SEC Publishes July 2008 ComplianceAlert
Today, the U.S. Securities and Exchange Commission (SEC) released its July 2008 ComplianceAlert letter which identifies and describes common deficiencies and weaknesses that SEC examiners have found during compliance examinations of SEC registered investment advisers/mutual funds, broker-dealers, and transfer agents. The release, which is considered official comment from the SEC’s Office of Compliance Inspections and Examinations and other select SEC department staff, provides valuable guidance for registered investment advisors trying to navigate the regulatory maze. In the release, the SEC provides guidance on four major areas: (1) personal trading by advisory staff; (2) proxy voting and funds’ use of proxy voting services; (3) valuation and liquidity issues in high yield municipal bond funds; and (4) soft dollar practices of investment advisors.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
Labels: Compliance Program, Proxy Voting, Regulatory Inspections, SEC, Soft Dollars
posted by bhill at 2:38 PM
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
Proposed Changes To Forms U4 and U5 May Change Disclosure Requirements for Investment Adviser Representatives
The Financial Industry Regulatory Authority (FINRA) has proposed revisions that would require that allegations of sales practice violations made in arbitration claims and civil lawsuits against registered persons who are not named as parties in those proceedings be reported as customer complaints. Current reporting requirements do not require a report to the Form U4 (Uniform Application for Securities Industry Registration or Transfer) or Form U5 (Uniform Termination Notice for Securities Industry Registration) of allegations of a sales practice violation against a registered person contained in the body of the lawsuit or arbitration claim unless the registered person is specifically named as a defendant or respondent in the lawsuit or arbitration claim.
In considering these proposed revisions, it is helpful to understand the relationship between the parties involved in the registration and disclosure systems. The Investment Adviser Registration Depository (IARD) is an electronic filing system for Investment Advisers that is sponsored by the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA). FINRA does not have regulatory authority over Investment Advisers; however, FINRA serves as the developer and operator of the IARD system. The IARD system collects and maintains the registration and disclosure information for Investment Advisers and their associated persons. The SEC has mandated that its Investment Adviser registrants use the IARD system. The IARD system also accommodates registration requirements for state-regulated Investment Advisers. The IARD Program provides for the registration of Investment Advisor Representatives using the Individual Form Filing Functionality in Web CRD. Web CRD enables firms to register their Investment Adviser Representatives online via the Web CRD system. This Representative Registration component of the IARD system uses the Uniform Forms U4 and U5.
If a registered person is identified in a written complaint as the person responsible for alleged sales practice violation(s), the matter is required to be reported on that persons Form U4 or U5. However, the regulatory interpretation has been that even if a registered person is identified in the body of an arbitration claim or lawsuit as the person responsible for the alleged sales practice violation(s), the matter is not required to be reported on that persons Form U4 or U5 if he or she was not named as a respondent or defendant in the arbitration or litigation. This interpretation has resulted in arbitration and litigation claims-- a form of "customer complaint"-which allege sales practice violations against a registered person not being reported via the Forms U4 and U5. The proposed revision is intended to address this inconsistent treatment regarding the reporting of alleged sales practice violations. The proposed revision would require alleged sales practice violations made by a customer against registered persons identified in the body of a complaint, litigation or arbitration claim to be reported even when the registered persons are not named as parties in the litigation or arbitration.
As a matter of procedure, before becoming effective, FINRA's proposed rule change must be authorized for filing with the SEC by the FINRA Board and then must additionally be approved by the SEC after publication for public comment in the Federal Register.
RIA Compliance Consultants, Inc. can help your registered investment adviser prepare and submit Form U4 and U5 or other IARD registration and disclosure filings. Please contact us at 877-345-4034 if you are interested in discussing such services.
In considering these proposed revisions, it is helpful to understand the relationship between the parties involved in the registration and disclosure systems. The Investment Adviser Registration Depository (IARD) is an electronic filing system for Investment Advisers that is sponsored by the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA). FINRA does not have regulatory authority over Investment Advisers; however, FINRA serves as the developer and operator of the IARD system. The IARD system collects and maintains the registration and disclosure information for Investment Advisers and their associated persons. The SEC has mandated that its Investment Adviser registrants use the IARD system. The IARD system also accommodates registration requirements for state-regulated Investment Advisers. The IARD Program provides for the registration of Investment Advisor Representatives using the Individual Form Filing Functionality in Web CRD. Web CRD enables firms to register their Investment Adviser Representatives online via the Web CRD system. This Representative Registration component of the IARD system uses the Uniform Forms U4 and U5.
If a registered person is identified in a written complaint as the person responsible for alleged sales practice violation(s), the matter is required to be reported on that persons Form U4 or U5. However, the regulatory interpretation has been that even if a registered person is identified in the body of an arbitration claim or lawsuit as the person responsible for the alleged sales practice violation(s), the matter is not required to be reported on that persons Form U4 or U5 if he or she was not named as a respondent or defendant in the arbitration or litigation. This interpretation has resulted in arbitration and litigation claims-- a form of "customer complaint"-which allege sales practice violations against a registered person not being reported via the Forms U4 and U5. The proposed revision is intended to address this inconsistent treatment regarding the reporting of alleged sales practice violations. The proposed revision would require alleged sales practice violations made by a customer against registered persons identified in the body of a complaint, litigation or arbitration claim to be reported even when the registered persons are not named as parties in the litigation or arbitration.
As a matter of procedure, before becoming effective, FINRA's proposed rule change must be authorized for filing with the SEC by the FINRA Board and then must additionally be approved by the SEC after publication for public comment in the Federal Register.
RIA Compliance Consultants, Inc. can help your registered investment adviser prepare and submit Form U4 and U5 or other IARD registration and disclosure filings. Please contact us at 877-345-4034 if you are interested in discussing such services.
Labels: Form U4
posted by bhill at 10:47 PM
The CFP Board's Revised Standards of Professional Conduct Impose New Requirements on CFP® Certificants Who Provide Financial Planning
The Certified Financial Planner ("CFP") Board of Standards, Inc. has issued updated Code of Ethics and Professional Responsibility and Rules of Conduct, which are scheduled to become effective July 1, 2008. With these updates, all CFP certificants will be held to a higher duty of care standard and will be required to place the interest of their clients ahead of their own at all times. Additionally, the updates make distinctions for CFP® certificants who provide financial planning services.
For example, the duty of care for CFP® certificants who provide financial planning services has been raised from the duty to "act in the interest of the client" to the "duty of care of a fiduciary." See Code of Ethics and Professional Responsibility, Rules of Conduct, Rule 1.4. The CFP Board defines fiduciary as "One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client." Secondly, the updated standards require additional disclosures to both a client or prospective client, if the services to be provided include financial planning or material elements of the financial planning process. [See Rules 1.2 and 2.2.] Also, if services provided by a CFP® certificant include financial planning or material elements of the financial planning process, the certificant is required to have a written agreement with the client to govern the financial planning services. [See Rule 1.3.]
In the February 20, 2008, release, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, the CFP Board's Disciplinary and Ethics Commission ("Commission") provided guidelines to help CFP® certificants determine when their activities are financial planning or material elements of the financial planning process. According to the Commission, some of the primary criteria for determining "material elements" are: 1) The client's understanding and intent in engaging the certificant; 2) The degree to which multiple financial planning subject areas are involved; 3) The comprehensiveness of data gathering; and 4) The breadth and depth of recommendations. The CFP Board has stated that if a certificant is "unsure if a particular service or client relationship rises to the level of financial planning", then the certificant should "embrace the CFP Board's fiduciary standard and provide services in ways they believe are in the best interest of the client." Supra, Question 8, p.6.
Rule 2.2 lists the written disclosures required to be made to clients or prospective clients when CFP® certificants are involved in engagements that involve financial planning or material elements of the financial planning process. These disclosures include:
1) An accurate and understandable description of the compensation arrangements being offered; 2) A general summary of likely conflicts of interest between the client and the certificant, the certificant's employer or any affiliates or third parties; 3) Any information about the certificant or the certificant's employer that could reasonably be expected to materially affect the client's decision to engage the certificant or that the client might reasonably want to know in establishing the scope and nature of the relationship; and 4) Contact information for the certificant and if applicable, the certificant's employer.
In addition to the written disclosures required by Rule 2.2, Rule 1.2 outlines additional disclosure obligations to clients and prospective clients when a certificant's services include financial planning or material elements of the financial planning process. These additional disclosures include: 1) The obligations and responsibilities of each party, 2) Any compensation that may be related to the client agreement, 3) Any factors that determine costs, 4) The terms under which proprietary products may be offered, and 5) The terms under which other entities will be used to meet any services outlined in the agreement. Additionally, the certificant is instructed by Rule 1.2 to "encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have." See CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 12, p. 8.
The updated disclosure standards differ from the existing standards. For example, disclosures are now required to be made to prospective clients as well as existing clients. Disclosures must include material information that is relevant to the professional relationship, including compensation and conflicts of interest, as well as the CFP® certificant's credentials and business affiliations. Disclosures must include direct or indirect compensation to both the CFP® certificant and/or the certificant's employer. Also, in place of the standard for the certificant to advise clients that they can request updated information about compensation and conflicts of interest on an annual basis, the new standards impose a requirement that the certificant make timely disclosures to the client if previously disclosed information becomes outdated. Supra, Question 13, p.8. See also Rules 1.2 and 2.2.
It is a new requirement that for financial planning services, the certificant or certificant's employer shall enter into a written agreement which identifies 1) The parties to the agreement, 2) The date of the agreement and its duration, 3) How and on what terms each party can terminate the agreement, and 4) The services to be provided as part of the agreement. See Rule 1.3. The CFP Board has explained that "the written agreement requirement was designed to help ensure that CFP® certificants and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services." CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 14, p. 8.
The CFP Board has explained that its enforcement of the ethical standards for CFP® professionals is intended to instill confidence in the public that they can trust a CFP® practitioner to help them realize their life goals through proper management of financial resources. See CFP Board Strengthens Its Ethics Enforcement Policy, Message from David G. Strege, CFP®, CFA®, Chair of CFP Board's Board of Directors, p.3.
For further information regarding the new CFP standards, you may directly review the CFP Code of Ethics and Professional Responsibility, the CFP Rules of Conduct, the CFP Financial Planning Practice Standards, the CFP Disciplinary Rules and Procedures, and the CFP Board of Standards, Inc. release dated February 20, 2008, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions. If you are an investment advisor, RIA Compliance Consultants can assist you in complying with the new disclosure and agreement provisions of the CFP Board's Revised Standards of Professional Conduct. Please contact us if you would like to discuss the services that we can provide.
For example, the duty of care for CFP® certificants who provide financial planning services has been raised from the duty to "act in the interest of the client" to the "duty of care of a fiduciary." See Code of Ethics and Professional Responsibility, Rules of Conduct, Rule 1.4. The CFP Board defines fiduciary as "One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client." Secondly, the updated standards require additional disclosures to both a client or prospective client, if the services to be provided include financial planning or material elements of the financial planning process. [See Rules 1.2 and 2.2.] Also, if services provided by a CFP® certificant include financial planning or material elements of the financial planning process, the certificant is required to have a written agreement with the client to govern the financial planning services. [See Rule 1.3.]
In the February 20, 2008, release, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, the CFP Board's Disciplinary and Ethics Commission ("Commission") provided guidelines to help CFP® certificants determine when their activities are financial planning or material elements of the financial planning process. According to the Commission, some of the primary criteria for determining "material elements" are: 1) The client's understanding and intent in engaging the certificant; 2) The degree to which multiple financial planning subject areas are involved; 3) The comprehensiveness of data gathering; and 4) The breadth and depth of recommendations. The CFP Board has stated that if a certificant is "unsure if a particular service or client relationship rises to the level of financial planning", then the certificant should "embrace the CFP Board's fiduciary standard and provide services in ways they believe are in the best interest of the client." Supra, Question 8, p.6.
Rule 2.2 lists the written disclosures required to be made to clients or prospective clients when CFP® certificants are involved in engagements that involve financial planning or material elements of the financial planning process. These disclosures include:
1) An accurate and understandable description of the compensation arrangements being offered; 2) A general summary of likely conflicts of interest between the client and the certificant, the certificant's employer or any affiliates or third parties; 3) Any information about the certificant or the certificant's employer that could reasonably be expected to materially affect the client's decision to engage the certificant or that the client might reasonably want to know in establishing the scope and nature of the relationship; and 4) Contact information for the certificant and if applicable, the certificant's employer.
In addition to the written disclosures required by Rule 2.2, Rule 1.2 outlines additional disclosure obligations to clients and prospective clients when a certificant's services include financial planning or material elements of the financial planning process. These additional disclosures include: 1) The obligations and responsibilities of each party, 2) Any compensation that may be related to the client agreement, 3) Any factors that determine costs, 4) The terms under which proprietary products may be offered, and 5) The terms under which other entities will be used to meet any services outlined in the agreement. Additionally, the certificant is instructed by Rule 1.2 to "encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have." See CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 12, p. 8.
The updated disclosure standards differ from the existing standards. For example, disclosures are now required to be made to prospective clients as well as existing clients. Disclosures must include material information that is relevant to the professional relationship, including compensation and conflicts of interest, as well as the CFP® certificant's credentials and business affiliations. Disclosures must include direct or indirect compensation to both the CFP® certificant and/or the certificant's employer. Also, in place of the standard for the certificant to advise clients that they can request updated information about compensation and conflicts of interest on an annual basis, the new standards impose a requirement that the certificant make timely disclosures to the client if previously disclosed information becomes outdated. Supra, Question 13, p.8. See also Rules 1.2 and 2.2.
It is a new requirement that for financial planning services, the certificant or certificant's employer shall enter into a written agreement which identifies 1) The parties to the agreement, 2) The date of the agreement and its duration, 3) How and on what terms each party can terminate the agreement, and 4) The services to be provided as part of the agreement. See Rule 1.3. The CFP Board has explained that "the written agreement requirement was designed to help ensure that CFP® certificants and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services." CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions, Question 14, p. 8.
The CFP Board has explained that its enforcement of the ethical standards for CFP® professionals is intended to instill confidence in the public that they can trust a CFP® practitioner to help them realize their life goals through proper management of financial resources. See CFP Board Strengthens Its Ethics Enforcement Policy, Message from David G. Strege, CFP®, CFA®, Chair of CFP Board's Board of Directors, p.3.
For further information regarding the new CFP standards, you may directly review the CFP Code of Ethics and Professional Responsibility, the CFP Rules of Conduct, the CFP Financial Planning Practice Standards, the CFP Disciplinary Rules and Procedures, and the CFP Board of Standards, Inc. release dated February 20, 2008, CFP Board's Revised Standards of Professional Conduct: Frequently Asked Questions. If you are an investment advisor, RIA Compliance Consultants can assist you in complying with the new disclosure and agreement provisions of the CFP Board's Revised Standards of Professional Conduct. Please contact us if you would like to discuss the services that we can provide.
Labels: CFP, Code of Ethics
posted by bhill at 10:41 PM
FINRA's Proposed Rule 3110 May Extend the Scope of Broker-Dealer Supervision of Investment Advisors
FINRA's (The Financial Industry Regulatory Authority) proposed rule 3110 would expand the supervision responsibilities of broker-dealers by requiring broker-dealer principals to supervise business that the firm's registered representatives engage in, regardless of whether such activity requires registration as a broker-dealer. The current FINRA rules require broker-dealer firms to designate a registered principal to supervise each type of business that requires registration as a broker-dealer, and additionally require registered representatives to notify their broker-dealer and get written approval for outside business activities.
If the proposed rule is passed, the scope of broker-dealer supervisory responsibilities will go beyond written approval for the outside business activity and arguably will require supervision of all approved outside business activities. As a result, the offer of investment advisory services by representatives affiliated with a broker-dealer would be subject to supervision by broker-dealer principals. If this truly is the intent of proposed rule 3110, it is a significant departure from previous FINRA guidance on this issue. Notice to Members 94-44 had indicated that investment advisory activities that did not include the RR/IA's participation in the execution of a securities transaction would require notification of the investment advisory activity to the broker-dealer firm but would not require record keeping and supervision of the transactions. Notice to Members 96-33 again clarified that supervision of specific transactions by a FINRA member firm would be required only if the registered representative who is also an investment adviser ("RR/IA") "participates in the execution of a securities transaction such that his or her actions go beyond a mere recommendation, thereby triggering the record keeping and supervision requirements" for the broker-dealer firm. See NTM 96-33. It appears that the current version of the proposed rule may be an attempt to broaden the scope of the supervisory responsibility of broker-dealer firms in that it could require broker-dealer firms to supervise investment advisory activities at a level beyond notification and with such supervision to potentially include record keeping, and approval or disapproval at the transaction level. Consequently, investment advisors affiliated with a broker-dealer would be required to obtain prior written approval from their broker-dealer for investment advisory activities.
FINRA has accepted comments regarding the proposed rule and many in the financial industry have voiced concerns including that the language of the proposed rule is vague and that the proposed rule is too broad, overlaps with the jurisdiction of other regulators, and that the rule may conflict with rules which restrict the release of client information without client approval. Marc Menchel, executive vice president and general counsel of FINRA has commented that FINRA is not trying to expand its jurisdiction with this rule proposal and that FINRA believes that broker-dealer firms should be supervising the investment advisory business in which the representatives of their firm engage. See "Brokers, Advisers Blast FINRA Proposal", Investment News, June 30, 2008. In response to comments submitted, FINRA may amend the proposed rule or provide clarification related to the language of the proposed rule. Additionally, the Securities and Exchange Commission would need to approve FINRA's proposed rule before it could take effect. FINRA encouraged all interested parties to comment on the rule proposal by June 13, 2008. FINRA has not yet submitted the rule proposal to the SEC.
If the proposed rule is passed, the scope of broker-dealer supervisory responsibilities will go beyond written approval for the outside business activity and arguably will require supervision of all approved outside business activities. As a result, the offer of investment advisory services by representatives affiliated with a broker-dealer would be subject to supervision by broker-dealer principals. If this truly is the intent of proposed rule 3110, it is a significant departure from previous FINRA guidance on this issue. Notice to Members 94-44 had indicated that investment advisory activities that did not include the RR/IA's participation in the execution of a securities transaction would require notification of the investment advisory activity to the broker-dealer firm but would not require record keeping and supervision of the transactions. Notice to Members 96-33 again clarified that supervision of specific transactions by a FINRA member firm would be required only if the registered representative who is also an investment adviser ("RR/IA") "participates in the execution of a securities transaction such that his or her actions go beyond a mere recommendation, thereby triggering the record keeping and supervision requirements" for the broker-dealer firm. See NTM 96-33. It appears that the current version of the proposed rule may be an attempt to broaden the scope of the supervisory responsibility of broker-dealer firms in that it could require broker-dealer firms to supervise investment advisory activities at a level beyond notification and with such supervision to potentially include record keeping, and approval or disapproval at the transaction level. Consequently, investment advisors affiliated with a broker-dealer would be required to obtain prior written approval from their broker-dealer for investment advisory activities.
FINRA has accepted comments regarding the proposed rule and many in the financial industry have voiced concerns including that the language of the proposed rule is vague and that the proposed rule is too broad, overlaps with the jurisdiction of other regulators, and that the rule may conflict with rules which restrict the release of client information without client approval. Marc Menchel, executive vice president and general counsel of FINRA has commented that FINRA is not trying to expand its jurisdiction with this rule proposal and that FINRA believes that broker-dealer firms should be supervising the investment advisory business in which the representatives of their firm engage. See "Brokers, Advisers Blast FINRA Proposal", Investment News, June 30, 2008. In response to comments submitted, FINRA may amend the proposed rule or provide clarification related to the language of the proposed rule. Additionally, the Securities and Exchange Commission would need to approve FINRA's proposed rule before it could take effect. FINRA encouraged all interested parties to comment on the rule proposal by June 13, 2008. FINRA has not yet submitted the rule proposal to the SEC.
Labels: Outside Business Activities
posted by bhill at 10:33 PM
SEC Issues Cease-and-Desist Order for Failure to Disclose Conflicts of Interest and Misrepresentation of Its Research Process
Recently, the U.S. Securities and Exchange Commission ("SEC") issued a cease-and-desist order, disgorgement to clients, prejudgment interest and penalties, among other sanctions against a registered investment adviser for its failure to disclose conflicts of interest in its selection of funds for discretionary clients and for providing misrepresentations to clients by stating that funds selected for model portfolios were chosen according to the firm's approved research process.
In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.
Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).
This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.
In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.
Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).
This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.
Labels: Conflict of Interest, Enforcement
posted by bhill at 10:23 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
SEC Publishes Proposed Rule 151A Under the Securities Act of 1933 - Clarifying Under What Circumstances an EIA Constitutes an Annuity or Security
For those following the regulation of equity indexed annuities (also known as EIAs or fixed indexed annuities), the U.S. Securities and Exchange Commission ("SEC") has now posted to its website proposed Rule 151A under the Securities Act of 1933.
This 96 page proposed rule release provides background and details to the SEC proposal to clarify whether an equity indexed annuity constitutes a security under federal law. If adopted as proposed, Rule 151A would drastically change the regulatory licenses necessary for insurance agents to offer EIAs falling under the clarified definition of an annuity/security.
Insurance marketing organizations and insurance agents offering EIAs need to carefully review this proposed rule. The SEC is accepting public comments regarding proposed Rule 151A until September 10, 2008.
This 96 page proposed rule release provides background and details to the SEC proposal to clarify whether an equity indexed annuity constitutes a security under federal law. If adopted as proposed, Rule 151A would drastically change the regulatory licenses necessary for insurance agents to offer EIAs falling under the clarified definition of an annuity/security.
Insurance marketing organizations and insurance agents offering EIAs need to carefully review this proposed rule. The SEC is accepting public comments regarding proposed Rule 151A until September 10, 2008.
Labels: Equity-Indexed Annuities
posted by bhill at 10:13 PM
SEC Proposing Rule for Determining When Equity Indexed Annuities (EIA) Are Securities
At today's open meeting of the Commissioners of the U.S. Securities and Exchange Commission ("SEC"), it was announced by Chairman Christopher Cox that the SEC is proposing a rule that would establish "...the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws." The proposed rule has yet to be posted on the SEC's website; however, RIA Compliance Consultants will prepare and post to its blog a summary of the SEC's proposed EIA rule once available.
Labels: Equity-Indexed Annuities
posted by bhill at 9:11 PM
SEC Revokes Investment Adviser's Registration Due to Improper Trade Allocations
The U.S. Securities and Exchange Commission ("SEC") recently revoked the registration of an investment adviser located in Delray Beach, Florida as a result of improper allocation of trades.
In April 2005, the SEC filed a civil injunction action against the Delray Beach based investment adviser alleging the firm violated the anti-fraud provision of the Investment Advisers Act of 1940 by profiting, at the expense of its clients, from allocation of profitable trades to proprietary accounts of an affiliate of the investment adviser. The U.S. District Court for the Southern District of Florida found the investment adviser engaged in fraud upon the investment advisory clients by using discretionary authority over client accounts to allocate profitable trades to the proprietary accounts of an affiliate of the investment adviser. The Court noted that this cherry-picking netted the investment adviser's affiliate $4.5 million of gains and passed $9 million of losses to the investment adviser's clients. Based upon the Court's findings in the civil injunction action and the investment adviser's offer to settle the administrative proceeding, the SEC deemed it in the public interest to order the revocation of the investment adviser's registration.
In addition to this administrative proceeding, the SEC's Director of Compliance Inspections & Examinations, Lori Richards, recently noted in a public speech that SEC "[e]xaminers are looking for cherry-picking and favoritism in allocations [by investment advisers], to, for example, relatives, high profile clients, clients with performance–fee accounts, or other clients that the adviser may have an incentive to benefit."
This administrative proceeding and the informal guidance by the SEC staff clearly underscore the need for federally registered investment advisers to develop, maintain, disclose and test policies and procedures that prevent improper trading activity. If your investment adviser requires further guidance and support regarding its trading allocation policies and procedures, RIA Compliance Consultants is available to assist you.
In April 2005, the SEC filed a civil injunction action against the Delray Beach based investment adviser alleging the firm violated the anti-fraud provision of the Investment Advisers Act of 1940 by profiting, at the expense of its clients, from allocation of profitable trades to proprietary accounts of an affiliate of the investment adviser. The U.S. District Court for the Southern District of Florida found the investment adviser engaged in fraud upon the investment advisory clients by using discretionary authority over client accounts to allocate profitable trades to the proprietary accounts of an affiliate of the investment adviser. The Court noted that this cherry-picking netted the investment adviser's affiliate $4.5 million of gains and passed $9 million of losses to the investment adviser's clients. Based upon the Court's findings in the civil injunction action and the investment adviser's offer to settle the administrative proceeding, the SEC deemed it in the public interest to order the revocation of the investment adviser's registration.
In addition to this administrative proceeding, the SEC's Director of Compliance Inspections & Examinations, Lori Richards, recently noted in a public speech that SEC "[e]xaminers are looking for cherry-picking and favoritism in allocations [by investment advisers], to, for example, relatives, high profile clients, clients with performance–fee accounts, or other clients that the adviser may have an incentive to benefit."
This administrative proceeding and the informal guidance by the SEC staff clearly underscore the need for federally registered investment advisers to develop, maintain, disclose and test policies and procedures that prevent improper trading activity. If your investment adviser requires further guidance and support regarding its trading allocation policies and procedures, RIA Compliance Consultants is available to assist you.
Labels: Trade Allocation
posted by bhill at 7:56 PM
