Wednesday, January 25, 2012
In August 2004, the U.S. Securities and Exchange Commission (“SEC”) adopted Rule 204A-1 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) that required registered investment advisers to adopt codes of ethics. Under SEC Rule 204A-1, an investment advisory firm must adopt and implement a code of ethics, establishing rules and conduct all supervised persons must adhere to as a fiduciary. SEC Rule 204A-1 was adopted in attempt to create a standard of conduct that would “prevent fraud by reinforcing fiduciary principles that must govern the conduct of advisory firms and their personnel.” Section 206 of the Investment Advisers Act imposes a fiduciary duty on investment advisers by making it unlawful for an investment adviser to engage in fraudulent, deceptive or manipulative conduct. In its role as a fiduciary, an investment adviser has a duty to serve the best interest of its clients; a duty to have a reasonable, independent basis for investment advice; a duty to ensure that its investment advice is suitable to the client’s objectives, needs and circumstances; and a duty to be loyal to client.
An investment adviser’s code of ethics must establish standard of business conduct that the investment adviser requires of all its supervised persons. SEC Rule 204A-1 does not require an investment adviser to adopt a particular standard, but the standard chosen must reflect the fiduciary obligations of the investment adviser and its supervised persons and must require compliance with the federal securities laws. The SEC contends that while each investment adviser firm’s code of ethics must meet certain minimum provisions, the adopted rule allows for flexibility for investment advisers to adopt individualized codes that best suit the “structure, size and nature of [investment advisers] advisory businesses.”
An investment adviser’s code of ethics must meet the needs of its individual organization while achieving a proper balance of operational and aspirational elements. In the adopting release, the SEC stated:
“We urge advisers to take great care and thought in preparing their codes of ethics, which should be more than a compliance manual. Rather, a code of ethics should set out ideals for ethical conduct premised on fundamental principals of openness, integrity, honesty and trust. A good code of ethics should effectively convey to employees the value the advisory firm places on ethical conduct, and should challenge employees to live up not only to the letter of the law, but also to the ideals of the organization.”
Although SEC Rule 204A-1 does not require investment advisers to provide specific training regarding the firms code of ethics, the adopting release states, “An investment adviser’s procedures for informing its employees about its code of ethics are critical to obtaining good compliance and avoiding inadvertent violations of the code.” The adopting release also indicates that the following are among best practices for investment advisers:
- Holding periodic orientation or training sessions with new and existing employees to remind them of their obligations under the code of ethics;
- Requiring employees to certify that they have read and understand the code of ethics; and
- Requiring annual recertification that the employee has re-read, understands and has complied with the code.
RIA Compliance Consultants is hosting a webinar, Thursday, February 9, 2012, at 12:00pm CST, “Professional Ethics for Investment Adviser Representatives,” that will discuss the fiduciary duties of investment advisers as it relates to Section 206 of the Investment Advisers Act, including details on what it means to be a fiduciary, with supplemental examples of unethical behavior. The webinar will discuss the summary of requirements under SEC Rule 204A-1 and will expand on the reporting requirements of the rule. This webinar is intended to serve as an education tool designed to assist investment advisers in providing on-going ethics training to its investment adviser representatives. This webinar will provide up to one hour of Continuing Education credit to meet the on-going requirements for maintaining the Certified Financial Planner (“CFP”) certification, approved by the CFP Board of Standards, Inc. To register for this webinar, please click here. To speak with one of our consultants for more information on how RIA Compliance Consultants can assist your firm in implementing or reviewing your firm’s code of ethics, click here.
Does your investment adviser have errors and omissions insurance (“E&O insurance”) to cover you and your firm in the event of an error or if a client claims your firm made an error?
While investment advisers are not required by regulation to maintain E&O insurance, RIA Compliance Consultants strongly recommends that all investment advisers maintain E&O insurance that is determined to be sufficient to cover the advisory services practice of the investment adviser firm. As you might anticipate, legal fees can accumulate quickly even in situations where your firm is required to defend a claim that you believe to be frivolous. E&O insurance typically will cover any settlements or judgments and the associated defense costs relating to any professional claims, including, for example, claims alleging lack of suitability, investment losses, errors in financial planning engagements, and meritless claims.
An adequate E&O policy will cover the investment adviser firm and all of its employees and representatives. Most E&O insurance policies offer up to $1 million in coverage annually, although investment adviser firms with higher amounts of assets under management are advised to maintain more coverage. Investment adviser firms are advised to attain an E&O policy that is tailored to the advisory services offered by the firm. You should carefully review E&O policy provisions with your legal counsel and insurance broker to make a determination that the coverage provided by the E&O policy is sufficient coverage for the advisory services that your firm offers. As an example, many policies do not extend coverage to claims related to private funds. If your firm provides advisory services related to private funds, it is strongly recommended that you ensure that the E&O policy in place provides coverage for such activities. If there is no coverage for such activities, then you either need to obtain insurance that will cover such activities or alternatively, need to amend the advisory services offered to eliminate activities for which your firm does not have insurance coverage.
Tuesday, January 17, 2012
On January 4, 2012, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations released a regulatory alert discussing the use of social media by investment advisers.
In recent months, the SEC has been reviewing the existing social media policies and procedures of registered investment advisers. In the regulatory alert, the SEC documented many of its observations from these reviews and included some best practices to “assist [registered investment advisers] in designing reasonable procedures designed to prevent violations of the Advisers Act and other federal securities laws.”
One of the “hot-button” issues discussed in the regulatory alert is the use of the “Like” feature on social media sites and whether it constitutes a testimonial, which is prohibited by the Investment Advisers Act of 1940 (“Advisers Act”). According to the regulatory alert, a third-party’s use of the “Like” feature on a registered investment advisers social media web page “could be deemed to be a testimonial if it is an explicit or implicit statement of a client’s or clients’ experience with an investment adviser or [investment adviser representative].”
In the regulatory alert, the SEC also noted that most of the firms it reviewed had policies in place for advertising, client communications and electronic communications, but no policies specific to social media. According to the SEC, this is not sufficient and these registered investment advisers also need procedures that are specific to social media. If this describes your registered investment adviser, now is the time to implement policies and procedures specific to social media.
RIA Compliance Consultants can help your registered investment adviser update its written policies and procedures; click here to schedule a time to discuss with one of our consultants how RIA Compliance Consultants, Inc. is able to further assist your firm. RIA Compliance Consultants has drafted detailed policies and procedures that address the compliance concerns addressed in the SEC’s regulatory release, such as the use of the “Like” feature, the retention of online communication, supervision of representatives’ use of social media and how your firm will be represented online.
Additionally, if would like further guidance, RIA Compliance Consultants has recorded a webinar, “Compliance for Social Media Site,” which analyzes many of the issues discussed in the SEC’s regulatory alert. You can purchase a recording of this webinar by clicking here.
Wednesday, January 11, 2012
The U.S. Securities and Exchange Commission (“SEC”) recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Calhoun Asset Management, LLC (“Calhoun”) and its principal for, among other things, making false and misleading statements on Calhoun’s Form ADV.
According to the Order, the firm’s principal allegedly grossly misstated Calhoun’s assets under management on the firm’s Form ADV in order to attract investors for two funds of funds. According to Calhoun’s February 2009 Form ADV, the firm had $79.8 million in assets under management; the SEC’s Order alleges that the firm actually had $7 million in assets under management. In addition, the SEC’s Order alleges that the principal misstated the assets under management for another investment adviser controlled by the principal. For that firm, the principal regularly filed the Form ADV and stated the firm’s assets under management ranged from $24 million to $335 million, when in reality, according to the SEC, the firm had no assets under management.
On Thursday, January 12, 2012, RIA Compliance Consultants will be hosting a webinar, “Preparing your Form ADV Annual Amendment.” During this webinar, we will review the Form ADV items that are required to be updated on an annual basis. The webinar will include a review of the ADV Part 1 instructions for calculating regulatory assets under management. Our consultants will also discuss some of the common mistakes we see when investment advisors are filing their annual amendment. Additionally, our consultants will also address some of the other amendments and filings that may need to be made with your annual amendment, including those resulting from the recent SEC revisions to the Form ADV. To register for this webinar, click here.
Tuesday, January 10, 2012
Final Renewal Statements for registered investment advisors are now available in the IARD/Web CRD system. These statements will reflect the final registration statuses of the investment advisor firm and its representatives as of December 31, 2011. Final Renewal Statements will reflect that the investment advisor is ”Paid In Full,” has an “Amount Due,” or “Failed to Renew.”
All investment advisors should retrieve their Final Renewal Statements to verify the accuracy of this final reconciled statement. Investment advisors who’s Final Renewal Statement reflects an amount due must ensure that FINRA is in receipt of the full payment amount by no later than February 3, 2012. If an investment advisor’s Final Renewal Statement reflects a “Failed to Renew” status, you are advised to immediately contact each jurisdiction where your firm is required to be registered and/or notice field to determine the appropriate reinstatement procedures you must take.
If after reviewing your firm’s Final Renewal Statement, your firm discovers any discrepancies on the final statement, you must report, in writing, any errors to FINRA by February 3, 2012. With your letter of discrepancy, include a copy of your firm’s Final Renewal Statement and any supplemental documentation that would support your claim. If your renewal account had a credit balance as of January 3, 2012, the credit balance was transferred to your Daily Account. Investment advisors can leave the balance in the Daily Account for future needs or can request a refund. Instructions for requesting a refund can be found on the IARD website. For more information on the IARD renewal program, click here.
If you would like more information on how RIA Compliance Consultants may assist you with renewals, please click here to schedule a time to speak to one of our Senior Compliance Consultants. If you are an existing client of RIA Compliance Consultants, please contact your Senior Compliance Consultant directly.
Wednesday, January 4, 2012
The U.S. Securities and Exchange Commission (“SEC”) has modified the rules used to determine whether an individual is qualified to invest in certain unregistered securities offerings. The amendments were adopted as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
To invest in unregistered securities offerings, an investor must meet the “accredited investor” standards. Typically, to qualify as an “accredited investor” an investor must have a net worth, alone or with a spouse, greater than or equal to $1 million. The new rule modified the $1 million threshold to exclude the value of a person’s home. The rule also excludes from the $1 million net worth calculation, any liabilities secured by the individual’s primary residence with certain limitations. If secured liabilities exceed the fair market value of the residence, then the indebtedness that is greater than the value of the residence is applied against the individual’s net worth. In addition, secured loans must have originated more than 60 days prior to the purchase of the unregistered security to prevent individuals from taking out a second line of equity on their home in order to invest in unregistered securities. Individuals who qualified as “accredited investors” under the prior Securities Act of 1933 standards (pre-adoption of the SEC’s Dodd-Frank Act standards) may use the prior net worth standard for certain “follow-on investments.”
This new rule will go into effect 60 days after it has been published in the Federal Register. To view the full rule release, click here.
For most registered investment advisers, it is now time to file an amendment to your Form ADV. Pursuant to Rule 204-1 under the Investment Advisers Act of 1940 (“Advisers Act”), all investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) must file an amendment to the Form ADV at least annually, within 90 days of the investment adviser’s fiscal year end and more frequently if required by the instructions to Form ADV. Most state securities regulators have similar rules and the Form ADV Instructions specifically indicate that the update instructions apply to “SEC and State Registered Advisers.”
Many investment advisers have a December fiscal year end, which would mean that the 2011 annual amendment filing is due by March 30, 2012. This year is a little different for all investment advisers registered with the SEC. Due to changes to the Advisers Act resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act, all investment advisers registered with the SEC must file an amendment to Form ADV by March 30, 2012 indicating the reason it will remain eligible for SEC registration or that it is no longer eligible for SEC registration and will need to become state registered. For SEC investment advisers with a fiscal year end of October, November, or December 2011, this filing can be done in connection with your annual amendment as long as you have not done the annual amendment filing prior to January 1, 2012. For all other SEC investment advisers, this filing should be done as an other-than-annual amendment filing.
The Form ADV instructions provide specific details regarding which Items must be updated only annually; which items must be updated “promptly” if the information becomes inaccurate in any way; and which items must be updated “promptly” if the information becomes “materially” inaccurate. When filing an amendment to your Form ADV, all investment advisers should review the entire Form ADV to determine what information needs to be updated. This year a review of the entire Form ADV will be especially important because the Form ADV has been revised in several ways. The Form ADV revisions include new items, changes to existing items so as to request additional information or information to be provided in a different manner than in the past, and modifications to the instructions for completing the Form ADV, which most notably includes revisions to the instructions for calculating “regulatory” assets under management.
Failure to update your Form ADV, in accordance with the Form ADV instructions, is a violation of SEC Rule 204-1 and similar state rules and could lead to an investment adviser’s registration being revoked. RIA Compliance Consultants will be presenting a webinar, “Preparing Your Form ADV Annual Amendment” on January 12, 2011 at 12:00 pm CST if you would like more information regarding preparing your Form ADV amendments. The cost for this webinar is $69.95. Click here to register for the webinar.
RIA Compliance Consultants can assist you with your Form ADV amendments. If you are interested in this service, click here to schedule a time to speak with one of our consultants. Existing RIA Compliance Consultants’ clients should contact their consultant directly.
Wednesday, December 21, 2011
Earlier this year, the U.S. Securities and Exchange Commission (“SEC”) adopted rule changes under the Investment Advisers Act of 1940 in order to implement Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the more significant rule changes impacts all registered investment advisers as it centers on revisions to the Form ADV Part 1. Beginning January 1, 2012, all investment advisers registered with the SEC will have 90 days to complete and submit the revised Form ADV Part 1 confirming their eligibility to remain SEC registered. Investment advsiers registered with the SEC with November, December, January and February fiscal year ends are reminded they must also file their official Form ADV Part 1 Annual Amendment within 90 days of their fiscal year end and will likely choose to file their SEC eligibility amendment and annual amendment in conjunction.
There are numerous changes that have been made to the Form ADV Part 1 and registered investment advisers need to devote sufficient time and resources to review, understand and properly respond to the new Form ADV Part 1 items.
Item 1 – Identifying Information
An investment adviser must now disclose:
- the name and contact information of the investment adviser’s Chief Compliance Officer;
- if a person other than the Chief Compliance Officer is authorized to receive information and respond to questions about the Form ADV;
- if the investment adviser is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934 and provide their SEC assigned CIK number (Central Index Key number that the SEC assigns to each public reporting company); and
- if the investment adviser has $1 billion or more in assets on the last day of your most recent fiscal year and the investment adviser’s Legal Entity Identifier if applicable.
Item 2 – SEC Registration
An investment adviser is now required to disclose if they are eligible to register (or remain registered with the SEC.
The vast majority of SEC registered investment advisers will be required to indicate the following.
- If a large investment adviser firm:
An investment adviser is considered to be a large firm if the investment adviser has regulatory assets under management of $100 million (in U.S. dollars) or more, or has regulatory assets under management of $90 million (in U.S. dollars) or more at the time of filing its most recent annual updating amendment and is registered with the SEC.
- If a mid-sized investment adviser firm:
An investment adviser is considered to be a mid-sized investment adviser firm if it has regulatory assets under management of $25 million (in U.S. dollars) or more but less than $100 million (in U.S. dollars) and the investment adviser is either not required to be registered as an adviser in its home state or not subject to examination by the state securities regulator of its home state.
- If no longer eligible to remain registered as an investment adviser with the SEC:
Such investment adviser firms ares required to switch to state registration.
An investment adviser must complete Item 2.B. if it is reporting to the SEC as an exempt reporting adviser and disclose if it:
(1) qualifies for the exemption from registration as an investment adviser solely to one or more venture capital funds; qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;
(2) qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;
(3) acts solely as an investment adviser to private funds but it isno longer eligible to check box 2.B.(2) because it have assets under management in the United States of $150 million or more.
Item 5 - Your Advisory Business
An investment adviser must now disclose:
- The number of employees rather than just a range;
- The number of “employees” that are registered representatives of a broker-dealer;
- The number of “employees” that are investment adviser reps of your investment adviser firm;
- The number of “employees” that are investment adviser reps of another investment adviser firm; and
- The number of “employees” that are licensed insurance agents.
Other Item 5 Changes:
- The definition of an individual client has been change to include trusts, estates, 401(k) plans, and IRAs (but not sole proprietorships).
- The types of clients disclosed has been updated to include business development companies, other investment advisers and insurance companies.
- An investment adviser is now required to not only list the percentage of clients by number, but also by the percentage of clients based upon its regulatory assets under management.
- The definition of regulatory assets under management has also been amended to include securities portfolios for which they provide continuous and regular supervisory or management services, regardless of whether these assets are family or proprietary assets, assets managed without receiving compensation, or assets of foreign clients.
- The types of investment advisory activities has also been amended to include management of pooled investment vehicles and “educational seminars/workshops”
- An investment advisor must also indicate if the investment adviser provides investment advice with respect to only limited types of investments.
Item 6 - Other Business Activities
- Listed other business activities now include futures commission merchant (broken out from commodity pool operated or trading advisor), trust company, registered municipal advisor, registered security-based swap dealer, major swap participant, accountant/accounting firm, and lawyer/law firm.
- If another business activity uses a different name from the IA name, it must be furnished on Schedule D.
- If you sell products or services other than investment advice to your clients, that business must be described on Schedule D.
Item 7 - Financial Industry Affiliations and Private Fund Reporting
- The related persons list has been changed to remove investment company and add municipal advisor, swap dealer, major swap participant, futures commission merchant trust company, and sponsor of pooled investment vehicles.
- Foreign affiliates (registered or unregistered) must be reported
- Item 7 of the Form ADV Part 1A has been changed to request more detail on services provided by firms and related persons including custodians, private funds and seminar providers.
Item 8 – Participation or Interest in Client Transactions
- An investment adviser must now disclose whether they receive of any compensation for client referrals.
Item 9 – Custody
- An investment adviser is required to identify the number of custodians used in connection with those assets where the firm has custody and Schedule D of the Form ADV has been revised in order for firms to provide more detail about these arrangements.
Item 11 – Disclosure Information
An investment adviser will be required to indicate if any of the responses in Item 11 relate to any of their supervised persons.
Schedule D of Form ADV
Section 6 of the Schedule D has had significant changes that will require an investment adviser to provide details of their business activities
- Section 6.A. must disclose the name of any other business (if different from your investment adviser’s name).
- Section 6.B. must describe your investment adviser’s primary business (if not investment advisory) or other products and services.
Section 7 of the Schedule D has been added to require private fund managers and those investment advisers with related or affiliated entities that are private funds to provide responses to another 40 to 60 questions depending upon the investment adviser’s activities.
- Under Section 7.A., an investment adviser must identify the type of each related person (same as Item 7.A.), describe the control relationship with each related person, and disclose the registration status of each related person.
- Section 7.B(1) covers any private fund your firm advises. An investment adviser must identify the name and exemption status of each private fund; describe the ownership, advisory services, and private offering of each private fund; and identify each fund’s auditors, prim broker, custodian, administrator and marketer(s).
Section 7.B(2) requires an investment adviser to disclose whether the investment adviser solicits clients to invest in each private fund.
Registered investment adviser may soon be required to monitor client accounts for money laundering activities. James Freis, the director of the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”), recently announced that FinCEN and the U.S. Securities and Exchange Commission (“SEC”) are working together to finalize anti-money laundering regulations that would apply to investment advisers. The proposed rule would likely require investment advisers to implement anti-money laundering policies and procedures and would also require them to report suspicious activity to the appropriate authorities.
Currently, broker-dealers and investment companies are subject to anti-money laundering rules. A rule that would have subjected investment advisers to the similar anti-money laundering requirements was proposed in 2003. However, the rule did not receive much attention from regulators and was withdrawn in November of 2008.
Stay tuned to RIA Compliance Consultants for further updates as we will continue to follow this story.
Wednesday, November 30, 2011
In order for an investment adviser to maintain active state registration or notice filing statuses, as well as active state registration statuses for investment adviser representatives licensed under an investment adviser firm, renewal fees must be paid, in full, by all investment advisers by no later than December 12, 2011. Investment advisers need to be sure to allow sufficient time for submitted funds to be processed and reflected in the renewal account; it is highly encouraged that investment advisers submit their renewal payments electronically by no later than December 8, 2011. If renewal fees are submitted by check via the U.S. postal service, the investment adviser must account for delivery and processing time. It is important to remember that failure to pay renewal fees in full and on time may result in the termination of your investment adviser firm and its investment representative’s active registration statuses. Additionally, many jurisdictions also impose fines against investment advisers that fail to renew properly.
As the renewal process begins to wrap up, most investment advisers should also be preparing for filing the annual Form ADV updating amendment. Investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) and state registered advisers must file a Form ADV annual amendment within 90 days of the investment adviser’s fiscal year. Between January 1, 2012 and March 30, 2012 all SEC registered investment advisers must file a Form ADV Part 1 amendment (annual amendment or other than annual amendment, as applicable) to confirm the investment advisers qualification to remain SEC registered or to indicate that the investment adviser is no longer eligible for SEC registration. Investment advisers that are no longer eligible for SEC registration must register with the appropriate state regulator(s) and must file a Form ADV-W to withdraw registration with the SEC by June 28, 2011. Please note, an investment adviser’s failure to update Form ADV is considered an SEC violation or similar state rules violation and may result in the investment advisers registration being revoked.
If your investment adviser firm would like additional information in regards to RIA Compliance Consultants renewal service, annual amendment services, or services to assist with switching from SEC to state registration, please click here to schedule a time to speak to one of our Senior Compliance Consultants regarding our services. If you are an existing client of RIA Compliance Consultants, you should contact your consultant directly to discuss how your consultant can assist you.
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