SEC Initiates Charges for Insider Trading
The SEC today announced that it is charging the mayor of Beaufort, South Carolina with insider trading on non-public information he obtained while doing consulting work for a California biotechnology firm. According to the SEC, the individual was given information about new technology. The information was provided in confidence and had not been made publicly available. Shortly after receiving the information, the individual purchased shares in the company that would have netted more than $20,000 had he sold out. The individual agreed to pay $20,708 in disgorgement, $2,576 in prejudgment interest, and a $20,708 penalty.
“This case underscores how important it is for consultants provided with non-public information to be mindful of the duties of confidentiality owed to companies that hire them," stated Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office, in the SEC press release.
RIA Compliance Consultants, Inc. would like to use this as an example for registered investment advisor firms which often have clients that are or work for publicly traded companies. Due to these types of client relationships, registered investment advisors can often find themselves in receipt of material, non-public information (i.e. inside information). Acting on inside information is a serious violation of federal securities laws. In fact, Section 204A of the Investment Advisers Act of 1940 requires all federally and state registered investment advisors to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the registered investment advisor or any person associated with the registered investment advisor. In other words, federal regulators require registered investment advisors to implement policies and procedures designed to prevent their associated persons from engaging in activities that the mayor of Beaufort, South Carolina was charged for. Further, registered investment advisors should have procedures designed to prevent the registered investment advisor from enabling a client to act on inside information.
RIA Compliance Consultants, Inc. can help your firm understand its responsibility to prevent insider trading. We also provide services designed to ensure compliance with the SEC’s Code of Ethics and personal securities transactions policies and procedures. Give us a call to learn more.
“This case underscores how important it is for consultants provided with non-public information to be mindful of the duties of confidentiality owed to companies that hire them," stated Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office, in the SEC press release.
RIA Compliance Consultants, Inc. would like to use this as an example for registered investment advisor firms which often have clients that are or work for publicly traded companies. Due to these types of client relationships, registered investment advisors can often find themselves in receipt of material, non-public information (i.e. inside information). Acting on inside information is a serious violation of federal securities laws. In fact, Section 204A of the Investment Advisers Act of 1940 requires all federally and state registered investment advisors to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the registered investment advisor or any person associated with the registered investment advisor. In other words, federal regulators require registered investment advisors to implement policies and procedures designed to prevent their associated persons from engaging in activities that the mayor of Beaufort, South Carolina was charged for. Further, registered investment advisors should have procedures designed to prevent the registered investment advisor from enabling a client to act on inside information.
RIA Compliance Consultants, Inc. can help your firm understand its responsibility to prevent insider trading. We also provide services designed to ensure compliance with the SEC’s Code of Ethics and personal securities transactions policies and procedures. Give us a call to learn more.
Labels: Insider Trading, SEC
posted by bhill at 1:58 PM
Single Family Office Not Required to Register with SEC
The SEC recently granted an order under Section 202(a)(11)(G) of the Investment Advisers Act of 1940 (“Advisers Act”) declaring that a particular “family office” and its employees, when acting within the scope of their employment, are not required to register as investment advisers pursuant to Section 203(a) of the Advisers Act. The SEC granted this order because it found that the applicant and its employees are not within the intent of Section 202(a)(11) of the Advisers Act which defines the term “investment adviser”. Section 202(a)(11)(G) allows the SEC to designate by rule, regulation, or order that certain persons are not within the intent of the definition of an “investment adviser.”
This particular “family office” filed an application on behalf of itself and its employees for an order based on the following:
Based on the information provided by the applicant, the SEC granted an order declaring that the applicant and its employees are not persons within the intent of Section 202(a)(11) of the Advisers Act. This means that registration is not required.
This particular “family office” filed an application on behalf of itself and its employees for an order based on the following:
- The applicant and its employees operate as a “family office” providing advisory services to family members only. This includes estate accounts, entities, trusts, and foundations all of which are wholly owned, funded, and for the benefit of the family and its lineal descendents.
- The applicant is and will at all times be owned, directly or indirectly, exclusively by one or more family members and its Board of Directors will at all times be, at a minimum, made up by members of the family.
- The applicant provides advice regarding various investments in addition to other services but does not and will not provide investment advice to any person that is not a family member.
- The applicant only charges fees that are sufficient to cover its costs for providing services. The applicant’s fee structure is not designed to generate a profit.
- The applicant will not hold itself out to the public as an investment adviser and will not be listed in the phone book or any other directory as an investment adviser.
- The applicant will not engage in any advertising or conduct marketing activities and it will not solicit or accept as an investment advisory client any person that is not a family member.
Based on the information provided by the applicant, the SEC granted an order declaring that the applicant and its employees are not persons within the intent of Section 202(a)(11) of the Advisers Act. This means that registration is not required.
Labels: Registration, SEC
posted by bhill at 2:26 PM
One-Day Audits Being Conducted on Newly Registered SEC Investment Advisers
The U.S. Securities and Exchange Commission (SEC) has been examining certain recently registered investment advisers by conducting limited scope, one-day examinations. According to the SEC’s cover letter sent in advance of these audits, “the purpose of these examinations is to assess and discuss important risk areas presented be the registered investment advisers’ operations and the related compliance policies and procedures implemented by the registered investment advisers to manage those risks.”
RIA Compliance Consultants, Inc. (RCC) has had first-hand experience with these limited scope examinations. A handful of RCC clients have been visited by their respective SEC regional offices this year. Specifically, RCC is aware of the Philadelphia Regional Office and the Atlanta Regional Office conducting these audits. To find out which SEC regional office has jurisdiction over your firm, click here. It appears the SEC is conducting visits of registered investment advisers that have been approved for approximately one year. The examinations appear to be an effort by the SEC to make sure registered investment advisers are on the right track.
As part of the one-day visit, the SEC expects to speak to at least one member of senior management and/or the Chief Compliance Officer to obtain an overall view of the registered investment adviser’s organization, business, control environment, and compliance culture. The following are some of the topics discussed during the visits: the adequacy of the firm’s compliance program; portfolio management decisions being consistent with client mandates; disclosures to clients; brokerage arrangements; allocations among client accounts; personal trading activities of access persons; fiduciary obligations; performance and other information in marketing and advertising; and the safety of client information. Special attention has been paid to firms that manage hedge funds and other pooled accounts.
In preparation of the examinations, the SEC has been requesting a limited list of books and records. The following includes some of the documents requested during these examinations: Form ADV Part II and Schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements.
If you are a newly registered investment adviser, give RCC a call to find out about our mock-regulatory examination and training visits. We can discuss how our consulting services can help you prepare for an examination as discussed in this article or a full-blown routine SEC examination.
RIA Compliance Consultants, Inc. (RCC) has had first-hand experience with these limited scope examinations. A handful of RCC clients have been visited by their respective SEC regional offices this year. Specifically, RCC is aware of the Philadelphia Regional Office and the Atlanta Regional Office conducting these audits. To find out which SEC regional office has jurisdiction over your firm, click here. It appears the SEC is conducting visits of registered investment advisers that have been approved for approximately one year. The examinations appear to be an effort by the SEC to make sure registered investment advisers are on the right track.
As part of the one-day visit, the SEC expects to speak to at least one member of senior management and/or the Chief Compliance Officer to obtain an overall view of the registered investment adviser’s organization, business, control environment, and compliance culture. The following are some of the topics discussed during the visits: the adequacy of the firm’s compliance program; portfolio management decisions being consistent with client mandates; disclosures to clients; brokerage arrangements; allocations among client accounts; personal trading activities of access persons; fiduciary obligations; performance and other information in marketing and advertising; and the safety of client information. Special attention has been paid to firms that manage hedge funds and other pooled accounts.
In preparation of the examinations, the SEC has been requesting a limited list of books and records. The following includes some of the documents requested during these examinations: Form ADV Part II and Schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements.
If you are a newly registered investment adviser, give RCC a call to find out about our mock-regulatory examination and training visits. We can discuss how our consulting services can help you prepare for an examination as discussed in this article or a full-blown routine SEC examination.
Labels: Compliance Training, Regulatory Inspections, SEC
posted by bhill at 2:22 PM
Lori Richards Provides Insight to SEC Exam Focus
On March 20, Lori Richards, Director - SEC's Office of Compliance Inspections and Examinations, delivered a speech explaining the SEC's current registered investment advisor examination priorities. The speech highlights the "top 10" areas of focus during routine examinations. While not an official statement from the SEC, Ms. Richards' speech provides excellent insight into the current mindset of the SEC Office of Compliance Inspections and Examinations.
It is important to note that the focus of an SEC examination will largely depend on a registered investment advisor firm's actual business operations, services, arrangements, policies and procedures. However, all registered investment advisor firms can benefit from reading Ms. Richards' speech in its entirety so that the areas of emphasis are understood and your firm can be prepared. Registered investment advisor firms should make sure the following areas are covered in their written policies and procedures and analyzed during the firm's annual assessment. The following is the top 10 according to Ms. Richards with highlights provided by RIA Compliance Consultants. To read Ms. Richards' speech in its entirety, click here.
1. Controls Over Valuation. How does the firm value securities? Particularly illiquid, private and other hard-to-price securities.
2. Controls Over Non-Public Information/Personal Trading/Code of Ethics. The SEC is focusing on personal securities transactions during its reviews. Policies to protect client information is also a priority of the SEC.
3. Dealing with Senior Investors. This continues to be a hot topic for both the SEC and state regulators.
4. Compliance and Supervision. Does the program effectively manage and control various compliance risks? Are all advisor representatives and branch offices properly supervised?
5. Portfolio Management. Are management services consistent with client mandates? Are they consistent with client objectives and restrictions?
6. Brokerage Arrangements and Best Execution. Is the registered investment advisor seeking best execution? Does the firm document its best execution reviews? Are arrangements properly and fully disclosed to clients, including services received from broker/dealers?
7. Allocations of Trades. Are all clients treated fairly and investment opportunities allocating consistently?
8. Performance Advertising, Marketing, and Fund Distribution Activities. Are there proper controls to review and approve marketing materials? Can performance numbers be justified and supported? This is a historically hot topic during SEC examinations and an area that consistently results in deficiencies.
9. Safety of Clients' and Funds' Assets. This area includes a focus on the safeguarding of client assets from theft.
10. Information Processing and Protection (books and records, disclosures, and filings). Does the firm have all required books and records? Are those records properly maintained and protected in the event of a disaster? Are all potential conflicts of interest disclosed to clients? Has the firm complied with applicable regulatory filings?
Included in the many services offered by RIA Compliance Consultants, Inc. are mock regulatory examinations and annual compliance program assessments. These services are provided with a goal of assisting registered investment advisor firms comply with applicable rules and regulations and prepare for SEC examinations. If you are interested in these services, please give us a call today.
It is important to note that the focus of an SEC examination will largely depend on a registered investment advisor firm's actual business operations, services, arrangements, policies and procedures. However, all registered investment advisor firms can benefit from reading Ms. Richards' speech in its entirety so that the areas of emphasis are understood and your firm can be prepared. Registered investment advisor firms should make sure the following areas are covered in their written policies and procedures and analyzed during the firm's annual assessment. The following is the top 10 according to Ms. Richards with highlights provided by RIA Compliance Consultants. To read Ms. Richards' speech in its entirety, click here.
1. Controls Over Valuation. How does the firm value securities? Particularly illiquid, private and other hard-to-price securities.
2. Controls Over Non-Public Information/Personal Trading/Code of Ethics. The SEC is focusing on personal securities transactions during its reviews. Policies to protect client information is also a priority of the SEC.
3. Dealing with Senior Investors. This continues to be a hot topic for both the SEC and state regulators.
4. Compliance and Supervision. Does the program effectively manage and control various compliance risks? Are all advisor representatives and branch offices properly supervised?
5. Portfolio Management. Are management services consistent with client mandates? Are they consistent with client objectives and restrictions?
6. Brokerage Arrangements and Best Execution. Is the registered investment advisor seeking best execution? Does the firm document its best execution reviews? Are arrangements properly and fully disclosed to clients, including services received from broker/dealers?
7. Allocations of Trades. Are all clients treated fairly and investment opportunities allocating consistently?
8. Performance Advertising, Marketing, and Fund Distribution Activities. Are there proper controls to review and approve marketing materials? Can performance numbers be justified and supported? This is a historically hot topic during SEC examinations and an area that consistently results in deficiencies.
9. Safety of Clients' and Funds' Assets. This area includes a focus on the safeguarding of client assets from theft.
10. Information Processing and Protection (books and records, disclosures, and filings). Does the firm have all required books and records? Are those records properly maintained and protected in the event of a disaster? Are all potential conflicts of interest disclosed to clients? Has the firm complied with applicable regulatory filings?
Included in the many services offered by RIA Compliance Consultants, Inc. are mock regulatory examinations and annual compliance program assessments. These services are provided with a goal of assisting registered investment advisor firms comply with applicable rules and regulations and prepare for SEC examinations. If you are interested in these services, please give us a call today.
Labels: Compliance Program, Regulatory Inspections, SEC
posted by bhill at 9:36 AM
Summary of SEC's Newly Proposed Form ADV Part 2
RIA Compliance Consultants, Inc. intends to submit formal comments to the U.S. Securities and Exchange Commission ("SEC") regarding proposed changes to Part 2 of Form ADV. The “re-proposed” changes were announced earlier this month after an initial attempt to change Part 2 of Form ADV was made in 2000. RIA Compliance Consultants is encouraging registered investment advisers to read the proposed rule release and provide their own comments. Comments must be received by the SEC on or before May 16, 2008. The proposed rule release can be viewed on the SEC’s website at http://www.sec.gov/rules/proposed.shtml. Clients of RIA Compliance Consultants can also forward their comments to us for inclusion into our comment letter. Comments should be sent to RIA Compliance Consultants by April 30, 2008.
A. Form ADV – Registration and Disclosure Document. The Form ADV is the registration document for investment adviser firms registered with the SEC and state securities authorities. The new Part 1 of Form ADV has been in effect since 2001 and is filed electronically through the Investment Adviser Registration Depository (IARD). Part 1 is a “check-the-box” form and while made publicly available through the IARD system, investment advisers are typically not required to provide the Part 1 to clients. The current Part 2 is provided to clients and is considered an investment adviser’s disclosure brochure. The SEC’s amendments to the Part 2 are intended to require investment advisers to provide regulators and clients with a brochure written in plain English. The brochure must describe the investment adviser’s services, fees, business practices, and conflicts of interest.
The new Part 2 brochures will need to be filed through the IARD system in PDF format. Investment advisers will prepare and make changes to their brochures using their own computers and then simply submit versions of the brochure through IARD. Currently, the SEC provides a standard form that must be used when preparing the Part 2. Under the proposed rules, the SEC will just provide instructions to complete the brochure, but will not provide a standard form that must be used. According to the proposed rule release, the SEC will implement a transition schedule requiring investment advisers to comply with the new Part 2 requirements by the date they must make their next annual updating amendment to Form ADV following the date the revised form becomes effective. Under SEC rules, investment advisers must submit an annual updating amendment within ninety (90) days after their fiscal year ends. However, investment advisers would not be required to comply with the new requirements no earlier than six (6) months after the rules become effective. State registered investment advisers will need to comply with the applicable state authority transition schedules.
B. Form ADV – Brochure Delivery Requirements. Proposed changes would also require investment advisers deliver a copy of the brochure within 120 days after the firm’s fiscal-year end. Currently, investment advisers are required to “offer” the brochure and the timing can be decided by the investment adviser as long as it is consistent from year to year.
According to Jarrod James, Senior Compliance Consultant of RIA Compliance Consultants, “the annual delivery requirements will be an additional burden for investment advisers that do not currently have similar procedures. However, the SEC originally proposed delivery requirements any time a material change is made. The SEC is seeking a middle ground on this issue by only requiring an annual delivery. It should be noted however, that an investment adviser’s fiduciary duty may require it to deliver updated brochures if there are material changes throughout the year.”
The SEC is also proposing changes to the timing of the initial delivery requirements to clients. Currently, investment advisers need to provide the brochure to clients at least 48 hours prior to entering into a contract with a client or at the time the contact is entered into. If the brochure is provided at the time the contract is signed, investment adviser’s must provide clients a five (5) day “free look” period whereby the client can cancel the contract without penalty. Under the proposed rules, the investment adviser would provide the brochure at or before the contract is signed and does not need to provide a “free look” period.
C. Form ADV – New Part 2. “The SEC should be commended for proposing updates to the new Part 2,” according to Tammy Emsick, Senior Compliance Consultant of RIA Compliance Consultants. “Changes are needed and long overdue. However, complying with the new rules will not be easy. Investment advisers are going to need to take time to fully understand new questions required which will also mean correctly interpreting the SEC’s intent for changing existing Part 2.”
The SEC has essentially overhauled the existing Part 2. No longer will the Part 2 contain questions in a check-the-box format. The new brochure will now entirely be a true brochure written in plain English. An outline of the proposed structure to the new Part 2 is provided below.
Item 1 – Cover Page. The brochure would have a cover page which must include a contact person and the firm’s website, if one has been created for public consumption.
Item 2 – Material Changes. The brochure would need to provide a summary of any material changes since the last update of the brochure. This is a significant change and may be viewed by investment advisers as burdensome.
Item 3 – Table of Contents. The brochure must have a table of contents. The SEC is not providing a standard table of contents and is leaving the construction of the table of contents to the discretion of the investment adviser.
Item 4 – Advisory Business. Among other things, an investment adviser must provide a description of its advisory business and describe if it specializes in any type of service. The SEC would allow instruct investment advisers to disclose the amount client assets it manages. Investment advisers would not be required to use the asset under management methodology on Part 1, but instead could include assets not counted on Part 1.
Item 5 – Fees and Compensation. Similar to the existing Part 2, this item would require an investment adviser to describe how it is compensated for services and the types of other costs a client can expect to incur in connection with the investment adviser’s services (e.g. brokerage, custody fees, and fund expenses).
Item 6 – Performance Fees and Side-by-Side Management. This “new” item specifically requires firms to describe performance fees charged and conflicts of interest relating to such charges.
Item 7 – Types of Clients. Similar to the current Part 2, a description of the firm’s types of clients would be required.
Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss. Similar to the existing Part 2, this section would require the investment adviser to describe its investment process and methodology. It would also require the firm to disclose to clients to potential risks associated with the investment adviser’s services.
Item 9 – Disciplinary Information. This section will require an investment adviser to disclose any legal or disciplinary event that is material to a client’s evaluation of the integrity of the investment adviser. Currently, investment advisers are required to provide written or oral disclosure to clients regarding these types of events under Rule 206(4)-4. According to the proposed changes, Rule 206(4)-4 will be rescinded and disclosure must be provided in the brochure. “The exact types of disciplinary events are still open for comment and consideration” according to Mr. James. “This proposal was controversial in 2000 and will likely prove to be controversial in 2008. I would think investment advisers with a reportable event on the Part 1 will have a special interest in this new requirement.”
Item 10 – Other Financial Industry Activities and Affiliations. Similar to the existing Part 2, material relationships or arrangements with related financial industry participants will need to be disclosed along with conflicts of interest regarding those relationships and how the adviser addresses the conflicts of interest.
Item 11 – Codes of Ethics, Participation or Interest in Client Transactions and Personal Trading. Similar to the existing Part 2, the new rule will require disclosure regarding the firm’s code of ethics, personal trading procedures, and conflicts regarding those procedures.
Item 12 – Brokerage Practices. Similar to the existing Part 2, this section will require the investment adviser to describe its brokerage arrangements. Specifically, soft dollar arrangements, client referrals from brokerage firms, trade aggregation, and client directed brokerage arrangements must be described.
Item 13 – Review of Accounts. Similar to the existing Part 2, this section would require an investment advice to disclose whether, and how often, it reviews clients’ accounts or financial plan, and identify who reviews the accounts.
Item 14 – Payment for Client Referrals. Similar to the existing Part 2, this section would require the investment adviser to describe arrangements it has for paying cash or other payment for client referrals.
Item 15 – Custody. This new section would require investment advisers to disclose if the client’s qualified custodian sends account statements or if the investment adviser generates and delivers account statements.
Item 16 – Discretion. Similar to the current Part 2, the investment advice would be required to describe its discretionary authority and arrangements.
Item 17 – Voting Client Securities. This new section would provide instructions on how to describe and disclose the firm’s proxy voting procedures.
Item 18 – Financial Information. Similar to Item 10 above, this section would require the investment adviser to disclose certain financial information about the adviser when material to clients. Adviser’s that require prepayment of more than $1,200 and six (6) or more months in advance, will still be required to provide a balance sheet to clients. Additional, the proposal would require disclosures of financial conditions reasonable likely to impair the investment adviser’s ability to meet contractual commitments to clients if the firm has discretion, custody or requires prepayment of more than $1,200 in fees per client and six months or more in advance. The proposal also seeks comments on requiring the disclosure of investment advisers subject to a bankruptcy petition during the past ten years.
Item 19 – Index. The SEC is proposing an index that must be submitted to the SEC, but does not need to be given to clients.
D. Form ADV – Supplements for Supervised Persons providing Investment Advice. Investment advisers will also be required to provide supplemental brochures for each supervised person that provides advice to clients. This is similar to the old Part I, Schedule D requirement. These supplements would not need to be submitted through IARD, but would need to be given to clients for which the supervised person provides advice. There are exceptions to when the supplement needs to be given and would not be included in the annual delivery of the firm brochure requirement. The content of the supplements would include business background, education background and disciplinary information.
E. Conclusion. RIA Compliance Consultants has attached a preliminary summary of the proposed new Form ADV Part 2 (Press%20Release.NewPart2.03.09.08.pdf), and we intend to post a more comprehensive summary and our comments by the end of the month.
A. Form ADV – Registration and Disclosure Document. The Form ADV is the registration document for investment adviser firms registered with the SEC and state securities authorities. The new Part 1 of Form ADV has been in effect since 2001 and is filed electronically through the Investment Adviser Registration Depository (IARD). Part 1 is a “check-the-box” form and while made publicly available through the IARD system, investment advisers are typically not required to provide the Part 1 to clients. The current Part 2 is provided to clients and is considered an investment adviser’s disclosure brochure. The SEC’s amendments to the Part 2 are intended to require investment advisers to provide regulators and clients with a brochure written in plain English. The brochure must describe the investment adviser’s services, fees, business practices, and conflicts of interest.
The new Part 2 brochures will need to be filed through the IARD system in PDF format. Investment advisers will prepare and make changes to their brochures using their own computers and then simply submit versions of the brochure through IARD. Currently, the SEC provides a standard form that must be used when preparing the Part 2. Under the proposed rules, the SEC will just provide instructions to complete the brochure, but will not provide a standard form that must be used. According to the proposed rule release, the SEC will implement a transition schedule requiring investment advisers to comply with the new Part 2 requirements by the date they must make their next annual updating amendment to Form ADV following the date the revised form becomes effective. Under SEC rules, investment advisers must submit an annual updating amendment within ninety (90) days after their fiscal year ends. However, investment advisers would not be required to comply with the new requirements no earlier than six (6) months after the rules become effective. State registered investment advisers will need to comply with the applicable state authority transition schedules.
B. Form ADV – Brochure Delivery Requirements. Proposed changes would also require investment advisers deliver a copy of the brochure within 120 days after the firm’s fiscal-year end. Currently, investment advisers are required to “offer” the brochure and the timing can be decided by the investment adviser as long as it is consistent from year to year.
According to Jarrod James, Senior Compliance Consultant of RIA Compliance Consultants, “the annual delivery requirements will be an additional burden for investment advisers that do not currently have similar procedures. However, the SEC originally proposed delivery requirements any time a material change is made. The SEC is seeking a middle ground on this issue by only requiring an annual delivery. It should be noted however, that an investment adviser’s fiduciary duty may require it to deliver updated brochures if there are material changes throughout the year.”
The SEC is also proposing changes to the timing of the initial delivery requirements to clients. Currently, investment advisers need to provide the brochure to clients at least 48 hours prior to entering into a contract with a client or at the time the contact is entered into. If the brochure is provided at the time the contract is signed, investment adviser’s must provide clients a five (5) day “free look” period whereby the client can cancel the contract without penalty. Under the proposed rules, the investment adviser would provide the brochure at or before the contract is signed and does not need to provide a “free look” period.
C. Form ADV – New Part 2. “The SEC should be commended for proposing updates to the new Part 2,” according to Tammy Emsick, Senior Compliance Consultant of RIA Compliance Consultants. “Changes are needed and long overdue. However, complying with the new rules will not be easy. Investment advisers are going to need to take time to fully understand new questions required which will also mean correctly interpreting the SEC’s intent for changing existing Part 2.”
The SEC has essentially overhauled the existing Part 2. No longer will the Part 2 contain questions in a check-the-box format. The new brochure will now entirely be a true brochure written in plain English. An outline of the proposed structure to the new Part 2 is provided below.
Item 1 – Cover Page. The brochure would have a cover page which must include a contact person and the firm’s website, if one has been created for public consumption.
Item 2 – Material Changes. The brochure would need to provide a summary of any material changes since the last update of the brochure. This is a significant change and may be viewed by investment advisers as burdensome.
Item 3 – Table of Contents. The brochure must have a table of contents. The SEC is not providing a standard table of contents and is leaving the construction of the table of contents to the discretion of the investment adviser.
Item 4 – Advisory Business. Among other things, an investment adviser must provide a description of its advisory business and describe if it specializes in any type of service. The SEC would allow instruct investment advisers to disclose the amount client assets it manages. Investment advisers would not be required to use the asset under management methodology on Part 1, but instead could include assets not counted on Part 1.
Item 5 – Fees and Compensation. Similar to the existing Part 2, this item would require an investment adviser to describe how it is compensated for services and the types of other costs a client can expect to incur in connection with the investment adviser’s services (e.g. brokerage, custody fees, and fund expenses).
Item 6 – Performance Fees and Side-by-Side Management. This “new” item specifically requires firms to describe performance fees charged and conflicts of interest relating to such charges.
Item 7 – Types of Clients. Similar to the current Part 2, a description of the firm’s types of clients would be required.
Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss. Similar to the existing Part 2, this section would require the investment adviser to describe its investment process and methodology. It would also require the firm to disclose to clients to potential risks associated with the investment adviser’s services.
Item 9 – Disciplinary Information. This section will require an investment adviser to disclose any legal or disciplinary event that is material to a client’s evaluation of the integrity of the investment adviser. Currently, investment advisers are required to provide written or oral disclosure to clients regarding these types of events under Rule 206(4)-4. According to the proposed changes, Rule 206(4)-4 will be rescinded and disclosure must be provided in the brochure. “The exact types of disciplinary events are still open for comment and consideration” according to Mr. James. “This proposal was controversial in 2000 and will likely prove to be controversial in 2008. I would think investment advisers with a reportable event on the Part 1 will have a special interest in this new requirement.”
Item 10 – Other Financial Industry Activities and Affiliations. Similar to the existing Part 2, material relationships or arrangements with related financial industry participants will need to be disclosed along with conflicts of interest regarding those relationships and how the adviser addresses the conflicts of interest.
Item 11 – Codes of Ethics, Participation or Interest in Client Transactions and Personal Trading. Similar to the existing Part 2, the new rule will require disclosure regarding the firm’s code of ethics, personal trading procedures, and conflicts regarding those procedures.
Item 12 – Brokerage Practices. Similar to the existing Part 2, this section will require the investment adviser to describe its brokerage arrangements. Specifically, soft dollar arrangements, client referrals from brokerage firms, trade aggregation, and client directed brokerage arrangements must be described.
Item 13 – Review of Accounts. Similar to the existing Part 2, this section would require an investment advice to disclose whether, and how often, it reviews clients’ accounts or financial plan, and identify who reviews the accounts.
Item 14 – Payment for Client Referrals. Similar to the existing Part 2, this section would require the investment adviser to describe arrangements it has for paying cash or other payment for client referrals.
Item 15 – Custody. This new section would require investment advisers to disclose if the client’s qualified custodian sends account statements or if the investment adviser generates and delivers account statements.
Item 16 – Discretion. Similar to the current Part 2, the investment advice would be required to describe its discretionary authority and arrangements.
Item 17 – Voting Client Securities. This new section would provide instructions on how to describe and disclose the firm’s proxy voting procedures.
Item 18 – Financial Information. Similar to Item 10 above, this section would require the investment adviser to disclose certain financial information about the adviser when material to clients. Adviser’s that require prepayment of more than $1,200 and six (6) or more months in advance, will still be required to provide a balance sheet to clients. Additional, the proposal would require disclosures of financial conditions reasonable likely to impair the investment adviser’s ability to meet contractual commitments to clients if the firm has discretion, custody or requires prepayment of more than $1,200 in fees per client and six months or more in advance. The proposal also seeks comments on requiring the disclosure of investment advisers subject to a bankruptcy petition during the past ten years.
Item 19 – Index. The SEC is proposing an index that must be submitted to the SEC, but does not need to be given to clients.
D. Form ADV – Supplements for Supervised Persons providing Investment Advice. Investment advisers will also be required to provide supplemental brochures for each supervised person that provides advice to clients. This is similar to the old Part I, Schedule D requirement. These supplements would not need to be submitted through IARD, but would need to be given to clients for which the supervised person provides advice. There are exceptions to when the supplement needs to be given and would not be included in the annual delivery of the firm brochure requirement. The content of the supplements would include business background, education background and disciplinary information.
E. Conclusion. RIA Compliance Consultants has attached a preliminary summary of the proposed new Form ADV Part 2 (Press%20Release.NewPart2.03.09.08.pdf), and we intend to post a more comprehensive summary and our comments by the end of the month.
posted by bhill at 2:49 PM
Investment Advisers Should Review Insider Trading Policies & Procedures
Although the recent report concerning possible insider trading by a public pension plan administrator conducted by the Division of Enforcement of the U.S. Securities and Exchange Commission ("SEC") involves an essentially unregulated money manager which is not subject to the Investment Advisers Act of 1940, it still offers an excellent opportunity for each registered investment adviser to review its policies and procedures regarding trading activity based upon material, non-public ("insider") information.
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
- Has your registered investment adviser designated in writing a staff person, such as the chief compliance officer ("CCO"), to be responsible for establishing, implementing and enforcing written insider trading policies and procedures?
- Does your registered investment adviser's insider trading policy require a supervised person to report acquisition of insider information or suspected insider information to the CCO and likewise require the CCO to determine and communicate the appropriate course of action for the supervised person?
- Does your registered investment adviser's insider trading policy require the CCO to confidentially document such disclosure of the acquisition of insider information and the communicated course of action?
- To the extent that the supervised person needs to communicate such insider information to other supervised person, doe your registered investment adviser have procedures to limit such disclosures and document such disclosures.
- Has your registered investment adviser held training concerning its insider policy and procedures with its supervised persons? Can your supervised persons correctly identify what constitutes potentially insider information and how such situations should be handled?
- Does your registered investment adviser have any clients that are a publicly traded company, a board director of publicly traded company, or a high level executives of a publicly traded company with significant concentrated positions within the company? If so, are the personal securities transaction by your supervised persons within such companies subject to an exception report, restricted securities list, pre-clearance procedure, or black-out period? Likewise, does the investment committee of your registered investment adviser use similar supervisory tools with respect to making investment recommendations or decisions for client accounts or proprietary funds or accounts?
RIA Compliance Consultants can help your registered investment adviser develop written insider trading policies and procedures so as to minimize the risk of its supervised person's misusing material, non-public information. Please contact us at 877-345-4034 if you're interested in discussing such services.
Labels: Insider Trading, Pensions, SEC
posted by bhill at 3:57 PM
SEC Proposing to Permit the Release of Customer Contact Info. to Departing Reps
The U.S. Securities and Commission ("SEC") released today a proposed rule amending Regulation S-P, which includes an exception from the privacy notice and opt-out requirements so as to permit the release of certain customer contact information to the customer's representative when departing his or her current SEC registered investment adviser or broker-dealer and joining a new firm.
According to the text of the proposed amendments, this exception for releasing limited customer information to a departing representative is based upon the following conditions:
According to the text of the proposed amendments, this exception for releasing limited customer information to a departing representative is based upon the following conditions:
- The information is limited to a customer's name, a general description of the type of account and products held by the customer, and the customer’s contact information, including the customer’s address, telephone number, and email information;
- The information does not include any customer's account number, social security number, or security positions; and
- The departing representative must provide the departing investment adviser or broker-dealer, no later than the representative’s separation date from employment with the departing investment adviser or broker-dealer, a written record of the information that will be disclosed pursuant to this exception, and the departing investment adviser or broker-dealer must maintain and preserve such records.
In the proposing rule release, the SEC clarified that a representative could use this information to solicit only a departing firm's customers that were the representative’s clients. The SEC explained that "this condition recognizes that an investor might expect to be contacted by a representative with whom the investor has done business before, but not by another person at the representative’s new firm."
Finally, the SEC noted that a registered investment adviser or broker-dealer "may not require or expect a representative from another firm to bring more information than necessary for the representative to solicit former clients."
The SEC is seeking comments regarding the proposed rule. RIA Compliance Consultants will keep readers of our blog informed of the SEC's final action related to this amendment.
posted by bhill at 9:13 PM
Proposed Amendments to Reg S-P Permits Limited Transfer of Information When IARs Change Firms
At its open meeting today, the U.S. Securities and Exchange Commission ("SEC") voted to propose several amendments to Regulation S-P, which sets forth the privacy obligations of registered investment advisers and broker-dealers with respect to confidential client information.
Of particular interest to those investment adviser representatives and/or registered representatives that are considering the possibility of departing their existing registered investment adviser or broker-dealer and joining a new firm, the proposed amendments to Regulation S-P would apparently permit the transfer of limited information when such personnel change firms. Although the SEC has not issued the text of these proposed amendments, SEC Chairman Christopher Cox explained during the open meeting that "the proposed amendments would provide guidance on the responsibilities that a firm and its employees have to protect client privacy when employees move from one firm to another."
Upon the SEC's publication of the proposing release, RIA Compliance Consultants will provide a detailed summary of the proposed amendments to Regulation S-P to the readers of our blog.
Of particular interest to those investment adviser representatives and/or registered representatives that are considering the possibility of departing their existing registered investment adviser or broker-dealer and joining a new firm, the proposed amendments to Regulation S-P would apparently permit the transfer of limited information when such personnel change firms. Although the SEC has not issued the text of these proposed amendments, SEC Chairman Christopher Cox explained during the open meeting that "the proposed amendments would provide guidance on the responsibilities that a firm and its employees have to protect client privacy when employees move from one firm to another."
Upon the SEC's publication of the proposing release, RIA Compliance Consultants will provide a detailed summary of the proposed amendments to Regulation S-P to the readers of our blog.
posted by bhill at 7:52 PM
SEC Bars Investment Advisor for Inflating AUM and Performance Advertising
In January of this year, the SEC entered bar and cease and desist orders against a two member registered investment advisor firm. The firm was owned by a husband and wife with the wife serving strictly in an administrative capacity. The law judge in the case found that the registered investment advisor had willfully violated the Investment Advisers Act of 1940 because it falsely represented to the SEC that it had assets under management (AUM) exceeding $25 million in order to remain eligible for SEC registration. The inflated AUM numbers were reported on several Form ADV Part 1 amendments from 1996 through 2000. The SEC terminated the firm’s registration in 2002. However, the firm continued to hold itself out to the public as an investment advisor and reported its AUM numbers through several database services. The reporting of those numbers were also found to be intentionally inflated and therefore misleading. Further, the firm was not able to provide documentation substantiating its AUM and performance numbers. The firm claimed all paperwork and client files were lost in a fire and then claimed the paperwork was lost in flood. To read the entire order click here.
While this firm’s actions were found to be willful and were intentionally done to mislead potential clients and the public in general, the lessons learned can be applied to every registered investment advisor. This case illustrates the importance of disclosing accurate AUM on the Form ADV Part 1. If your firm does not meet an eligibility requirement for SEC registration, it must deregister with the SEC and register with the state regulators. Do not take the risk of over reporting or misreporting AUM simply to maintain SEC registration. This case also illustrates action the SEC is willing to take when a registered investment advisor presents misleading AUM and performance information to the public through advertising and other marketing channels. All performance numbers need to be substantiated, documented and maintained with the firm’s books and records. Finally, a registered investment advisor is required to maintain books and records under Rule 204-2 and other applicable regulations, even after the firm terminates its registration. Once termination is effective, a registered investment advisor must maintain all books and records for the time period required under Rule 204-2, typically not less than five years from the end of the fiscal year during which the last entry was made on such record.
While this firm’s actions were found to be willful and were intentionally done to mislead potential clients and the public in general, the lessons learned can be applied to every registered investment advisor. This case illustrates the importance of disclosing accurate AUM on the Form ADV Part 1. If your firm does not meet an eligibility requirement for SEC registration, it must deregister with the SEC and register with the state regulators. Do not take the risk of over reporting or misreporting AUM simply to maintain SEC registration. This case also illustrates action the SEC is willing to take when a registered investment advisor presents misleading AUM and performance information to the public through advertising and other marketing channels. All performance numbers need to be substantiated, documented and maintained with the firm’s books and records. Finally, a registered investment advisor is required to maintain books and records under Rule 204-2 and other applicable regulations, even after the firm terminates its registration. Once termination is effective, a registered investment advisor must maintain all books and records for the time period required under Rule 204-2, typically not less than five years from the end of the fiscal year during which the last entry was made on such record.
Labels: Advertising, Enforcement, Form ADV, SEC
posted by bhill at 12:27 PM
SEC Considering a New Form ADV Part 2 at Its February 13th Meeting
The U.S. Securities and Exchange Commission ("SEC") announced today that the SEC Commissioners will consider at the SEC's open meeting on February 13, 2008 whether to propose amendments to the Part 2 of the Form ADV under the Investment Advisers Act of 1940.
According to the SEC's announcement, "[t]he proposed amendments, if adopted, would require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The proposal also would require advisers to electronically file their brochures with the Commission, and the brochures would be available to the public through the Commission's Web site."
Upon the SEC's public release of this proposal, RIA Compliance Consultants will post a summary and analysis of the proposed amendments. Stay tuned.
According to the SEC's announcement, "[t]he proposed amendments, if adopted, would require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The proposal also would require advisers to electronically file their brochures with the Commission, and the brochures would be available to the public through the Commission's Web site."
Upon the SEC's public release of this proposal, RIA Compliance Consultants will post a summary and analysis of the proposed amendments. Stay tuned.
posted by bhill at 8:08 PM
SRO Supervision for Investment Advisers?
In today's issue of Investment News, there's a report that an official of the Securities Industry and Financial Markets Association ["SIFMA"] is suggesting that "the SEC should consider whether investment-adviser-only firms should be subject to supervision by a self-regulatory organization [i.e. Financial Regulatory Authority or "FINRA"] so that customers are assured the high level of supervision and oversight that brokerage customers already have." These comments are apparently in response to the recent release of the recent report prepared by the Rand Corporation, which primarily concludes that experienced investors do not understand the difference between an investment adviser and a broker-dealer.
The comments by the SIFMA official are somewhat puzzling since the Rand Corporation did not evaluate whether the SEC's regulation of investment advisers under the Investment Advisers Act of 1940 was more or less effective than the FINRA's regulation of broker-dealers pursuant to the Securities and Exchange Act of 1934. An alternative perspective to SIFMA and interesting question to a concerned policymaker is whether investors would be better served by the SEC and/or Congress more broadly defining investment activity that falls under the jurisdiction of the Investment Advisers Act of 1940 and thereby obligating such firms to act as fiduciaries to their clients.
Investment advisers should stay tuned into this issue since this is undoubtedly the start of another round of the ongoing debate concerning how the SEC should regulate broker-dealers relative to investment advisers.
The comments by the SIFMA official are somewhat puzzling since the Rand Corporation did not evaluate whether the SEC's regulation of investment advisers under the Investment Advisers Act of 1940 was more or less effective than the FINRA's regulation of broker-dealers pursuant to the Securities and Exchange Act of 1934. An alternative perspective to SIFMA and interesting question to a concerned policymaker is whether investors would be better served by the SEC and/or Congress more broadly defining investment activity that falls under the jurisdiction of the Investment Advisers Act of 1940 and thereby obligating such firms to act as fiduciaries to their clients.
Investment advisers should stay tuned into this issue since this is undoubtedly the start of another round of the ongoing debate concerning how the SEC should regulate broker-dealers relative to investment advisers.
Labels: SEC
posted by bhill at 7:30 AM
SEC Chair Previews Results of "Free Lunch" Seminar Exams
During recent testimony before the U.S. Senate's Special Committee on Aging, United States Securities and Exchange Commission ("SEC") Chairman Christopher Cox offered a preview of the results from the SEC's targeted exams of financial firms that sponsor "free lunch" seminars in advance of the full release next week at the SEC's "Senior Summit". The following is an excerpt of SEC Chairman Cox's comments regarding the SEC's "free lunch" seminar exam findings:
But even at this point it is clear that we were right to identify these "free lunch" sales seminars as posing serious risks to senior investors. Many of the advertisements and mailers used to solicit seniors to attend these events were confusing or misleading about the intent of the event. Our examinations have found that, despite being advertised as "educational" or touting "nothing will be sold," the purpose of these seminars is to convince attendees to open new accounts with the sponsoring firm – and ultimately, to sell financial products to seniors.
Based on this insight, RIA Compliance Consultants would recommend that financial professionals immediately consider deleting terms and descriptions such as "educational" or "nothing will be sold" from the marketing materials promoting seminars or actual seminar presentations. Moreover, financial professionals that conduct seminars focused upon seniors should carve out time next week to review the complete results of the SEC target examinations of sponsors of "free lunch" seminars since this report will undoubtedly be used as guide by securities regulators for areas of further scrutiny.
If your firm needs guidance with respect to ensuring its sales literature and advertising is in compliance with the requirements of an investment adviser under state or federal law, please contact RIA Compliance Consultants at 877-345-4034.
But even at this point it is clear that we were right to identify these "free lunch" sales seminars as posing serious risks to senior investors. Many of the advertisements and mailers used to solicit seniors to attend these events were confusing or misleading about the intent of the event. Our examinations have found that, despite being advertised as "educational" or touting "nothing will be sold," the purpose of these seminars is to convince attendees to open new accounts with the sponsoring firm – and ultimately, to sell financial products to seniors.
Based on this insight, RIA Compliance Consultants would recommend that financial professionals immediately consider deleting terms and descriptions such as "educational" or "nothing will be sold" from the marketing materials promoting seminars or actual seminar presentations. Moreover, financial professionals that conduct seminars focused upon seniors should carve out time next week to review the complete results of the SEC target examinations of sponsors of "free lunch" seminars since this report will undoubtedly be used as guide by securities regulators for areas of further scrutiny.
If your firm needs guidance with respect to ensuring its sales literature and advertising is in compliance with the requirements of an investment adviser under state or federal law, please contact RIA Compliance Consultants at 877-345-4034.
Labels: Advertising, Equity-Indexed Annuities, SEC
posted by bhill at 10:15 PM
Attention SEC Registered Investment Advisors: Are You in Compliance with Your Home State’s Rules?
If your firm is registered with the SEC, RIA Compliance Consultants wants you to be aware that the Investment Advisers Act of 1940 provides state regulators authority over federally registered investment advisors and their employees, albeit on a limited scope. Many SEC firms believe that because they are not registered with a state regulator, they are therefore exempt from all requirements and provisions states have mandated. While it is true that SEC firms should focus their attention on the Advisers Act and its rules, SEC firms need to be cognizant of the authority provided to state regulators under Section 203A of the Advisers Act. The following summarizes the actions state regulators may take under Section 203A.
Licensing fees. States can impose and collect filing, registration, or licensing fees.
Investment adviser representative licensing. States have the ability to license, register, or otherwise qualify an investment adviser representative who has a place of business in the state.
Enforcement actions for fraud and deceit. States may have the authority to investigate and bring enforcement actions with respect to fraud or deceit against an investment adviser or person associated with an investment adviser.
Notice filings. States have the authority to require the filing of any documents filed with the Commission pursuant to the securities laws solely for notice purposes, together with a consent to service of process, and any required fee.
SEC firms need to make sure they are in compliance with the applicable requirements in each state in which the firm conducts business. RIA Compliance Consultants wants to ensure SEC-registered firms are aware that a state can bring an enforcement action against the firm for actions of fraud and deceit. Many states have specific prohibited acts SEC firms and their advisor representatives must follow in order to avoid enforcement actions.
Some of the common fraudulent, dishonest or unethical practices we see listed state statutes include: placing an order for a client account without authority to do so; exercising discretionary trading authorization without written authority; inducing trading in a client's account that is excessive in size and frequency in view of the client's financial resources and investment objectives, and character of the account; charging excessive advisory fees; loaning money to a client or borrowing money from a client; failing to enter into written agreements; and failing to provide disclosure of material conflicts of interest, including the receipt of possible dual fees.
If you have questions about the rules of a state in which you conduct business, please give us a call to see how we can help your firm and its advisor representatives stay in compliance with all applicable laws and regulations.
Licensing fees. States can impose and collect filing, registration, or licensing fees.
Investment adviser representative licensing. States have the ability to license, register, or otherwise qualify an investment adviser representative who has a place of business in the state.
Enforcement actions for fraud and deceit. States may have the authority to investigate and bring enforcement actions with respect to fraud or deceit against an investment adviser or person associated with an investment adviser.
Notice filings. States have the authority to require the filing of any documents filed with the Commission pursuant to the securities laws solely for notice purposes, together with a consent to service of process, and any required fee.
SEC firms need to make sure they are in compliance with the applicable requirements in each state in which the firm conducts business. RIA Compliance Consultants wants to ensure SEC-registered firms are aware that a state can bring an enforcement action against the firm for actions of fraud and deceit. Many states have specific prohibited acts SEC firms and their advisor representatives must follow in order to avoid enforcement actions.
Some of the common fraudulent, dishonest or unethical practices we see listed state statutes include: placing an order for a client account without authority to do so; exercising discretionary trading authorization without written authority; inducing trading in a client's account that is excessive in size and frequency in view of the client's financial resources and investment objectives, and character of the account; charging excessive advisory fees; loaning money to a client or borrowing money from a client; failing to enter into written agreements; and failing to provide disclosure of material conflicts of interest, including the receipt of possible dual fees.
If you have questions about the rules of a state in which you conduct business, please give us a call to see how we can help your firm and its advisor representatives stay in compliance with all applicable laws and regulations.
Labels: Compliance Training, SEC
posted by bhill at 9:07 AM
Are 12b-1 Fees Paid to Registered Representatives in Violation of Investment Advisers Act of 1940?
As the United States Securities and Exchange Commission (SEC) has started to scrutinize the current practices related to 12b-1 fees, several securities industry commentators have noted that the payment of 12b-1 fees by mutual funds to broker-dealers is likely in violation of the Investment Advisers Act of 1940 for those registered representatives that utilize the 12b-1 fees as a method for paying such registered representatives for their monitoring and ongoing advice to clients regarding their investments.
Under the Investment Advisers Act, an investment adviser is defined as an entity or individual that provide advice about securities for compensation in any form and engages in the regular business of providing advice about securities. However, Section 202(a)(11)(c) of the Investment Advisers Act excludes from the definition of an investment adviser "...any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor...." It's on this basis that broker-dealers and their registered representatives avoid the numerous requirements of the Investment Advisers Act.
As noted by these securities commentators, many of the activities performed by registered representatives are purely investment advisory services that are not transactional related. In other words, the monitoring and providing of ongoing investment advice in exchange for a 12b-1 trail fee is not solely incidental to the business of a broker, which is the execution of securities transactions. Moreover, it was noted that these 12b-1 fees strongly resemble the recently struck down fee-based brokerage accounts. It's difficult for an objective bystander to review the justifications for the 12b-1 fee by its proponents and not conclude that there's a violation of the federal laws regulating investment advisers.
The time has come to level the playing field between broker-dealers and investment advisers. If a registered representative of a broker-dealer is providing ongoing advice about mutual funds for a quarterly, asset-based trail, then the SEC needs to start requiring such registered representative and his or her broker-dealer to meet the higher fiduciary obligations of a registered investment adviser.
Under the Investment Advisers Act, an investment adviser is defined as an entity or individual that provide advice about securities for compensation in any form and engages in the regular business of providing advice about securities. However, Section 202(a)(11)(c) of the Investment Advisers Act excludes from the definition of an investment adviser "...any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor...." It's on this basis that broker-dealers and their registered representatives avoid the numerous requirements of the Investment Advisers Act.
As noted by these securities commentators, many of the activities performed by registered representatives are purely investment advisory services that are not transactional related. In other words, the monitoring and providing of ongoing investment advice in exchange for a 12b-1 trail fee is not solely incidental to the business of a broker, which is the execution of securities transactions. Moreover, it was noted that these 12b-1 fees strongly resemble the recently struck down fee-based brokerage accounts. It's difficult for an objective bystander to review the justifications for the 12b-1 fee by its proponents and not conclude that there's a violation of the federal laws regulating investment advisers.
The time has come to level the playing field between broker-dealers and investment advisers. If a registered representative of a broker-dealer is providing ongoing advice about mutual funds for a quarterly, asset-based trail, then the SEC needs to start requiring such registered representative and his or her broker-dealer to meet the higher fiduciary obligations of a registered investment adviser.
Labels: SEC
posted by bhill at 7:43 PM
SEC Announces New ComplianceAlerts
On June 14, the United States Securities and Exchange Commission (SEC) released its first ComplianceAlert to help chief compliance officers of SEC-registered firms (including registered investment advisors) learn about some of the common deficiencies being identified by SEC staff during regulatory examinations. ComplianceAlerts will be published periodically and posted on the SEC’s website for public viewing.
According to the SEC’s press release announcing the new program, the SEC hopes “this broader sharing of recent examination findings can benefit compliance officers and help them to proactively fine-tune their compliance and supervisory controls.” The goal is to provide firms with an additional tool to determine whether they are in compliance with federal securities laws. By understanding what the SEC is looking for during a regulatory examination and what other registered investment advisor firms have been cited for, chief compliance officers can implement compliance and supervisory procedures aimed at avoiding the same mistakes others have made.
With the new ComplianceAlerts and the pre-existing CCOutreach Program, the SEC is making a concerted effort to interact and be proactive with chief compliance officers of registered investment advisors . The SEC’s willingness to share information with its firms is a sign of the commission’s goal of encouraging firms to be proactive with their compliance programs.
RIA Compliance Consultants supports this initiative by the SEC and believes registered investment advisors should take full advantage of the ComplianceAlerts. While not all topics discussed in the ComplianceAlerts will focus solely on advisory issues, registered investment advisors should be able to gain valuable knowledge and insight into SEC examination initiatives. Stay tuned to RIA Compliance Consultants as we follow the ComplianceAlerts and pass along valuable insights concerning registered investment advisor examinations.
According to the SEC’s press release announcing the new program, the SEC hopes “this broader sharing of recent examination findings can benefit compliance officers and help them to proactively fine-tune their compliance and supervisory controls.” The goal is to provide firms with an additional tool to determine whether they are in compliance with federal securities laws. By understanding what the SEC is looking for during a regulatory examination and what other registered investment advisor firms have been cited for, chief compliance officers can implement compliance and supervisory procedures aimed at avoiding the same mistakes others have made.
With the new ComplianceAlerts and the pre-existing CCOutreach Program, the SEC is making a concerted effort to interact and be proactive with chief compliance officers of registered investment advisors . The SEC’s willingness to share information with its firms is a sign of the commission’s goal of encouraging firms to be proactive with their compliance programs.
RIA Compliance Consultants supports this initiative by the SEC and believes registered investment advisors should take full advantage of the ComplianceAlerts. While not all topics discussed in the ComplianceAlerts will focus solely on advisory issues, registered investment advisors should be able to gain valuable knowledge and insight into SEC examination initiatives. Stay tuned to RIA Compliance Consultants as we follow the ComplianceAlerts and pass along valuable insights concerning registered investment advisor examinations.
Labels: SEC
posted by bhill at 2:55 PM
Broker/Dealer Exemption Rule Vacated
In a 2-1 decision issued at the end of March, the U.S. Court of Appeals for the District of Columbia Circuit threw out what is commonly referred to as the Merrill Lynch Rule, formally known as Rule 202(a)(11)-1 of the Investment Advisers Act of 1940. Under this rule, the SEC exempted certain broker-dealers from investment advisor registration even if the broker-dealers provide what many contend to be advisory services and charge a fee for such services. From its inception, the Financial Planning Association fought the rule and ultimately received a successful outcome with last week's ruling. In the ruling, Judge Judith Rogers and Judge Brett Kavanaugh noted that the SEC exceeded its authority by exempting brokerage firms that charge asset-based fees from registration under the Advisers Act.
While RIA Compliance Consultants, Inc. agrees with the ruling, we do not think this will have much of an effect on our current clients, who are already registered as investment advisors. This ruling will affect broker-dealers that have been relying on the rule to avoid investment advisor registration. It should be noted that the rule remains in effect until the D.C. court's decision is final, which should occur on May 21, 2007, unless the SEC requests a rehearing. If your firm is interested to learn about the steps necessary to become registered as an investment advisor, please contact us and ask for Jarrod James, Senior Compliance Consultant. RCC offers a comprehensive turnkey approach to investment advisor registration at competitive prices. We also invite you to check out the Registration Services and FAQ – IA Registration pages of our website.
While RIA Compliance Consultants, Inc. agrees with the ruling, we do not think this will have much of an effect on our current clients, who are already registered as investment advisors. This ruling will affect broker-dealers that have been relying on the rule to avoid investment advisor registration. It should be noted that the rule remains in effect until the D.C. court's decision is final, which should occur on May 21, 2007, unless the SEC requests a rehearing. If your firm is interested to learn about the steps necessary to become registered as an investment advisor, please contact us and ask for Jarrod James, Senior Compliance Consultant. RCC offers a comprehensive turnkey approach to investment advisor registration at competitive prices. We also invite you to check out the Registration Services and FAQ – IA Registration pages of our website.
Labels: Registration, SEC
posted by bhill at 2:34 PM
SEC Announces CCOutreach Schedule for 2007
The SEC has announced dates and locations for the 2007 CCOutreach Program regional seminars. Seminars are conducted by the various SEC regional and district offices, but seating is limited for the seminars and priority is given to CCOs of investment advisors and mutual funds.
According to the SEC, the goal of the CCOutreach Program is to provide Chief Compliance Officers (CCOs) of investment advisors with the information on the SEC, resources available to CCOs, and the SEC examination process, including hot topics and items examiners will be focusing on. Another goal of the program is to create a continuous dialogue between the SEC and CCOs. According to the SEC press release, this year's seminar topics will include:
According to the SEC, the goal of the CCOutreach Program is to provide Chief Compliance Officers (CCOs) of investment advisors with the information on the SEC, resources available to CCOs, and the SEC examination process, including hot topics and items examiners will be focusing on. Another goal of the program is to create a continuous dialogue between the SEC and CCOs. According to the SEC press release, this year's seminar topics will include:
- the examination and risk assessment process;
- books and records and disclosures and filings;
- brokerage arrangements, best execution, trade allocation, and soft dollars;
- marketing, performance, advertising, and distribution.
The CCOutreach program was an outcome from passage of Rule 206(4)-7, "Compliance Procedures and Policies", which can seem challenging and downright intimidating to the average investment advisor. The thought of an SEC, risk-based examination only compounds the pressure placed upon the CCO. The SEC should be commended for making a serious effort to work with investment advisors and their CCOs. RIA Compliance Consultants, Inc. believes investment advisors are better off by taking advantage of this program. Click here to read more information from the SEC website.
If your firm cannot attend one of the CCOutreach seminars but would still like to talk to a compliance professional regarding the current regulatory environment facing investment advisors, give us a call today.
Labels: SEC
posted by bhill at 12:35 PM
SEC Chairman Issues Press Release Concerning Goldstein v. SEC
On August 7, SEC Chairman Christopher Cox issued a press release concerning the recent D.C. Circuit Court of Appeals decision in SEC v. Goldstein. In the release, Cox stated that the SEC does not intend to fight the recent decision of the Court which threw out the controversial hedge fund advisor registration rule that was effective earlier this year. This decision by the SEC effectively ends the most current debate of whether advisors to hedge funds fall under the Investment Advisers Act of 1940. However, while this current battle appears over, the issue is not.
In the same press release, Cox stated that he has instructed the SEC to continue looking at ways to monitor hedge funds and those persons that advise hedge funds. The SEC is looking at methods to bring hedge funds under the anti-fraud provisions of the Advisers Act in a way that would pass legal scrutiny. He said possible changes “would have the effect of 'looking through' a hedge fund to its investors. This would reverse the side-effect of the Goldstein decision that the anti-fraud provisions of the Act apply only to 'clients' as the court interpreted that term, and not to investors in the hedge fund.” Finally, Cox made an effort to remind the industry that while Goldstein may have thrown out the registration rule, hedge funds are still “subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws.”
To read the entire text of the press release click here
The debate over hedge fund regulation appears far from over. If you are an advisor to a hedge fund and have questions concerning these recent developments or just have general questions concerning the regulation of investment advisors, please give us a call.
In the same press release, Cox stated that he has instructed the SEC to continue looking at ways to monitor hedge funds and those persons that advise hedge funds. The SEC is looking at methods to bring hedge funds under the anti-fraud provisions of the Advisers Act in a way that would pass legal scrutiny. He said possible changes “would have the effect of 'looking through' a hedge fund to its investors. This would reverse the side-effect of the Goldstein decision that the anti-fraud provisions of the Act apply only to 'clients' as the court interpreted that term, and not to investors in the hedge fund.” Finally, Cox made an effort to remind the industry that while Goldstein may have thrown out the registration rule, hedge funds are still “subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws.”
To read the entire text of the press release click here
The debate over hedge fund regulation appears far from over. If you are an advisor to a hedge fund and have questions concerning these recent developments or just have general questions concerning the regulation of investment advisors, please give us a call.
Labels: SEC
posted by bhill at 10:54 AM
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
SEC Provides Guidance As to What Constitutes Investment Advisory Activities
The SEC's recent adoption of the controversial rule, Certain Broker-Dealers Deemed not to be Investment Advisers, does not appear to have a direct effect on the compliance practices of existing RIA firms; however, it does require significant action to be taken by brokers-dealers that are conducting what have usually been considered advisory services.
While we believe that the SEC did not go far enough in reigning in the advisory activities of BDs, the new rule does provide some much needed guidance for the industry. Here are three examples of items from the new rule that many BDs will have to address and resolve within the next two months:
Assets Under Management - BDs may provide brokerage services on an "assets under management" or fixed fee basis without registering as an advisor. This has been a point of contention throughout the industry for several years, and the SEC has ruled on the side of BDs for this one. While BDs may continue to conduct these services, they need to disclose to the investing public that their services are brokerage only and not advisory in nature. In fact, the SEC has developed specific disclosure language that BDs must use in advertising and all agreements, contracts, applications, and other forms governing the operation of non-advisory, fee based accounts. The disclosure language must be in place by July 22, 2005.
Non-Discretionary - A BD's non-advisory, fee-based services must be done on a non-discretionary basis. The SEC has correctly ruled that discretionary brokerage services should only be conducted by an investment advisor. Therefore, if you are a BD registered rep with discretionary accounts, you need to either 1) move those accounts to an advisory platform, which may mean registering as an investment advisor, or 2) release the discretionary authority. Either way, you have until October 24, 2005 to comply with this part of the rule.
No Financial Planning - BDs may not provide financial planning services. With respect to this particular issue, the SEC ruled on the side of investment advisors and industry organizations such as the Financial Planning Association. The SEC has correctly interpreted that financial planning is an investment advisory activity. According to the rule, you need to register as an investment advisor if you are a broker or dealer that 1) provides financial planning services to clients; 2) advertises financial planning services; 3) maintains a listing as a financial planning in a telephone or building directory; 4) lets it be known by word of mouth or otherwise that new financial planning clients will be accepted; or 5) uses letterhead or business cards referring to financial planning services. Again, B/Ds will have until October 24, 2005 to move these accounts to an advisory platform. However, because the advertising requirements go into effect July 22, 2005, BDs should stop advertising financial planning services by that date.
While BDs may continue to provide fee-based brokerage services and consequently not need to be registered as an investment advisor, we fully expect many BDs will get registered in order to continue providing discretionary and/or financial planning services. We also expect the debate on this issue to continue, so stay tuned to RIA Compliance Consultants for the latest information.
While we believe that the SEC did not go far enough in reigning in the advisory activities of BDs, the new rule does provide some much needed guidance for the industry. Here are three examples of items from the new rule that many BDs will have to address and resolve within the next two months:
Assets Under Management - BDs may provide brokerage services on an "assets under management" or fixed fee basis without registering as an advisor. This has been a point of contention throughout the industry for several years, and the SEC has ruled on the side of BDs for this one. While BDs may continue to conduct these services, they need to disclose to the investing public that their services are brokerage only and not advisory in nature. In fact, the SEC has developed specific disclosure language that BDs must use in advertising and all agreements, contracts, applications, and other forms governing the operation of non-advisory, fee based accounts. The disclosure language must be in place by July 22, 2005.
Non-Discretionary - A BD's non-advisory, fee-based services must be done on a non-discretionary basis. The SEC has correctly ruled that discretionary brokerage services should only be conducted by an investment advisor. Therefore, if you are a BD registered rep with discretionary accounts, you need to either 1) move those accounts to an advisory platform, which may mean registering as an investment advisor, or 2) release the discretionary authority. Either way, you have until October 24, 2005 to comply with this part of the rule.
No Financial Planning - BDs may not provide financial planning services. With respect to this particular issue, the SEC ruled on the side of investment advisors and industry organizations such as the Financial Planning Association. The SEC has correctly interpreted that financial planning is an investment advisory activity. According to the rule, you need to register as an investment advisor if you are a broker or dealer that 1) provides financial planning services to clients; 2) advertises financial planning services; 3) maintains a listing as a financial planning in a telephone or building directory; 4) lets it be known by word of mouth or otherwise that new financial planning clients will be accepted; or 5) uses letterhead or business cards referring to financial planning services. Again, B/Ds will have until October 24, 2005 to move these accounts to an advisory platform. However, because the advertising requirements go into effect July 22, 2005, BDs should stop advertising financial planning services by that date.
While BDs may continue to provide fee-based brokerage services and consequently not need to be registered as an investment advisor, we fully expect many BDs will get registered in order to continue providing discretionary and/or financial planning services. We also expect the debate on this issue to continue, so stay tuned to RIA Compliance Consultants for the latest information.
Labels: SEC
posted by bhill at 9:10 PM
SEC Starts CCO Outreach Program
Last week the SEC wrapped up its first set of Chief Compliance Officer regional meetings. The initial seminars were held by the Pacific Regional Office in several locations throughout California. This is the first step in what the SEC has described as its "CCO Outreach" program.
The Outreach program was announced back in March during a speech by SEC Chairman William Donaldson. The speech focused on advisors to fund companies; however the program is also geared towards investment advisor firms. The program will involve several regional seminars held throughout the spring and summer. A national seminar is planned for later this year and the program will also include a periodic newsletter, CCO Observer. According to Donaldson, the program will aim to provide CCOs with information on the SEC, resources available to CCOs,and the SEC examination process, including hot topics and items examiners will be focusing on. Another goal of the program is to create a continuous dialogue between the SEC and CCOs.
This should be viewed as another positive sign from the SEC as it tries to enforce its new Advisor Compliance Programs rule. It appears that the SEC is making a serious effort to work with investment advisors and their CCOs in order to help prepare them for the SEC's new risk-based examination. Is your firm ready for an SEC examination? Have you appointed a CCO and implemented written compliance and procedures programs? We can help make sure you are compliant with the new Rule and are prepared for an SEC examination.
The Outreach program was announced back in March during a speech by SEC Chairman William Donaldson. The speech focused on advisors to fund companies; however the program is also geared towards investment advisor firms. The program will involve several regional seminars held throughout the spring and summer. A national seminar is planned for later this year and the program will also include a periodic newsletter, CCO Observer. According to Donaldson, the program will aim to provide CCOs with information on the SEC, resources available to CCOs,and the SEC examination process, including hot topics and items examiners will be focusing on. Another goal of the program is to create a continuous dialogue between the SEC and CCOs.
This should be viewed as another positive sign from the SEC as it tries to enforce its new Advisor Compliance Programs rule. It appears that the SEC is making a serious effort to work with investment advisors and their CCOs in order to help prepare them for the SEC's new risk-based examination. Is your firm ready for an SEC examination? Have you appointed a CCO and implemented written compliance and procedures programs? We can help make sure you are compliant with the new Rule and are prepared for an SEC examination.
Labels: SEC
posted by bhill at 5:33 PM
