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Thursday, October 13, 2016

Addition to RIA Compliance Consultants’ Sample Forms Library – Non-Access Person Acknowledgement Form

RIA Compliance Consultants added a new Sample Form to our Sample Forms Library. Our new Non-Access Person Acknowledgement Form is for investment advisers to document employees who are “non-access persons.” According the Securities and Exchange Commission (SEC), an investment adviser’s “access persons” are, “any of the investment adviser’s supervised persons who have access to non-public information regarding any investment advisory client’s purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund or any person who is involved in making securities recommendations to investment advisory clients, or who has access to such recommendations that are nonpublic.”

Similarly, a “non-access” person is an individual who does not have access to the above-described information and is not involved in making securities recommendations to clients.

This Sample Form is available to clients in Silver, Gold, and Platinum Packages through their online subscription accounts. Clients in the Sample Forms, Value, and Bronze Packages can purchase this Sample Form by clicking here.

Please Note: An investment adviser firm considering the possibility of using this sample Non-Access Person Acknowledgement form must be prepared to prove and substantiate that supervised persons signing this Non-Access Person Acknowledgement form are in fact not access persons.   The burden of proof that someone is not an access person will be placed on the investment adviser firm, and it is a high standard.  The U.S. Securities and Exchange Commission (“SEC”) will challenge any presumption that a supervised person is not an access person.  If it is determined that a supervised person is in fact an access person but has not been submitting personal and household securities holdings and transactions to the investment adviser firm, the investment adviser firm will be violation of the SEC’s code of ethics rule.  RIA Compliance Consultants, Inc. recommends that you review SEC Rule 204A-1 and consult with your compliance professional before using this sample form.

Tuesday, September 13, 2016

SEC Focuses On Wrap Fee Disclosures and “Trade Away” Costs

The United States Securities and Exchange Commission (“SEC”) recently fined two investment adviser firms nearly $1 million for alleged failures related to wrap account fee disclosures. As the name implies, a wrap account “wraps” brokerage fees and account management fees together; a customer will generally pay a single fee to the investment adviser, as agreed upon in advance, regardless of how many (or how few) brokerage transactions are placed on the customer’s behalf so long as the trades are placed with the sponsoring broker. For customers with a pattern of active trading, a wrap account can be a cost effective choice. The benefits disappear at an increasing rate, however, each time the customer’s trades are directed to a non-sponsoring broker whose fees are billed in addition to the normal wrap fee.

According to the SEC, the investment adviser firms subject to these enforcement actions failed to adequately disclose the additional costs that customers would incur when the investment adviser firms or their sub-advisers directed trades to non-sponsoring brokers. Although firms disclosed the possibility of conducting away trades in the wrap account, they allegedly failed to advise customers how often these cost-added trades could be expected to occur. In one instance, a sub-adviser to one of the investment advisers was incurring trade away costs in 90% of its transactions. In other instances, customers were unable negotiate for lower wrap fees because trade away commissions were not disclosed; account statements published by that investment adviser firm showed only the net purchase price per trade. Click here to read the SEC press release on these two enforcement actions.

Most importantly, the SEC noted that it would have been impossible to make these disclosures even had the investment adviser firms so intended since the firms lacked any policies or procedures to gather information related to trading away in customer accounts. Such information is a necessary prerequisite for an investment adviser firm to be able to disclose the trade away fees or evaluate whether its wrap program is suitable for a particular client.

Viewed in context with the current annual Exam Priorities published by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) and a recently published Investor Bulletin, these enforcement actions highlight the SEC’s continued scrutiny of wrap fee account management programs. Click here to view OCIE’s Examination Priorities for 2016; click here to read the related SEC Bulletin for Investors “How Fees and Expenses Affect Your Investment Portfolio.”

Investment adviser firms offering wrap fee accounts should have robust policies and procedures for evaluating wrap offerings and determining whether customers are in a suitable account type, both at account opening and on a periodic basis. RIA Compliance Consultants can help your firm evaluate its wrap fee practices and develop custom policies and procedures to ensure the costs associated with wrap fee accounts are properly monitored and disclosed.

Monday, September 12, 2016

SEC’s Passes New Rule Requiring Additional Information from Investment Advisers on the Form ADV

The United States Securities and Exchange Commission (“SEC”) recently announced changes to the Form ADV used by investment adviser firms to register with the SEC and state securities regulators. Two changes are of particular note. First, investment adviser firms will now be required to disclose all social media platforms the firm uses for business purposes, such as pages on Facebook, Twitter, or LinkedIn. In the event of a regulatory exam, investment adviser firms should also be prepared to produce records related to the content of those sites at any given point in time. The SEC rule does not require investment adviser firms to provide information about personal social media accounts held by employees or about social media sites whose content is generated by third parties and not controlled by the investment adviser. It is important to remember, however, that client communications made by the investment adviser firm’s employees on a personal account would still be subject to other applicable record keeping requirements, such as those relating to performance claims or solicitation. Click here to read the SEC rule release detailing the new requirements.

Second, the new rule will require investment advisers to “make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person.” Maintaining records related to performance claims and rates of return will make it easier for the SEC to ensure that investors are receiving truthful and accurate information about how an investment or investment model is performing. In the event of a dispute, these records can also help investment adviser firms defend against allegations of spreading false or inflated performance claims. Thirteen investment adviser firms recently ran afoul of the SEC for spreading false performance claims, allegedly relying on claims made by a third party money manager without conducting due diligence that would have uncovered their false and inflated nature. Click here to read our blog post on those recent enforcement actions.

In addition to the above discussed changes, the SEC rule also expands the reporting requirements of an investment adviser firm for branch offices, requiring information on all branches where advisory services take place, as well as detailed information on the largest 25 branches. Investment adviser firms will also have to disclose more information about their separately managed accounts, including the types of assets held and the use in those accounts, if any, of derivatives and borrowings.

These new requirements will go into effect October 2017, but it’s not too early to begin planning your compliance strategy. RIA Compliance Consultants can help your investment adviser firm evaluate and update your Form ADV disclosures to comply with these new requirements.


Friday, September 2, 2016

SEC Penalizes Investment Advisory Firms for Spreading False Performance Claims

The U.S. Securities and Exchange Commission (SEC) recently fined thirteen investment adviser firms for promoting performance information for a third party investment product that the SEC alleges the investment adviser firms knew, or should have known, was false. At the heart of the enforcement actions were claims made by a third party money manager who purported to have a time tested investment program that consistently and greatly exceeded standard market returns. The SEC alleged that in fact, the mathematical algorithm underlying the investment program had only been in existence a short period of time and the third party money manager was using selective, back-tested (“hypothetical”) data to promote its new program. Compounding the problem, the investment performance calculations contained an error that further inflated the product’s artificial performance statistics. Despite being notified of the calculation error and knowing the algorithm’s investment performance data was not from actual accounts, the SEC alleged that third party money manager claimed in marketing materials given  to investment adviser firms and investment adviser firm clients that the data was genuine. Click here to read the SEC enforcement action on the third party money manager.

Although some of the investment adviser firms in the SEC enforcement action had asked the third party money manager to verify its claims, ultimately all thirteen investment adviser firms ran afoul of SEC for failing to sufficiently verify the money manager’s assertions. This was true even of investment adviser firms who disclosed the third party source and back tested (“hypothetical”) nature of the data to their customers in the investment adviser firms’ own marketing materials, since they also made available to customers the money manager’s original marketing claims. Other investment adviser firms relied directly on the money manager’s assertions or upon reports generated by other parties that were based solely on information provided by the third party money manager and not independently verified. In its press release, the SEC noted that investment adviser firms have a duty to sufficiently and independently verify investment performance related claims the investment adviser firm will pass on to its clients or otherwise rely on when making investment advisory recommendations. Without admitting or denying the SEC’s charges, the thirteen investment adviser firms individually consented to penalties totaling $2.2 million. Click here to read the SEC press release.

To the extent that  your investment adviser firm utilizes investment performance marketing materials obtained from third parties, RIA Compliance Consultants encourages you to review your disclosures and due diligence and record keeping procedures with regard to performance marketing claims and materials. If your investment adviser firm needs help developing policies and procedures to support your investment performance advertising and marketing practices click here to schedule an introductory call with our team.

Monday, August 15, 2016

Wyoming to Start Requiring IA Registration

In March of 2016 the state of Wyoming signed into law its Uniform Securities Act. The biggest take away from Wyoming’s Uniform Securities Act is that Wyoming will require investment advisers to register with Wyoming securities regulators if the investment adviser has less than $100 million Assets Under Management (AUM). The new legislation will take effect on July 1, 2017.

Currently, Wyoming is the only state that does not regulate investment advisers. Investment advisers with main office locations in Wyoming register with the Securities Exchange Commission (SEC) regardless of their amount of assets under management. Several investment advisers had taken advantage of Wyoming’s dearth of investment adviser regulations, claiming Wyoming as home to their principal office location.

If your investment adviser is located in Wyoming or has clients in Wyoming we encourage you to contact your Compliance Consultant at RIA Compliance Consultants. Your Compliance Consultant can walk you through the new legislation and help you determine if you need to register in Wyoming.

Tuesday, August 9, 2016


The Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) recently announced a new initiative focusing on investment advisers’ recommendations regarding mutual fund share class purchases. According to the SEC, investment advisers have a fiduciary duty to recommend the lowest cost mutual fund share class available and appropriate for the client, and must avoid inducing clients to purchase shares in a more expensive share class merely because it generates more revenue for the investment adviser or its affiliates. The investment adviser’s ability to influence its own compensation or that of its affiliates by recommending a more expensive share class creates a conflict of interest that the investment adviser must manage or risk regulatory intervention by the SEC. Click here to read the SEC’s Risk Alert on the Share Class Initiative.

The SEC’s Risk Alert outlines three areas of focus for upcoming examinations. First, the SEC will be looking to see whether the investment adviser has been putting clients’ interests first and seeking best execution for its clients’ transactions. The investment adviser should be able to show that it has been purchasing the lowest cost shares available to its client(s) and is not structuring transactions merely to increase the investment adviser’s compensation or that of its affiliates. Second, the SEC will be looking at whether the investment adviser is making full and fair disclosures of all material conflicts of interests associated with the sale or purchase of mutual funds. A conflict is considered material if it would affect the advisory relationship, e.g., by causing the client to engage in or abstain from a recommended course of conduct. In addition to describing the compensation the investment adviser will receive, the investment adviser’s disclosures must also explain how the adviser intends to address any resulting conflicts of interest. Third and finally, the SEC will be looking to see whether the investment adviser has a robust compliance program that includes written policies and procedures, as well as documentation regarding the implementation of those procedures and the investment adviser’s current practices.

RIA Compliance Consultants encourages investment advisers to review the initiative and evaluate their current practices in light of this new share class guidance from the SEC. A subscription to our RIA Express – Compliance Review Tool includes review questions that can help your investment adviser firm evaluate its share class policies, procedures, and disclosures. If your investment adviser firm would like help developing a new mutual fund share class compliance strategy in response to the SEC’s Risk Alert, contact your consultant or click here to schedule an introductory call.


Tuesday, August 2, 2016

SEC Continues to Focus on Cybersecurity for Investment Advisers

As in 2015, the Securities and Exchange Commission (“SEC”) Examination Priorities for 2016 identify cybersecurity as an area of “potentially heightened [market-wide] risk.” Citing the Office of Compliance Inspections and Examinations (“OCIE”) 2015 Risk Alert, the SEC promised to continue using its exams to evaluate investment adviser firms’ cybersecurity preparedness. Click here to read our blog on the OCIE Cybersecurity Risk Alert.

Given investment advisers’ increasing reliance on technology to support, facilitate, and maintain critical business operations – and an expanding market for illicitly and illegally obtained confidential information – cybersecurity is a foundational component of every healthy investment adviser firm. New technologies, such as cloud computing, can bring new benefits but are accompanied by new risks. An investment adviser firm that does not appropriately plan for the risks associated with its use of technology exposes itself to the potential for the loss of sensitive and confidential information, the consequences of which can include both civil and regulatory liability.

In one of its first enforcement action focusing on cybersecurity, the SEC fined a registered investment advisory firm $75,000 for the firm’s alleged cybersecurity failures that resulted in Chinese hackers gaining access to the personal information of more than 100,000 individuals, the majority of whom were not clients of the firm. Click here to read the SEC enforcement action. In another enforcement action, the SEC fined an investment adviser firm $1 million for its alleged failure to prevent an employee from accessing and downloading unauthorized, confidential client information over a period of three years. After the employee allegedly downloaded the information, investigators believe a third party hacked employee’s personal server and began selling the information online. In its enforcement action, the SEC noted that the investment adviser firm had not reviewed some of its information control procedures for more than 10 years, allowing the employee to exploit detectable defects, and had also failed to monitor employee access logs for unusual or unauthorized activity. Click here to read the SEC press release.

In the ever-changing world of cybersecurity, the need to regularly review your investment adviser firm’s cybersecurity practices remains constant. RIA Compliance Consultants has created a best practices checklist that investment adviser firms can use to supplement their discussions with IT staff and information security consultants. Click here to purchase our Cybersecurity Best Practices Checklist or click here to view our Cybersecurity Package, which includes both the checklist and our Cybersecurity for Investment Advisers webinar. If you would like more information regarding the Cybersecurity Best Practices Checklist or any of our compliance support services, contact your consultant or click here to schedule an introductory call.

Wednesday, July 27, 2016

SEC Enforcement Action – Forgivable Loans

The U.S. Securities and Exchange Commission (“SEC”) recently fined an investment adviser firm located in Cedar Rapids, IA for its alleged failure to disclose $3 million in forgivable loans that the investment adviser firm received from its broker-dealer. In addition to allegedly failing to disclose the forgivable loan or the resulting conflict of interest to its clients as required under Rule 206(2), the investment adviser allegedly violated Rule 207 when it omitted any discussion of the forgivable loan from its filings with the SEC. In the enforcement action, the SEC noted that the first disclosures regarding the forgivable loan were made on the investment adviser firm’s Form ADV 2A a full three years after first receiving the loan. And even then, the SEC alleged that the disclosures were not truthful or complete: they failed to discuss terms or origin of the forgivable loan; stated that that new representatives “may” receive payments pursuant to the forgivable loan rather than stating that all representatives had in fact already received such payments; did not explain the conflict of interest arising from the payments and the investment adviser firm’s continued use of the broker-dealer; and failed to explain how the investment adviser firm managed this conflict of interest. Click here to read the SEC enforcement action.

In a similar action, the SEC also fined an investment adviser firm in San Diego, CA for its alleged failure to disclose loans it received on favorable terms from a broker-dealer. The SEC alleged that of four loans made to the investment adviser firm between 2012 and 2013, two were forgivable over a five year term, amounting to approximately a $1.1 million benefit to the investment adviser firm. The remaining two loans, amounting to nearly $800,000, were interest-free for six months and then incurred a favorable rate for the remainder of the term. Since all of the loans were conditioned on the investment adviser firm retaining the broker-dealer’s services, the SEC alleged a disclosable conflict of interest had arisen as soon as the agreement was executed. Instead of disclosing the conflict promptly, however, the investment adviser firm did not update its Form ADV Part 2A until nearly a year later when an SEC examination noted the deficiency. Click here to read the SEC enforcement action.

Forgivable loans to registered representatives are a common tool used by broker-dealers looking to entice new business or encourage retention. These recent enforcement actions, however, show that the SEC is taking note of the special conflicts of interest that can arise when loan forgiveness is made contingent upon the investment adviser firm or its dually licensed investment adviser representative/registered representative selecting or continuing relationship with a broker-dealer for investment advisory services. Based upon these enforcement actions, it appears that the SEC believes that the economic benefit inherent in forgivable loans can, for example, influence an investment adviser firm to recommend a particular broker-dealer to its clients.

In light of these SEC enforcement actions, investment advisers should be prepared to make an accurate and complete disclosure of all material facts relating to forgivable loans, including its terms, which individuals or entities receive payments in connection with the loan, and what conflicts of interest may arise as a result. The investment adviser should also discuss how it will address those conflicts of interests on behalf of its clients. If your firm, its representative(s) or control person(s) has a currently outstanding forgivable loan from a broker-dealer, we recommend that you promptly update your firm’s Form ADV Part 2A Item 10 and the applicable representative’s Form ADV Part 2B Item 5 disclosing this conflict of interest. RIA Compliance Consultants can assist your firm with drafting these disclosures.

Thursday, July 21, 2016

Business Continuity and Succession – SEC and Nebraska Proposed Rules

The Securities and Exchange Commission (SEC) has proposed a new business continuity and transition plan rule that would require investment advisers to develop business continuity and transition plans tailored to the specific needs of their investment advisory business. In its guidance on the new rule, the SEC noted that investment advisers increasingly rely on technology to carry out both vital and day to day functions. When those technological processes are not available, either due to severe weather, system failure, or other causes, investment advisers should have a plan in place to minimize any harm or disruption to their clients’ interests. An investment adviser should also consider what it would do if key personnel are lost or unavailable, or if the investment adviser’s physical office is temporarily or permanently unusable. Click here to read the SEC’s proposed rule in its entirety.

If not properly handled, such events can cause harm to both the clients’ interests and to the investment adviser’s reputation. The SEC noted that this risk of harm to clients — combined with the investment adviser’s fiduciary duty — requires investment advisers to create and implement robust business continuity and transition plans. Although many investment advisers already use business continuity plans as a matter of best practice, the SEC hopes the proposed rule will promote universal adoption among investment advisers, while also increasing their quality and implementation.

In April 2015, the North American Securities Administrators Associations (NASAA) adopted a model rule similar to the SEC’s proposed rule. NASAA’s “Model Rule on Business Continuity and Succession Planning” states that “every investment adviser shall establish, implement, and maintain written procedures relating to a Business Continuity and Succession Plan.” NASAA’s model rule states that an investment adviser’ business continuity plan should, at a minimum, provide for the following:

1. The protection, backup, and recovery of books and records

2. Alternate means of communication with customers, key personnel, employees, vendors, service providers, and regulators

3. Office relocation in the event of a loss of a principal place of business

4. Assignment of duties to qualified persons in the event of the death or unavailability of key personnel

5. Minimizing service disruptions and client harm resulting from a sudden significant business interruption

Click here to read NASAA’s Business Continuity and Succession Plan Model Rule.

In order for NASAA’s Business Continuity and Succession Plan Model Rule to become effective for state registered investment advisers, each state must individually adopt the rule. For instance, the Nebraska Department of Banking and Finance has proposed a business continuity and succession planning rule for investment advisers registered in Nebraska. Nebraska would require investment advisers to create and implement a written business continuity and succession plan that is tailored to the specific needs of the advisory firm. At a minimum, investment advisers registered in Nebraska would be required to address how investment advisory records will be backed up and protected, how the investment adviser will communicate with internal and external parties, what to do if the office needs to be relocated, and how to carry on if key investment advisory personnel are unavailable. Click here to read Nebraska’s proposed business continuity and succession planning rule in its entirety. A hearing on the Nebraska proposed rule will be held on August 10, 2016 at 9:30 am at the Department of Banking and Finance, located at 1526 K Street, Suite 300, Lincoln, Nebraska, 68508.

RIA Compliance Consultants encourages investment advisers to read the SEC’s proposed rule, Nebraska’s proposed rule, and NASAA’s model rule for business continuity and succession planning. Investment advisers should use these proposals and models as a tool to assess their own business continuity and succession plans they current have in place or as guides to develop their own business continuity and succession plans if plans are not already in place. RIA Compliance Consultants offers a template Disaster Recovery and Business Continuity plans and can help your investment adviser draft its own specific business continuity and succession plan.

Tuesday, July 5, 2016

SEC Revises Performance Fee Rules

The U.S. Securities and Exchange Commission (“SEC”) recently finalized revisions to Rule 205-3 under the Investment Advisers Act of 1940, raising the net worth requirements for individuals who are charged performance fees.  The SEC increased the threshold requirements for “qualified clients” to account for inflation, which the Dodd-Frank Act and section 205(e) of the Advisers Act require it to do every 5 years.

This Order is effective as of August 15, 2016.

Under the revised rule, in order for an investment adviser to charge a performance fee, the client must have $1 million ($1,000,000) under management at the time an advisory contract is entered into with the investment adviser to satisfy the assets-under-management test or the investment adviser must reasonably believe that the client has a net worth of more than $2.1 million ($2,100,000) at the time the advisory contract is entered into to satisfy the net worth test.  The previous net worth requirement was $2 million ($2,000,000). The dollar amount adjustment will not generally apply retroactively, but would instead take effect on new contractual relationships entered into on or after the effective date (August 15, 2016).

To read the full release, click here.

To the extent your investment advisor charges a performance fee, you should verify and document that any new clients meet these performance fee requirements and correspondingly update your written supervisory policies and procedures and client agreement.

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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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