial statement requirements. In order to avoid the audited financial statement requirements, the following safeguards must be met. Advisor firms must (1) attain the client's written authorization to have fees deducted from the account, (2) send a copy of the fee invoice to the custodian or trustee at the same time it is sent to the client, and (3) ensure the client's custodian sends quarterly statements indicating all disbursements from the account including the amount of the advisory fees. It is important to note that the invoice sent to a client must indicate the amount of the fee that will be deducted, the manner in which the fee was calculated, any adjustments to the fee and an explanation of such adjustment. It is vital that advisor firms actually implement procedures to fulfill these safeguards. Too many advisor firms mark the items under Form ADV Part 1B, but never follow through with sufficient procedures to ensure the safeguards are met and, therefore, are in violation of the Nebraska custody requirements.
If you have questions concerning Nebraska's requirements, your home state's custody regulations, or your firm's procedures regarding the deduction of advisory fees, please feel free to give us a call. Stay tuned to RIA Compliance Consultants as we try to stay on top of this ever-evolving issue.
Labels: Custody
posted by bhill at 1:52 PM
NASD Fines Firm for Record Keeping Violations
Earlier this week, the NASD fined four broker-dealers affiliated with Fidelity Investments. According to the news release published on its website (www.nasd.com), NASD fined the firm a total of $3.75 million for, "improperly maintaining NASD registrations for 1,100 individuals, failing to assign registered supervisors to 1,000 individuals, failing to retain the email of 1,900 registered individuals, and other electronic recordkeeping failures. NASD also ordered the four broker-dealers to conduct comprehensive audits of the firms' systems, policies and procedures relating to registration and electronic recordkeeping."
While the fine was not levied by the SEC against an investment advisor, it is still an excellent reminder for all advisor firms. Regulators do not take the poor implementation of policies and procedures lightly. They are also serious when it comes to firms maintaining required books and records. Under Rule 206(4)-7, it is now unlawful for an investment advisor to conduct business without implementing and enforcing written compliance policies and procedures. Do not be surprised to see enforcement actions handed down in the coming months and years by the SEC for failure to implement effective policies and internal controls. Regardless of your firm's size, if you do not follow through on your policies and procedures, you could face a comparative outcome to what Fidelity is dealing with right now.
One of the best ways to supplement your firm's internal controls and mitigate risk is to retain a compliance consulting firm such as RIA Compliance Consultants. Call us today to discuss our services and find out how we can develop a customize package to fit the needs of your firm.
While the fine was not levied by the SEC against an investment advisor, it is still an excellent reminder for all advisor firms. Regulators do not take the poor implementation of policies and procedures lightly. They are also serious when it comes to firms maintaining required books and records. Under Rule 206(4)-7, it is now unlawful for an investment advisor to conduct business without implementing and enforcing written compliance policies and procedures. Do not be surprised to see enforcement actions handed down in the coming months and years by the SEC for failure to implement effective policies and internal controls. Regardless of your firm's size, if you do not follow through on your policies and procedures, you could face a comparative outcome to what Fidelity is dealing with right now.
One of the best ways to supplement your firm's internal controls and mitigate risk is to retain a compliance consulting firm such as RIA Compliance Consultants. Call us today to discuss our services and find out how we can develop a customize package to fit the needs of your firm.
Labels: Compliance Program, Record Keeping
posted by bhill at 12:00 PM
Attention State IA Firms - Are you in Compliance with the IAA of 1940?
If your firm is registered with a state regulatory body, are you aware that some sections of the Investment Advisors Act of 1940 do apply to your firm? Many state registered firms believe because they are exempt from SEC registration, they are also exempt from all requirements and provisions of the Advisers Act. While it is true that the majority of rules under the Advisers Act apply only to federal firms, there is several provisions that apply to state firms. Therefore, in addition to becoming familar with your home state's rules (and the rules of any state where your firm has clients), state registered firms must still pay close attention to the Advisers Act to identify those provisions the firm must comply with.
The SEC's Division of Investment Management has created an informational page which outlines many of the requirements under the Advisers Act. One particular section regards the provisions applicable to state firms. The following has been quoted directly from the Division of Investment Management's page.
Most provisions of the Advisers Act and Commission rules apply solely to SEC-registered advisers, and therefore are not applicable to state-registered advisers. Thus, state-registered advisers are not required to file and amend Form ADV with the Commission under Rule 204-1; comply with the SEC's books and recodkeeping requirements under Rule 204-2; or deliver a brochure to clients under Rule 204-3. State investment adviser laws, however, may impose substantially the same requirements. For example, many state laws require advisers to register by filing Form ADV with the state.
State-registered advisers are subject to Section 206 of the Advisers Act, which prohibits fraudulent conduct. The Commission has authority to bring enforcement actions against state-registered advisers for fraud. Other provisions of the Advisers Act that apply to state-registered advisers include:
• Section 204A, which requires advisers to establish, maintain, and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information;
• Section 205, which contains prohibitions on advisory contracts that (i) contain certain performance fee arrangements, (ii) permit an assignment of the advisory contract to be made without the consent of the client, and (iii) fail to require an adviser that is a partnership to notify clients of a change in the membership of the partnership. (The exemption provided in Rule 205-3 for certain performance fee arrangements, however, is available to all advisors, including state-registered advisers); and
• Section 206(3), which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from, a client, without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining the client's consent. (The exemption provided in Rule 206(3)-2 from the prohibitions of Section 206(3), however, is available to all advisers, including state-registered advisers.)
We invite you to review the entire page authored by the Division of Investment Management click here. Regulatory websites such as the SEC and comparable cites created by states securities department provide a wealth of information and should be consulted on a regular basis. RIA Compliance Consultants has also created a Resource page on our website with links to pertinent websites designed for your convenience and information. We invite you to check our Resource pages at click here.
The SEC's Division of Investment Management has created an informational page which outlines many of the requirements under the Advisers Act. One particular section regards the provisions applicable to state firms. The following has been quoted directly from the Division of Investment Management's page.
Most provisions of the Advisers Act and Commission rules apply solely to SEC-registered advisers, and therefore are not applicable to state-registered advisers. Thus, state-registered advisers are not required to file and amend Form ADV with the Commission under Rule 204-1; comply with the SEC's books and recodkeeping requirements under Rule 204-2; or deliver a brochure to clients under Rule 204-3. State investment adviser laws, however, may impose substantially the same requirements. For example, many state laws require advisers to register by filing Form ADV with the state.
State-registered advisers are subject to Section 206 of the Advisers Act, which prohibits fraudulent conduct. The Commission has authority to bring enforcement actions against state-registered advisers for fraud. Other provisions of the Advisers Act that apply to state-registered advisers include:
• Section 204A, which requires advisers to establish, maintain, and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information;
• Section 205, which contains prohibitions on advisory contracts that (i) contain certain performance fee arrangements, (ii) permit an assignment of the advisory contract to be made without the consent of the client, and (iii) fail to require an adviser that is a partnership to notify clients of a change in the membership of the partnership. (The exemption provided in Rule 205-3 for certain performance fee arrangements, however, is available to all advisors, including state-registered advisers); and
• Section 206(3), which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from, a client, without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining the client's consent. (The exemption provided in Rule 206(3)-2 from the prohibitions of Section 206(3), however, is available to all advisers, including state-registered advisers.)
We invite you to review the entire page authored by the Division of Investment Management click here. Regulatory websites such as the SEC and comparable cites created by states securities department provide a wealth of information and should be consulted on a regular basis. RIA Compliance Consultants has also created a Resource page on our website with links to pertinent websites designed for your convenience and information. We invite you to check our Resource pages at click here.
Labels: Compliance Program
posted by bhill at 10:53 AM
Are you Retaining Correct Order Memorandum?
Rule 204-2(a)(3) of the Advisers Act requires adviser firms to maintain a memorandum or each order given by the adviser (also known as a trade ticket). The majority of states have similar recordkeeping requirements. The specific language from Rule 204-2(a)(3) reads as follows. Items in bold have been bolded for emphasis.
§ 275.204-2 Books and records to be maintained by investment advisers. (a) Every investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b-3) shall make and keep true, accurate and current the following books and records relating to its investment advisory business; (3) A memorandum of each order given by the investment adviser for the purchase or sale of any security, and of any modification or cancellation of any such order or instruction. Such memorandum shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where the appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.
One of the more common deficiencies RIA Compliance Consultants has noted during recent mock regulatory examinations centers on this rule. Specifically, it has been noted that firms have not properly documented three key requirements on the order memorandum or trade ticket; 1) the person who recommends the transactions to the client, 2) the person who placed the order, and 3) whether discretionary power was used over the trade. Many firms have designated personnel who are tasked with executing all transactions, but do actually come in contact with clients or make specific recommendations. It is vital for a firm to provide documentation proving who entered the trade versus who recommended the trade so that it does not appear that the person entering the trade also recommended the transaction. Personnel recommending transactions to clients will generally need to be licensed as investment advisor representatives. The trade ticket also needs to designate if the transaction is being done on a discretionary, non-discretionary, or unsolicited basis. This is extremely important from a risk management perspective for firms that typically execute trades on a discretionary basis, but will from time-to-time execute a non-discretionary or unsolicited trade. Your firm needs to be able to easily show when a trade is done on a non-discretionary or unsolicited basis if there is ever doubt in the future.
Stay tuned to RIA Compliance Consultants as we keep you up to date on other issues or requirements challenging investment advisor firms. If you would like to find out more about our services or reserve a date for a mock examination, give us a call.
§ 275.204-2 Books and records to be maintained by investment advisers. (a) Every investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b-3) shall make and keep true, accurate and current the following books and records relating to its investment advisory business; (3) A memorandum of each order given by the investment adviser for the purchase or sale of any security, and of any modification or cancellation of any such order or instruction. Such memorandum shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where the appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.
One of the more common deficiencies RIA Compliance Consultants has noted during recent mock regulatory examinations centers on this rule. Specifically, it has been noted that firms have not properly documented three key requirements on the order memorandum or trade ticket; 1) the person who recommends the transactions to the client, 2) the person who placed the order, and 3) whether discretionary power was used over the trade. Many firms have designated personnel who are tasked with executing all transactions, but do actually come in contact with clients or make specific recommendations. It is vital for a firm to provide documentation proving who entered the trade versus who recommended the trade so that it does not appear that the person entering the trade also recommended the transaction. Personnel recommending transactions to clients will generally need to be licensed as investment advisor representatives. The trade ticket also needs to designate if the transaction is being done on a discretionary, non-discretionary, or unsolicited basis. This is extremely important from a risk management perspective for firms that typically execute trades on a discretionary basis, but will from time-to-time execute a non-discretionary or unsolicited trade. Your firm needs to be able to easily show when a trade is done on a non-discretionary or unsolicited basis if there is ever doubt in the future.
Stay tuned to RIA Compliance Consultants as we keep you up to date on other issues or requirements challenging investment advisor firms. If you would like to find out more about our services or reserve a date for a mock examination, give us a call.
Labels: Record Keeping
posted by bhill at 10:24 AM
Best Execution Review
As an investment advisor, your firm has a fiduciary duty to attempt to achieve best execution for your clients. This means an advisor firm must execute transactions for clients in a manner that the clients' total costs or proceeds in each transaction are most favorable under the circumstances. This obligation is something that should be made part of your firm's annual assessment of its policies and procedures. While RIA Compliance Consultations recommend on-going reviews of broker-dealers used, it is important to conduct at least an annual best execution and due diligence review of all broker-dealers that the advisor directs client trades. This is true for those advisor firms that use only one or two recommended broker-dealers. It is also true even when using a large, reputable broker-dealer such as Fidelity, Fiserve, Pershing, Schwab, or TD Ameritrade.
In selecting a broker-dealer to execute client securities transactions, RIA Compliance Consultants believe it is important to consider the full range of service offered by determining, at a minimum, the following:
- Execution capabilities including the ability to handle trades and answer
calls in a volatile market
- Commission rates
- Financial responsibility
- Value of research or brokerage provided
- Technology provided
- Willingness, ability, facilities and infrastructure to work with investment
advisor firms
- Administrative resources
- Responsiveness
- Pricing for services provided
It is also important to note that regulators have indicated that best execution is not determined by just the lowest possible commission costs but by the best qualitative execution. Therefore, it is not only okay, but necessary to conduct a quantitative and qualitative review of broker-dealers used. Firm should systematically and periodically evaluate broker-dealers used along with other broker/dealers to ensure that the firm's recommended broker-dealers' best execution services are optimal.
In selecting a broker-dealer to execute client securities transactions, RIA Compliance Consultants believe it is important to consider the full range of service offered by determining, at a minimum, the following:
- Execution capabilities including the ability to handle trades and answer
calls in a volatile market
- Commission rates
- Financial responsibility
- Value of research or brokerage provided
- Technology provided
- Willingness, ability, facilities and infrastructure to work with investment
advisor firms
- Administrative resources
- Responsiveness
- Pricing for services provided
It is also important to note that regulators have indicated that best execution is not determined by just the lowest possible commission costs but by the best qualitative execution. Therefore, it is not only okay, but necessary to conduct a quantitative and qualitative review of broker-dealers used. Firm should systematically and periodically evaluate broker-dealers used along with other broker/dealers to ensure that the firm's recommended broker-dealers' best execution services are optimal.
Labels: Best Execution, Compliance Program
posted by bhill at 12:31 PM
Have you considered a mock regulatory examination or training audit?
As the new business year begins, many firms are constructing their compliance budgets and initiatives for 2007. A tool we feel can be vital for measuring your firm's compliance barometer is to hire an outside consulting firm to conduct mock examinations or training audit. Such a visit from an outside consulting firm, such as RIA Compliance Consultants, can provide numerous benefits for a firm, regardless of its size. A mock examination provides an objective look at the compliance and regulatory structure of your advisor firm. It can help assess whether or not your firm is prepared for an actual regulatory visit and what the firm needs to do to shore up its compliance policies and procedures. Such a visit also provides an opportunity to receive training from an outside expert who is focused on helping advisor firms meet their fiduciary and regulatory responsibilities. It can also be integrated into your firm's assessment of its internal policies and procedures. It indicates to regulators that the firm is committed to a culture of compliance.
Ultimately, if you are a CCO you have to ask yourself "Is my firm really ready for an SEC visit?" If you can not provide an assertive positive response, it may be time to seek help from an outside consulting firm such as RIA Compliance Consultants. If you would like to learn more about our mock audits, training audits, or our different levels of engagement, please contact us today.
Ultimately, if you are a CCO you have to ask yourself "Is my firm really ready for an SEC visit?" If you can not provide an assertive positive response, it may be time to seek help from an outside consulting firm such as RIA Compliance Consultants. If you would like to learn more about our mock audits, training audits, or our different levels of engagement, please contact us today.
Labels: Compliance Program, Regulatory Inspections
posted by bhill at 11:55 AM
Is It Time to Register with the SEC?
Because many firms have a December 31 fiscal year-end, it is likely that your investment advisor firm is currently working on its Form ADV Part 1 Annual Amendment. The Annual Amendment must be submitted through the IARD within ninety (90) days after an advisor's fiscal year-end. While there are other criteria for registering with the SEC, by far the most common test for SEC registration is a firm's assets under management. Therefore, for a large majority of firms, when completing the Annual Amendment, an advisor firm must pay close attention to updating the firm's assets under management. Regulators, both at the federal and state levels, have stated an advisor's assets under management must be current as on the firm's most recently completed fiscal year.
Once you've calculated your investment advisor's assets under management, you must determine whether your firm will need to change from a state to SEC registration or conversely from an SEC to state registration. When a firm's assets exceed $30 million, the firm must be registered directly with the SEC. A firm with assets under $25 million must register with the applicable individual state. If a firm's assets under management are between $25 million and $30 million, the firm can choose between SEC or state registration. (Check out our FAQ's page here to learn more about some of the more common factors when determining SEC v. state registration.)
Be careful to not simply lump all accounts and assets together when calculating assets under management. The Form ADV Part 1 provides detailed instructions for counting assets under management and regulators will scrutinize how assets under management tally and the basis for including discretionary accounts versus non-discretionary accounts.
If your firm's assets under management now exceed $30 million (or are significantly above $25 million) for the first time, do you know the steps that must be taken to register with the SEC? Has your firm developed a code of ethics and set of written supervisory policies and procedures? Are you ready for an SEC examination? Will your firm's Form ADV pass federal scrutiny?
If you need help calculating assets under management, completing the Form ADV Annual Amendment or filing your registration with the SEC, please give us a call.
Once you've calculated your investment advisor's assets under management, you must determine whether your firm will need to change from a state to SEC registration or conversely from an SEC to state registration. When a firm's assets exceed $30 million, the firm must be registered directly with the SEC. A firm with assets under $25 million must register with the applicable individual state. If a firm's assets under management are between $25 million and $30 million, the firm can choose between SEC or state registration. (Check out our FAQ's page here to learn more about some of the more common factors when determining SEC v. state registration.)
Be careful to not simply lump all accounts and assets together when calculating assets under management. The Form ADV Part 1 provides detailed instructions for counting assets under management and regulators will scrutinize how assets under management tally and the basis for including discretionary accounts versus non-discretionary accounts.
If your firm's assets under management now exceed $30 million (or are significantly above $25 million) for the first time, do you know the steps that must be taken to register with the SEC? Has your firm developed a code of ethics and set of written supervisory policies and procedures? Are you ready for an SEC examination? Will your firm's Form ADV pass federal scrutiny?
If you need help calculating assets under management, completing the Form ADV Annual Amendment or filing your registration with the SEC, please give us a call.
Labels: Form ADV, Registration
posted by bhill at 9:57 AM
