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Monday, December 14, 2015

SEC Risk Alert-Outsourcing CCO

The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) recently issued a risk alert regarding outsourcing compliance activities to third parties. The SEC’s OCIE conducted nearly 20 examinations focusing on SEC-registered investment adviser firms that outsource the position of the Chief Compliance Officer (CCO) to third parties. The risk alert shares SEC staff’s observations and identifies areas of risk associated with an investment adviser firm outsourcing the role of CCO. This SEC Risk Alert comes on the heels of a new rule the SEC proposed in May of 2015, which would require investment advisers to disclose if they outsource the role of CCO. These two actions indicate that the SEC is seriously scrutinizing the effectiveness of an investment adviser firm’s outsourced CCO.

Pursuant to Rule 206(4)-7(c) under the Investment Advisers Act of 1940, an investment adviser firm must designate an individual as CCO to be responsible for administering its policies and procedures. There are no rules prohibiting an investment adviser outsourcing the role of a CCO to a third party, however the SEC staff evaluated the effectiveness of the outsourced CCOs by considering whether;

  • The CCO was administering a compliance environment that addressed and supported the goals of the Investment Advisers Act, Investment Company Act, and other federal securities laws, as applicable (i.e., compliance risks were appropriately identified, mitigated, and managed);
  • The investment adviser’s compliance program was reasonably designed to prevent, detect, and address violations of the Investment Advisers Act, Investment Company Act, and other federal securities laws, as applicable;
  • The investment adviser’s compliance program supported open communication between service providers and those with investment adviser compliance oversight responsibilities;
  • The investment adviser’s compliance program appeared to be proactive rather than reactive;
  • The CCO appeared to have sufficient authority to influence adherence with the investment adviser’s compliance policies and procedures, as adopted, and was allocated sufficient resources to perform his or her responsibilities;
  • Compliance appeared to be an important part of the investment adviser’s culture

The examination found that outsourced CCOs were generally effective in administering the investment adviser’s compliance program when they frequently interacted with the firm and its employees and were able to obtain independently the records they deemed necessary for conducting such reviews.

The SEC staff identified areas of risk associated with outsourcing the role of CCO including the misidentification of the firm’s risks. Other areas of risk are:

  • Standardized checklists, which the outsourced CCO would use to gather information about the investment adviser firm. Some of these checklists were found to be generic and did not capture the business models or strategies of the investment adviser firms.
  • Compliance policies and procedures were not tailored to investment adviser’s businesses or practices.
  • A general lack of documentation evidencing the compliance annual review testing.

If your investment adviser firm outsources the role of CCO to a third party, RIA Compliance Consultants strongly encourages you to review your business practices specifically scrutinizing the the risks highlighted in this SEC Risk Alert.

Thursday, December 10, 2015

Congress Amends GLBA so an Investment Adviser Is No Longer Required to Provide Annual Privacy Disclosure if No Changes Were Made

On Dec. 4, 2015 President Obama signed a piece of legislation, Fixing America’s Surface Transportation Act or “Fast Act”, which features an amendment to the Gramm-Leach-Bliley Act (GLBA). The amendment provides an exception to GLBA’s annual privacy policy notice requirement. Section 75001 of the Fast Act states:

“A financial institution that (1) provides nonpublic personal information only in accordance with the provisions of subsection (b)(2) or (e) of section 502 or regulations prescribed under section 504(b), and (2) has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent disclosure sent to consumers in accordance with this section, shall not be required to provide an annual disclosure under this section.

Previously, GLBA required all investment advisers to provide an annual privacy policy disclosure to their clients. The road to the elimination of the annual privacy statement was bricked incrementally. In October of 2014, the Consumer Financial Protection Bureau (CFPB) finalized a rule that allows financial institutions to post their annual privacy notices online instead of delivering them individually if they meet certain criteria. In March and April of 2015, several financial groups* pushed to eliminate any annual privacy statement. They argued that the annual privacy policy disclosure confused clients and, “has little value for either customers or financial institutions.”

Please note, the implementation of this amendment does not mean investment advisers and other financial institutions no longer need to disclose their privacy policies to clients. Rather, only certain firms that meet the outlined provisions are no longer required to release the disclosure annually. If you are uncertain if your firm needs to send an annual privacy policy notice and you are a client of RIA Compliance Consultants we encourage you to contact your consultant. If you are not a client of RIA Compliance Consultants and you have questions about a privacy policy notification or if you have other investment advisor compliance questions click here to set up an introductory call with one of our consultants.

*The American Bankers Association, American Financial Services Association, Consumer Bankers Association, Credit Union National Association, Financial Services Roundtable, Independent Community Bankers of America, Midsize Bank Coalition of America, Mortgage Bankers Association, and National Association of Federal Credit Unions

Tuesday, December 8, 2015

Deadline for Receipt of Preliminary Renewal Statement Payments Quickly Approaches

The deadline for investment advisers to submit their Preliminary Renewal Statement payment is quickly approaching. The Financial Industry Regulatory Authority (FINRA) must be in receipt of the full payment listed on the Preliminary Renewal Statement by Friday, December 18, 2015. Investment advisers with sufficient funds in their Flex-Funding Account to cover the Preliminary Renewal Statement payment will have funds automatically transferred beginning on Friday, December 11, 2015 to their Renewal Account to cover total renewal fees owed. Automatic transfers will be conducted every day after December 11, 2015 until the WEB CRD/IARD shuts down for year-end processing on Tuesday, December 29, 2015. Investment advisers that choose to mail in their payments are advised to do so now to avoid delays and to ensure funds are received by the deadline. If your investment adviser would like assistance with the annual renewal service, click here for more information on or to purchase RIA Compliance Consultants’ IARD Renewal Program and ADV Amendment Service. If you have questions regarding these or any of the other services offered by RIA Compliance Consultants, please contact your consultant if you are an existing client or click here if you have not previously engaged RIA Compliance Consultants for our services.

Wednesday, November 25, 2015

Ensure Timely Preliminary Renewal Statement Payments

Don’t wait until the last minute to submit your annual renewal fees. The Financial Industry Regulatory Authority (FINRA) must be in receipt of the full payment listed on the Preliminary Renewal Statement, which is now available, by Friday, December 18, 2015. Investment advisers with sufficient funds in their Flex-Funding Account to cover the Preliminary Renewal Statement payment will have funds automatically transferred beginning Friday, December 11, 2015 to the Renewal Account to cover total renewal fees owed. Investment advisors that choose to mail in their payments are advised to do so now to avoid delays and to ensure funds are received by the deadline. If your investment adviser would like assistance with the annual renewal service, click here for more information on or to purchase RIA Compliance Consultants’ IARD Renewal Program and ADV Amendment Services.

Tuesday, November 17, 2015

Preliminary Renewal Statement Now Available

As of yesterday, Monday, November 16, 2015, your investment adviser firm can access, via its Investment Adviser Registration Depository (IARD) account, its Preliminary Renewal Statement for the upcoming year. Investment advisor firms are assessed individual registration fees based on the state(s) that the firm is notice filed or registered in and the number of investment advisor representatives and their approved registration statuses. The amount reflected in the Preliminary Renewal Statement is the amount of renewal fees investment advisors must pay in order to maintain active registration for the firm and its investment adviser representatives.

The Preliminary Renewal Statement must be paid, in full, by Friday, December 18, 2015.  Since it takes approximately two (2) business days for payment to post to the IARD account, your firm’s payment should arrive at FINRA no later than Wednesday, December 16, 2015 to ensure that funds are posted to your firm’s IARD account by December 18, 2015

Unfortunately, every year there are investment adviser firms that fail to submit renewal fees through their IARD accounts in a timely fashion, and almost all state securities regulators will automatically terminate these registered investment advisor firms and their investment advisor representatives for failing to pay their renewal fees.  The contacting of each state securities regulator after such a failure to renew can be time intensive and potentially expensive since a state securities regulator typically has the authority to require a new registration application and prohibit the charging of investment advisory fees as long as the firm and representatives are unregistered.

Many times investment advisors can find the IARD system difficult to use because they do not access it on a regular basis.  It is also important to note that IARD Renewal payments are submitted to a different account than the account the investment advisor would normally submit payment to for a new registration.  RIA Compliance Consultants can assist you with this process and save you the time of trying to figure out where to find your renewal reports and how to properly submit the renewal payments.  We recommend that you utilize our IARD Renewal and ADV Annual Amendment Service. In addition to assisting you with the IARD renewal process, this service includes preparing and filing your investment advisor firm’s Form ADV Part 1 Annual Amendment, which is required to be filed within 90 days after the firm’s fiscal year. Click here to purchase our 2016 IARD Annual Renewal and Form ADV Annual Amendment Services.

To speak with one of our Consultants to see how we may further assist you, click here. If you are a current client of RIA Compliance Consultants, please contact your consultant directly.

Thursday, November 12, 2015

Preliminary Renewal Statements Available Monday

Starting Monday, November 16, 2015, a registered investment adviser firm can access, via its Investment Adviser Registration Depository (IARD) account, its Preliminary Renewal Statement for 2016 renewals.  The Preliminary Renewal Statement must be paid, in full, by Friday, December 18, 2015.  Since it takes approximately two (2) days for a payment to post to the IARD account, your firm’s payment should arrive at the Financial Industry Regulatory Authority (FINRA) no later than Wednesday, December 16, 2015, to ensure that funds are posted to your firm’s IARD account by Friday, December 18, 2015.

Unfortunately, every year there are investment advisor firms that fail to submit renewal fees through their IARD accounts in a timely fashion, and almost all state securities regulators will automatically terminate these registered investment adviser firms and their investment adviser representatives for failing to pay their renewal fees.  Contacting each state securities regulator after such a failure to renew can be time intensive and potentially expensive since a state securities regulator typically has the authority to require a new registration application and prohibit the charging of investment advisory fees as long as the investment adviser and its representatives are unregistered.

To help avoid problems with your investment adviser’s annual renewals, RIA Compliance Consultants recommends that you utilize our IARD Renewal Program and ADV Annual Amendment Service. For only $625 investment advisers that engage us for this service will receive assistance with the annual renewal process and with preparing and submitting the Form ADV Part 1 annual amendment that all investment advisers are required to file and submit within 90 days following the investment adviser’s fiscal year.

If you would like to engage RIA Compliance Consultants to assist you with your annual renewals and Form ADV annual amendment, please click here to purchase the service online and execute the letter of engagement.  Please complete and return the consulting agreement and payment to RIA Compliance Consultants as soon as possible as engagements received after Saturday, November 14, 2015, are subject to availability and additional fees may be assessed.

Thursday, November 5, 2015

NASAA Announces IARD System Process Fee Waiver for State Registered Investment Adviser Firms

The North American Securities Administrators Association (NASAA) announced that the Investment Adviser Registration Depository System (IARD), the national database sponsored by NASAA and the U.S. Securities and Exchange Commission (SEC) that provides investment adviser firms and their investment adviser representatives a single source for filing state and SEC investment adviser registration and notice filings, will waive the IARD system processing fees for state registered investment adviser firms in 2016. While waiving IARD system processing fees for state registered investment adviser firms in 2016, NASAA will continue charging a $10 IARD system processing fee for each investment adviser representative (IAR).

Please understand that this waiver for the IARD system processing fees only applies to state registered investment adviser firms. SEC registered investment adviser firms will continue be subject to an IARD system processing fee based upon assets under management of the SEC registered investment adviser. For more details, please click here. It also important to note that the IARD system processing fees referenced above are separate from state registration and notice filing fees charged by state securities regulators. If you’d like to view a list of each state’s investment adviser registration or notice filing fee, please click here. Likewise, click here to view a list of each state securities regulator’s fee for investment adviser representative registration.

This announcement comes as annual renewal season for investment advisers approaches. RIA Compliance Consultants reminds investment adviser firms to be proactive and begin preparing IARD renewals for review to make sure the investment adviser firm is properly registered or notice filed and that all of its investment adviser representatives are properly licensed with all required state securities regulators. Although, an investment adviser’s registration, notice filing, and licensing requirements are things that should be reviewed and monitored on an ongoing basis, during the annual IARD renewal process all investment adviser firms should review their existing registration or notice filing status and each investment adviser representative’s licensing status to confirm that the investment adviser and its representatives are properly registered, notice filed, or licensed (as applicable). Additionally, all state registered investment adviser firms should also review the state requirements to see if branch office registration is required and, if it is, investment advisers should confirm that all branch office locations have been properly registered.

RIA Compliance Consultants can assist your investment adviser with the annual renewal process and provide assistance with preparing and filing the Form ADV annual update amendment when the time comes. If you would like to engage RIA Compliance Consultants to assist you, click here to purchase this service. If you have questions or need to further discuss these services and you are an existing client of RIA Compliance Consultants, please contact your consultant to discuss the services available. If you are not a client but are interested in these services, please click here to schedule a time to speak with one of our consultants.

Thursday, October 29, 2015

Investment Advisers Should Begin Preparations for 2016 Renewals

As annual renewal season rapidly approaches, investment advisers should be proactive and begin preparing for renewals by reviewing to make sure the investment advisor is properly registered or notice filed, as applicable, and that its investment adviser representatives are properly licensed with all required state securities regulators.  The IARD Renewal Program serves to facilitate the annual renewal of investment advisers and their investment adviser representatives’ registrations with the appropriate state securities regulators. Although, an investment adviser’s registration, notice filing, and licensing requirements is something that should be reviewed and monitored on an ongoing basis, during the annual renewal process all investment advisers should review their existing registration or notice filing status and each investment adviser representative’s licensing status to confirm that the investment adviser and its representatives are properly registered, notice filed, or licensed (as applicable).  Additionally, all state registered investment advisers should also review the state requirements to see if branch office registration is required and, if it is, investment advisers should confirm that all branch office locations have been properly registered.

It is imperative that registered investment advisers ensure they are properly registered or notice filed at all times and that its investment adviser representatives are properly licensed at all times. State investment adviser registrations and notice filings and investment adviser representatives’ licensing statuses expire every year on a calendar basis. All renewal fees are paid during the IARD renewal season. While the U.S. Securities and Exchange Commission (“SEC”) does not charge a registration fee, SEC registered investment advisers must pay the appropriate state fees to notice file with all required state securities regulators and to properly register the investment advisers’ representatives with the required state securities regulators.

In accordance with the 2016 IARD Renewal Program Calendar investment adviser firms are encouraged to “review their registered persons to ensure that they have properly and timely reported all appropriate information to Web CRD® and that all open branch offices have individuals assigned to them and they are accurately reported.”

If your investment adviser firm needs assistance with the renewal process or determining if it is properly registered, RIA Compliance Consultants can assist you. If you are an existing client of RIA Compliance Consultants, please contact your consultant to discuss how we can assist you. If you have not previously worked with RIA Compliance Consultants, please click here to learn more about our 2016 IARD Renewal and Form ADV Annual Amendment Services or click here to schedule a time to speak with one of our consultants.

Friday, October 2, 2015

NASAA Report on Common Investment Adviser Deficiencies

The North American Securities Administrators Association (NASAA) released a new report revealing a reported number of state registered investment adviser compliance regulation deficiencies. Every two years, state securities examiners voluntarily report sample data from their investment adviser examinations to NASAA’s Investment Adviser Operations Project Group. State examiners reported 4,983 deficiencies in 22 areas of compliance in 2015. The last time NASAA conducted this report in 2013 state examiners reported 6,482 deficiencies in 20 areas of compliance.

The report found that the biggest problem area for investment adviser compliance is books and records maintenance. Specifically, many investment advisers do not maintain client suitability documentation and order memorandum. The other leading deficiency areas were:

  • Top contracts deficiencies: fees not explained and not having all contracts in writing.
  • Top registration deficiencies: Form ADV inconsistencies between Part 1 and Part 2 and the timely filing of amendments.
  • Top fee deficiencies: fee charged does not match contract or ADV and unreasonable or excessive charges.
  • Top custody deficiencies: improper client invoice for direct fee deduction and dual invoicing of client and custodian for direct fee deduction.

Though these areas were responsible for many of the reported compliance deficiencies, deficiencies were commonly reported in: advertising, privacy, fees, compliance/supervision, financial matters, brochure delivery, and pooled investments.

The NASAA Report offers the following best practices to help investment advisers remain in compliance with securities regulations:

  • Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
  • Prepare and maintain client profiles or other client suitability information.
  • Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
  • File amendments in a timely manner.
  • Prepare and distribute an initial and annual privacy policy
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Provide disclosure brochure to clients initially, and then provide updates and offers to deliver afterwards as required.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
  • Review solicitor agreements, disclosures, and delivery procedures.

Though a good place to start, NASAA’s list of best practices is in no way exhaustive. There are many areas and strata of compliance regulations with which investment advisers need to comply. Different states have different compliance requirements so investment advisers must make sure to comply with the appropriate regulations of the states in which they are registered and different states have different compliance requirements. RIA Compliance Consults can help your investment adviser firm address these compliance concerns. We have services that can address investment adviser Form ADVs, client brochures, wrap programs, solicitor disclosures, compliance policies and procedures, advertising reviews, compliance assessments and more.  If you would like more information regarding these or any of our compliance support services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.

Monday, September 28, 2015

SEC Provides Guidance on How to Respond to Cybersecurity/Identity Theft Incident


The U.S. Securities and Exchange Commission (SEC) continues to promote the importance of cybersecurity and protecting confidential investor information. On September 22, 2015 the SEC’s Office of Investor Education and Advocacy issued an Investor Alert regarding investment accounts if they become victims of identity theft or a data breach. This Investor Alert came one week after the SEC issued a Risk Alert on the topic of its Cybersecurity Exam Initiative (September 15, 2015).

Though the SEC’s Investor Alert is intended for individual investors who experience identity theft or whose confidential information has been compromised, investment adviser firms should take note of its content and suggestions as they provide ideas for best practices in response to compromised client information.

According to the Gramm-Leach-Bliley Act and Regulation S-P, investment advisers have an obligation to safeguard their client’s records and information. These regulations require investment advisers to take appropriate measures to protect customer information and to protect against identity theft.

If identity theft or a breach of client information occurs the SEC’s Investor Alert recommends that an investor should:

Contact his or her investment firm and other financial institutions immediately.  As an investment adviser you should encourage your client to contact other financial institutions where he or she holds an account.

Change his or her online account passwords.  Immediately change the password for any investment or financial account associated with the compromised personal financial information.  Investment advisers should change the client’s account password at its firm and encourage the client to change his or her passwords at other financial institutions.

Close compromised accounts.  The victim should consult his or her investment firm about the best way to handle closing an account, if he or she chooses to do so. As an investment adviser you should close the compromised account.

Activate two-step verification.  As an investment adviser you should offer a two-step verification process for gaining access to client’s online accounts.  With a two-step verification process, each time anyone attempts to log into your account through an unrecognized device (i.e., a device you have not previously authorized on the account), the investment firm sends a unique code to either the client’s e-mail or cell phone.  Before anyone can gain access to the account, they must enter this code and the password.  Activating this added layer of security may help reduce the risk of unauthorized access to client accounts by identity thieves.

Place a fraud alert on his or her credit file.  Placing an initial fraud alert in a credit file provides notice to potential creditors (e.g., banks and credit card companies) that an individual may have been a victim of fraud or identity theft and will help reduce the risk that an identity thief can use the compromised personal financial information to open new accounts. As an investment adviser you should recommend the client place a fraud alert on credit file with credit bureaus.

Create an Identity Theft Report, which helps the victim deal with reporting companies, debt collectors, and businesses that opened accounts in the victim’s name.  As an investment adviser you should recommend the client creates an identity theft report at the Federal Trade Commission and contact local police department to file a police report. See www.identitytheft.gov for additional details.

Although we are not information security experts, RIA Compliance Consultants has identified some best practices that an investment adviser can discuss with its IT staff and information security consultants. Purchase our Cybersecurity Package, which includes a cybersecurity best practices checklist and access to our webinar Cybersecurity for Investment Advisers. You can also purchase our webinar Identity Theft & Third Party Wire and Check Fraud by clicking here. We also have an annual review tool with questions regarding best practices for cybersecurity, which could help investment advisers and their IT staff and information security consultants. If you would like more information regarding these or any of our compliance support services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.

 

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* RIA Compliance Consultants, Inc. ("RCC") is not a law firm and does not provide legal services. A compliance consulting relationship with RCC is not provided those legal and professional protections that normally exist under an attorney-client relationship. For more information, please visit our Disclosures webpage.

The determination to use a third-party compliance services provider is an important decision and should not be based solely upon advertisements or self-proclaimed expertise. A description or indication of limitation of our compliance services does not mean that an agency or board has certified RCC as a specialist or expert in investment advisor compliance. All potential clients are urged to make their own independent investigation and evaluation of RCC.

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