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
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.
ยง 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.
ยง 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
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
Future SEC Initiatives: IA/BD Study, Books and Records, New Part II, Soft-Dollar and Hedge Funds
In a recent speech, Andrew J. Donohue, Director of the SEC's Division of Investment Management, outlined several future initiatives for the Division of Investment Management. These initiatives include the SEC's Investment Adviser/Broker-Dealer study which aims to analyze current industry and regulatory practices and also examine the levels of protection afforded to investors under both the Securities Exchange Act and the Investment Advisers Act. The next initiative Mr. Donohue discussed is a potential reformulation of the SEC's books and records requirements for investment advisors. This should be welcome news as hopefully the SEC will factor the many technological changes that have occurred over the last 40 years and establish practical books and records requirements.
Mr. Donohue also mentioned the new Form ADV Part II. A new Part II is something advisors have been hearing about for over six years now. In fact, the SEC must repropose the changes to the current Part II which is currently being worked upon by the Division of Investment Management.
In regard to soft dollars, portfolio trading practices, and best execution, Mr. Donohue stated the Division has set a goal "to provide guidance that would enable fund boards and others to have meaningful dialogue with fund managers on soft dollar practices, as well as the adviser's philosophy with respect to brokerage and soft dollar practices."
Finally, according to the Mr. Donohue, the SEC's attempt to regulate advisors to hedge funds is not going away any time soon. Mr. Donohue reiterated Chairman Cox's intention "to recommend that the SEC promulgate a new anti-fraud rule under the Investment Advisers Act that would have the effect of "looking through" a hedge fund to its investors." The SEC has essentially gone back to the drawing board and is trying to find methods that will enable a new rule to withstand judicial scrutiny.
To read the text of Mr. Donohue's entire speech, click here.
Mr. Donohue also mentioned the new Form ADV Part II. A new Part II is something advisors have been hearing about for over six years now. In fact, the SEC must repropose the changes to the current Part II which is currently being worked upon by the Division of Investment Management.
In regard to soft dollars, portfolio trading practices, and best execution, Mr. Donohue stated the Division has set a goal "to provide guidance that would enable fund boards and others to have meaningful dialogue with fund managers on soft dollar practices, as well as the adviser's philosophy with respect to brokerage and soft dollar practices."
Finally, according to the Mr. Donohue, the SEC's attempt to regulate advisors to hedge funds is not going away any time soon. Mr. Donohue reiterated Chairman Cox's intention "to recommend that the SEC promulgate a new anti-fraud rule under the Investment Advisers Act that would have the effect of "looking through" a hedge fund to its investors." The SEC has essentially gone back to the drawing board and is trying to find methods that will enable a new rule to withstand judicial scrutiny.
To read the text of Mr. Donohue's entire speech, click here.
Labels: Form ADV, Record Keeping
posted by bhill at 3:54 PM
