Join Our Webinar - Maintaining Required Books & Records for a Registered Investment Adviser
Your registered investment adviser is required to make and keep true accurate and current certain books and records relating to its investment advisory business. For SEC registered investment advisers, these required books and records are outlined in SEC Rule 204-2 of the Investment Advisers Act of 1940 ("Advisers Act"). Every investment adviser registered with the SEC should familiarize themselves with the requirements of this rule in relation to the documents and reports that need to be maintained, where and for how long the documents must be maintained, and how the documents may be maintained. Most state securities regulators impose books and records requirements similar to the SEC for state registered investment advisers, however, your registered investment adviser will need to make sure that it understands the specific requirements of its state securities regulator.
Maintenance of books and records is something that should be covered in a registered investment adviser's compliance program. It is not enough just to know what books and records your registered investment adviser needs to maintain, your registered investment adviser should perform periodic testing to make sure that it is maintaining and can provide the appropriate books and records to the securities regulator. A best practice is to have a mock examination performed of your registered investment adviser. Take the list of required books and records and test to determine if your registered investment adviser is prepared to present all required documents and if it can do so in a timely manner. This mock examination of your registered investment adviser's books and records is something that can be performed internally or you can hire RIA Compliance Consultants to perform this service for your registered investment adviser.
It is surprising how many books and records deficiencies are discovered during our mock examinations of registered investment advisers. The following are some examples of common books and records deficiencies found by our compliance consultants:
- Not maintaining an order memorandum or not maintaining complete information in the order memorandum as outlined in Rule 204-2(a)(3) the Advisers Act;
- Not maintaining current financial or complete financial records;
- Not maintaining proper documentation to support performance advertising figures;
- Not maintaining a list of all access persons for the past five years;
- Not maintaining access person holdings reports;
- Not maintaining records to support the firm's duty of best execution;
- Not maintaining or unable to locate contracts the firm has executed with service providers, sub-advisors, or solicitors;
- Not able to easily or timely produce copies of requested email records; and
- Not having complete or adequate written compliance programs or having written compliance programs that are not consistent with what the firm is actually doing.
For more information and guidance on maintaining the appropriate books and records for you registered investment adviser, register for the Maintaining Required Books and Records webinar that will be presented by RIA Compliance Consultants on Thursday, July 23, 2009 from 12:00 -1:00 p.m. Central Standard Time. During the webinar you will have the ability to direct questions to our staff. The fee for the webinar is $59.95 and space is limited so sign up today!
For online payment by credit card, after completing the webinar registration page, you will be re-directed to a PayPal shopping cart for processing. If you prefer to pay over the telephone, after completing the webinar registration page, please contact Crystal Walz at 877-345- 4034 x 100.
Purchase now your webinar seat for $59.95: https://www2.gotomeeting.com/register/497126507
Labels: Books Records
posted by bhill at 10:26 PM
SEC Files Enforcement Action Against an RIA for Allegedly Failing to Disclose Compensation Received from Private Investment Funds
In the complaint, the SEC alleges breach of fiduciary duty and fraud for misrepresenting the safety and stability of the two largest private funds managed by Wealth Management while placing their clients into these investments even though they were unsuitable for some of their clients. The SEC's complaint also alleged, among other things, that Mr. Putman and Mr. Fevola each accepted at least $1.24 million in undisclosed payments derived from certain investments made within the private funds that were managed by Wealth Management, while continuing to cause clients to invest in these private funds.
The offering documents for the private investment funds disclose that Wealth Management would be compensated for managing the funds through a management fee based on a percentage of assets under management. Additionally, on four of the six funds that were managed by Wealth Management an annual "Incentive Allocation" of up to 10% (depending on the fund) of the annual profits could be paid to Wealth Management. No other forms of compensation were disclosed, and Wealth Management's Form ADV indicated that the adviser and its associated persons did not receive any economic benefits from non-clients in connection with giving investment advice to clients. No references were made regarding the payments received from the investments made within the funds.
This case should serve as a reminder to a registered investment adviser that it has a fiduciary duty to its clients. As a fiduciary, a registered investment adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts, especially when the registered investment adviser's interest may conflict with the client's interest. Not providing proper disclosure to advisory clients can result in violations to the anti-fraud provisions of the Investment Advisers Act of 1940. The receipt of any form of additional compensation received from any source other than the client when the adviser is recommending a security to a client is just one example of a conflict of interest that must be fully disclosed to the client.
Labels: Enforcement, Fiduciary, Hedge Funds
posted by bhill at 10:20 PM
The Adminstration Seeks Fiduciary Duty for B/Ds -- Is the SEC Chairman Advocating the Establishment of an SRO for RIAs?
Although there were only six paragraphs concerning the broker-dealer v. registered investment adviser issue in the white paper consisting of eighty-nine pages, the few details provided by the Administration are worthy of review.
In particular, the Administration takes the position that "standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers." Moreover, the Administration urges that the U.S. Securities and Exchange Commission ("SEC") be empowered to prohibit forms of compensation that allow an intermediary (a broker-dealer or registered investment adviser) to put a client in a product profitable to the intermediary and not in the best interests of the client. Finally, the Administration proposes that legislation should provide simple and clear disclosure to investors regarding the scope and terms of the relationship with the intermediary and ban certain conflicts of interest and sales practices contrary to best interests of an investor.
It's noteworthy that the Obama Administration's white paper on financial regulatory reform only identifies what appear to be as deficiencies with broker-dealer regulations and its standard of care. There were no references within the Treasury Department's release to the establishment of a self-regulatory organization ("SRO") for registered investment advisers.
Although the term "harmonization of regulations" is used in the title for this broker-dealer versus registered investment adviser section of the white paper, there is actually little explanation by the Administration within the white paper as what is actually meant, except for the prohibition of certain broker-dealer conduct described above. However, the day after the Administration's white paper was released Mary L. Schapiro, Chairman of the SEC, commented about the harmonization of these regulations:
While I believe that a consistent fiduciary standard of conduct should be applied to all financial professionals providing personalized investment advice, I also understand that the fiduciary standard is not a panacea to deter all fraud against individual investors.Is Chairman Schapiro suggesting that an SRO should be established for the regulation of registered investment advisers or is she laying the ground work for the case that the SEC needs more resources to regulate registered investment advisers? This ambiguity could be intentional during this early stage of the legislative process and may provide the SEC Chairman more options and flexibility at a later point. Time well tell.
Unfortunately, malevolent behavior still occurs, even by those who owe a fiduciary obligation to their clients. Since I became Chairman, the SEC has brought 26 actions against Ponzi or Ponzi-like schemes, which on average is more than one action per week. Roughly one-third of those actions involved investment advisers that were subject to the fiduciary standard of care. Thus, we cannot build an effective regulatory regime around the fiduciary standard of conduct alone.
That is why more needs to be done to effectively harmonize our regulatory structure for broker-dealers and investment advisers and meaningfully protect investors. If both broker-dealers and investment advisers are providing virtually identical services to retail investors, then the regulatory regimes that govern those activities should be virtually identical as well.
posted by bhill at 1:17 PM
Proposal for SEC to Study Use Mandatory Arbitration Clauses in Investment Advisory Agreements
The Obama Administration explains that the legislation should provide that before the SEC may exercise such authority, the SEC be required to study "whether investors are harmed by being unable to obtain effective redress of legitimate grievances, as well as whether changes to arbitration are appropriate."
Since many federally registered investment advisers utilize arbitration clauses in their client agreements and legislation on this topic has already been introduced in Congress, registered investment advisers will need to monitor the progress of this proposal to prohibit mandatory arbitration clauses and be prepared to make comments to lawmakers.
Labels: Arbitration
posted by bhill at 10:20 AM
Obama Administration Calls for Managers of Hedge Funds and Other Private Investment Funds to Register as Investment Advisers
Moreover, the Obama Administration proposes that all investment funds managed by SEC registered investment advisers be subject to record keeping, investor disclosure and regulatory reporting requirements requirements and periodic examinations by the SEC.
As explained in the U.S. Treasury Department's proposal entitled "Financial Regulatory Reform: A New Foundation," by requiring SEC registration of investment advisers to hedge funds and other private investment funds, the SEC could monitor and assess whether these private funds have become so large, leveraged and interconnected so as to require further regulation.
It's appears that the Obama Administration proposal goes well beyond the SEC's previous efforts to regulate hedge fund managers. As these proposals to regulate private investment funds and their managers are considered in the U.S. Senate and House of Representatives, RIA Compliance Consultants will note key developments in our blog, Navigating the Regulatory Maze for Investment Advisers.
Labels: Hedge Funds
posted by bhill at 9:27 AM
Investment Adviser Reps May Need to Update Form U4
The changes to disclosure questions on the Forms U4 and U5 included the addition of questions about certain regulatory actions. The revised Forms have been implemented in the Central Registration Depository (CRD) system as of May 18, 2009. In summary, the changes included:
- Revision of questions on the Forms U4 and U5 to enable FINRA and other regulators to more readily identify individuals and firms subject to statutory disqualification based upon willful violations (pursuant to Section 15(b)(4)(D) or (E) of the Securities Exchange Act).
- Revision of question regarding the disclosure of arbitrations or civil litigations to require the reporting of allegations of sales practice violations made against a representative in an arbitration or civil lawsuit regardless of whether the representative is a named party in the arbitration or civil litigation.
- Revision to the monetary threshold for reporting of settlements of customer complaints, arbitrations, and civil litigations from $10,000 to $15,000 and making a conforming change for FINRA’s description of “Historic Complaints”.
- Revision to the definition of “Date of Termination” in Form U5, and enabling firms to amend the “Date of Termination” and “Reason for Termination” sections of the Form U5 subject to certain conditions and notifications.
The new questions regarding willful violations require a person to answer whether the SEC, the Commodity Futures Trading Commission or any self-regulatory organization has ever found them to have willfully violated any provision of the securities acts, to have willfully aided, abetted, counseled, commanded, induced, or procured the violation by any person of any provision of the securities acts, or to have failed reasonably to supervise another person subject to their supervision, with a view to preventing the violation of any provision of the securities acts. For these new questions related to willful violations, the reference to securities acts includes the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any MSRB rules. See http://www.sec.gov/rules/sro/finra/2009/34-59916.pdf.
These changes to the Forms U4 and U5 became effective May 18, 2009, except with regard to the new disclosure questions regarding willful violations, which become effective 180 days from May 18, 2009, which is on November 14, 2009. A registered investment adviser firm should amend its investment adviser representative's Form U4 to respond to these new questions the first time a Form U4 amendment is filed after the effective date of May 18, 2009, but in any event, not later than 180 days following that date, which is November 14, 2009.
Because FINRA acts as the operator of the IARD and CRD systems and does not have regulatory authority over investment advisers, there may be a question as to the applicability to registered investment advisers of these changes and FINRA’s deadline for responding to the new willful violation questions. It should be noted that North American Securities Administrators Association ("NASAA") filed a comment letter dated April 15, 2009 in support of the proposed changes to the Forms U4 and U5. Generally, regarding the Forms U4 and U5, investment adviser representatives have an obligation to update previously filed Forms U4 and U5 if they become aware of new disclosure information. Since NASAA has supported the proposed changes to Forms U4 and U5, it is our opinion that the individual states are likely to expect investment adviser representatives to comply with FINRA’s requirements and effective dates regarding the changes to the Forms U4 and U5. If you have any questions regarding your state’s implementation and effective dates with respect to these changes to the Forms U4 and U5, we recommend you directly contact your state securities department.
If you wish to review FINRA’s Regulatory Notice 09-23, Revised Forms U4 and U5 in its entirety, you may access that Notice at the following link: http://www.finra.org/Industry/Regulation/Notices/2009/P118706
RIA Compliance Consultants, Inc. can help your registered investment adviser prepare and submit Forms U4 or U5. Please contact us at 877-345-4034 if you are interested in discussing such services.
Labels: Form U4
posted by bhill at 10:06 AM
Join RIA Compliance Consultants for its June 18, 2009 Webinar on the Proposed Changes to the SEC’s Custody Rule
Last month, the U.S. Securities and Exchange Commission ("SEC") proposed amendments to the custody rule under the Investment Advisers Act of 1940, which the SEC explained are designed to increase protections for investors who entrust their funds and securities to registered investment advisers. According to the proposed rule changes, all SEC registered investment advisers will be required to hire an accounting firm to perform an annual surprise audit. The SEC has stated that it believes the surprise accounting audits will impact approximately 9,600 of the approximately 11,000 SEC registered investment advisor firms. The surprise accounting audits would be far-reaching because they would apply to all investment advisory accounts of which the registered investment advisor has any form of custody, including the ability to deduct advisory fees.
As the registered investment adviser industry wrestles with the proposed SEC rule changes, numerous questions are being asked. What do the changes mean for registered investment advisers? What is the practical implication of the proposed SEC rule? What will the costs be to the registered investment adviser? What new procedures will a registered investment adviser need to implement? What is the definition of custody, and what does a surprise accounting audit mean?
During a June 18 webinar, our consulting team will be discussing the major changes proposed by the SEC and providing answers to the many questions being asked by registered investment advisers. During the webinar we’ll examine some of the following topics:
- SEC’s intent and basis for proposing the changes;
- Definition and examples of custody;
Fee deduction procedures; - Proposed annual surprise audits for all firm’s with custody and the more stringent proposal requiring PCAOB accounting firm audits;
- Form ADV and client disclosure requirements; and
- Guidance on what an investment advisor can do during the proposed rule’s comment period.
The webinar sponsored by RIA Compliance Consultants will take place on Thursday, June 18, 2009 from 12:00 -1:00 pm Central Standard Time. During the webinar you will have the ability to direct questions to our staff. The fee for the webinar is $59.95 and space is limited so sign up today!
Purchase now your webinar seat for $59.95: https://www2.gotomeeting.com/register/466750603
Labels: Custody, SAS 70 Audit Report
posted by bhill at 3:51 PM
SEC Internal Compliance Program for Personal Securities Trading of Its Employees Is a Reminder to RIAs About Supervising PST of Its Access Persons
In a May 22, 2009 U.S. Securities and Exchange Commission ("SEC") press release, Mary Schapiro, SEC Chairman, outlined new steps being taken to strengthen the SEC's internal compliance program to guard against inappropriate personal securities trading by SEC employees. Previous internal rules for SEC employees prohibited, among other things, short selling, carrying securities on margin, engaging in options or futures transactions in instruments whose value is derived from an underlying security, and holding a security interest in broker-dealers and registered investment advisers. These existing internal rules of the SEC also required employees to hold stock they purchased for at least six months and to report all trades within five days of receiving confirmations.
The SEC's new compliance program for personal securities trading by its employees will include the following rules:
- SEC employees are required to pre-clear all of their personal securities transactions;
- SEC employees are prohibited from personal trading in securities of companies under SEC investigation regardless of whether the employee has personal knowledge of the investigation;
- SEC employees are prohibited from personal trading in any security if an employee has access to non-public information about a company's registration statement;
- SEC employees are prohibited from owning securities in publicly-traded exchanges and transfer agents, in addition to existing prohibitions against owning securities in broker-dealers, registered investment advisers, and others directly regulated by the SEC;
- SEC employees are required to authorize their brokers to provide duplicate confirmation statements to the agency; and
- SEC employees are required to certify before any personal securities trade that they do not process any non-public information about the company being traded.
In addition, the SEC will require its supervisors to perform periodic reviews to ensure SEC employees are in compliance with these internal rules for personal securities trading. The SEC is also contracting with an outside firm to develop a new computer system that will enable pre-clearance and tracking of all employee personal securities transactions for compliance with these internal rules.
This release and the new internal SEC rules should serve as a reminder to all registered investment advisers of the importance the SEC places on developing strong policies and procedures to supervise personal securities transactions for all access persons affiliated with the adviser. Investment advisers should review their current personal securities transactions policies and procedures to ensure that they are meeting all requirements under SEC Rule 204A-1 and that adequate controls and monitoring policies and procedures are currently in place to ensure that personal securities transactions do not disadvantage the adviser's clients in any way or raise any fiduciary requirements or anti-fraud provisions.
If your registered investment adviser needs assistance developing written policies and procedures for supervising the personal securities transactions of its access persons, please contact RIA Compliance Consultants.
Labels: PST
posted by bhill at 3:03 PM
SEC Backing Off Proposal to Require Third-Party Compliance Audits
Based upon recent public comments by several other SEC commissioners during the past month, this report isn't surprising. The fact that the third-party compliance audit requirement was not included with the SEC's recently proposed surprise audit and SAS 70 Type II audit requirement was a telltale sign that there wasn't a consensus among SEC commissioners for this approach.
Of course, this leads to the question of what, if any, additional reform efforts will the SEC support with respect to registered investment advisers. As the SEC's position become clearer, RIA Compliance Consultants will keep its readers of these developments.
Labels: Custody, SEC, Third-Party Compliance Audit
posted by bhill at 2:00 PM
Background Information for RIAs Concerning SAS 70 Type II Audit Reports by PCAOB Accountants
1. What is a SAS 70 Type II audit report? The American Institute of Certified Public Accountants ("AICPA") has developed auditing standards for services organizations known as Statement on Auditing Standards No. 70: Service Organizations ("SAS 70"). The Type II SAS 70 audit report (also known as a "Report on Controls Placed in Operation and Tests of Operating Effectiveness"), which will report the internal controls in place and test the effectiveness of such internal controls for period of six to twelve months.
2. What will be the scope of a SAS 70 Type II audit report under the proposed SEC rule? Based upon SEC Chairman Schapiro's speech, it appears that the scope of this SAS 70 Type II audit report will focus upon the custody controls of the registered investment adviser.
3. What is the PCAOB? According to its website, "The Public Company Accounting Oversight Board ("PCAOB") is a private-sectior, non-profit corporation, created by Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports."
4. How can I find an accountant registered and inspected by the PCAOB? The PCAOB maintains a list of PCAOB registered public accounting firms. Click here for a list of such accounting firms.
Once the SEC posts the text of the proposed amendments to its custody rule for federally registered investment advisers along with its interpretative release, RIA Compliance Consultants will provide its readers with further guidance about the scope of the proposed SAS 70 Type II audit report for a registered investment adviser using an affiliated qualified custodian.
Labels: Custody, SAS 70 Audit Report
posted by bhill at 9:33 AM
