The eligibility for registration as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) based upon the amount of assets under management will increase from the current minimum threshold of $25 million to a new threshold of $100 million pursuant to the Dodd-Frank Financial Reform Act, which passed on July 21, 2010. The Dodd-Frank Financial Reform Act included a provision affecting registered investment advisers eligible for SEC registration based upon the amount of assets under management and requiring that registered investment advisers with less than $100 million in assets under management register with state securities regulators rather than the SEC. It is estimated that as a result of this increased eligibility threshold, over 4,000 investment advisers currently registered with the SEC will need to register with the state securities regulator for each state where the investment adviser firm conducts investment advisory business and does not meet an exemption from the investment adviser registration requirements in that state.
The Dodd-Frank Financial Reform Act also changed the multi-state investment adviser registration exemption. Currently, a registered investment adviser is eligible to register with the SEC as a multi-state investment adviser if the investment adviser is required to register with the state securities regulator of 30 or more states regardless of the investment adviser’s total assets under management. The Dodd-Frank Financial Reform Act has decreased the multi-state investment adviser threshold to allow investment advisers to register with the SEC if the investment adviser is required to register with the state securities regulator of 15 or more states. It is important to note that the multi-state investment adviser eligibility is based upon the requirement to register in 15 or more states, which registration requirement is generally triggered upon the investment adviser having an office location or having more than 5 clients in a state. In other words, an investment adviser is not eligible for registration with the SEC as a multi-state investment adviser unless the investment adviser has either an office location or more than five clients in 15 or more states. (It is important to note that some state securities regulators may require investment adviser registration with less than 5 clients regardless of whether the investment adviser has a place of business in the state. It is important to check a state securities regulator’s investment adviser registration requirements prior to obtaining clients in that state.)
While the compliance date of July 21, 2011 has been announced, not every detail has been worked out with the switch. Currently the North American Securities Administration Association (“NASAA”) and the SEC are working together to determine when investment advisers who are currently registered with the SEC can switch to state investment adviser registration, and whether those investment advisers will have to pay multiple investment adviser registration fees. Stay tuned to RIA Compliance Consultants for more information regarding these issues.
If your registered investment adviser firm needs assistance with the switch from SEC to state registration or any other compliance matters, please use the following link to schedule a time to speak with one of our consultants regarding your investment adviser’s needs: http://www.ria-compliance-consultants.com/call.
Thursday, August 19, 2010
On July 23, 2010, the United States Securities and Exchange Commission (“SEC”) awarded $1 million to two individuals who provided crucial information and documents that led to the SEC’s insider trading cases against Pequot Capital. The award was the largest paid by the SEC for information in an insider trading case. However, a provision in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protect Act (“Dodd-Frank Act”) gives the SEC authority to further reward whistleblowers.
Under the new provisions, whistleblowers who provide “original information” to the SEC will be entitled to collect between 10 and 30 percent of the money the government recovers. According to the Dodd-Frank Act, “original information” is defined as “information that – (A) is derived from the independent knowledge or analysis of a whistleblower; (B) is not known to the Commission from any other source…; and (C) is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.” The act also protects whistleblowers by allowing them to provide the information through an intermediary, such as an attorney, so that not even the government is aware of their identity. Stephen Kohn, the executive director of the National Whistleblowers Center stated, “If the law works, whistleblowers should be rewarded with millions of dollars,” while further noting that, “those whistleblowers will save investors billions and billions of dollars.”
Finally, the Dodd-Frank Act enhances the retaliation penalties and procedures that protect whistleblowers. Unlike the Sarbanes-Oxley Act, which protects whistleblowers who are employees of public companies, the protections in the Dodd-Frank Act apply to employees of both public and private companies. Further, the Dodd-Frank Act gives whistleblowers protection from retaliation for making disclosures that are required under all rules, laws, and regulations subject to the SEC’s jurisdiction. Therefore, RIA Compliance Consultants recommends that all investment adviser firms implement a system to handle internal whistleblower complaints. If your investment adviser firm needs help implementing complaint procedures or would like help reviewing your existing system, any of our compliance consultants would be happy to assist your firm.
Did you know that most state securities regulators require paid solicitors of investment advisor firms to license as investment advisor representatives? This means that the solicitor must either establish his/her own investment advisor firm or license under an existing investment advisor firm. From the solicitor’s perspective it is far easier to simply license under an existing investment advisor firm rather than forming a new investment advisor firm. However, what does that mean for the existing investment advisor firm holding the solicitor’s investment advisor representative license?
When a solicitor is licensed as an investment advisor representative under an investment advisor firm, the investment advisor firm is responsible for supervising the investment advisory activities of the solicitor. The relationship moves away from a due diligence requirement to a supervision requirement. An investment advisor must treat all licensed investment advisor representatives, even those that are just solicitors, as supervised persons for purposes of the firm’s compliance policies and procedures and code of ethics. Therefore, in addition to ensuring compliance with the SEC’s solicitor rule, the solicitor must follow the firm’s written compliance policies and procedures including the firm’s code of ethics. The registered investment advisor must establish reasonable policies and procedures designed to properly supervise its licensed solicitors. These procedures could include training events, advertising limitations, and monitoring the actual services provided by the solicitor.
If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our Thursday, August 26 webinar entitled “Establishing & Supervising Solicitor Arrangements”. A seat to attend this webinar is only $59.95.
During this webinar, RIA Compliance Consultants will detail the requirements of SEC Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions. We will be examining the differences between affiliated and unaffiliated solicitors and the ramifications of holding licenses of solicitor-only investment advisor representatives.
To register for “Establishing & Supervising Solicitor Arrangements” click here.
The United States Securities and Exchange Commission (“SEC”) recently adopted the long-awaited amendments to Part 2 of Form ADV and related rules under the Investment Advisers Act of 1940. The Form ADV Part 2 amendments will require all investment advisors registered with the SEC to prepare and file plain English narrative brochures and supplements. SEC registered advisors will now be required to file these narrative brochures electronically through the IARD system in a text searchable PDF format. This filing process for the new Form ADV Part 2 is a task that state registered investment advisor firms have been required to do for sometime now but this will be a new process for SEC registered investment advisor firms.
The new Form ADV Part 2 will require each investment advisor to develop a narrative plain English brochure that describes the investment advisor’s business, conflicts of interest, disciplinary history, and other important information that would help clients make an informed decision about whether to hire or retain that investment adviser. The new Form ADV Part 2 will have two sub-parts: Part 2A and Part 2B. Form ADV Part 2A will contain 18 disclosure items about the investment advisory firm that must be included in the narrative brochure. Form ADV Part 2B, which is being referred to as the “brochure supplement”, will include information about certain investment advisory personnel on whom the clients rely for investment advice.
Pursuant to the new rule, SEC registered investment advisors must respond to each of the disclosure items required in Form ADV Part 2A. Information must be provided in order of the items in the form, using headings provided by the form. Investment advisors are instructed to use short sentences; definite, concrete, everyday words; and the active voice. In addition to many new disclosure requirements, Form ADV Part 2A must contain a cover page, summary of material changes since the advisor’s last annual update, and a table of contents. Form ADV Part 2B, the supplemental brochure, will require for investment advisory personnel on whom clients rely for investment advice disclosures regarding: educational and business background information; disciplinary information; other business activities; additional compensation arrangements; and information regarding how and by whom the individual is supervised. A cover page will also be required for Form ADV Part 2B.
Under the new requirements, an SEC registered investment advisor must deliver the brochure to perspective clients before or at the time the client enters into an agreement with the advisor. Additionally, an SEC registered investment advisors must annually within 120 days of the firm’s fiscal year end deliver either: (1) a copy of the current brochure that includes or is accompanied by the summary of material changes; or (2) a summary of material changes that includes an offer to provide a copy of the current brochure upon request.
New investment advisors applying for registration with the SEC after January 1, 2011 will be required to file brochures meeting the requirements of the new Form ADV Part 2. Each investment advisor currently registered with the SEC will be required to file a brochure or brochures meeting the new Form ADV Part 2 requirements with its annual updating amendment which is required within 90 days of the firm’s fiscal year end. For most investment advisors, the fiscal year end is December 31, which means that the new Form ADV Part 2 brochures will need to be filed no later than March 31, 2011. Each SEC registered investment advisor must deliver a copy of the new Form ADV Part 2 brochure to its existing clients within 60 days of the investment advisor filing its annual amendment.
For more information on the new Form ADV Part 2 requirements of the SEC, please register for our complimentary webinar, Understanding the New ADV Part 2, scheduled for Thursday, August 19 at 12:00 CDT. Register now for this free webinar by clicking here.
Today, the United States Securities and Exchange Commission (“SEC”) passed long-proposed changes to the disclosure statements that federally registered investment advisers provide regulators and clients. Originally, the SEC proposed changes to Form ADV Part 2 in 2000. That proposal was never adopted, but a second proposal was issued in 2008 and finally passed today.
Under current SEC regulations, the Form ADV Part II, along with Schedule F (or a document containing the same information as Part II and Schedule F), serves as the required disclosure statement that must be given to a client initially and offered annually thereafter. In past comments, Chairman Mary Shapiro described the current Form ADV Part II as a “1960s check-the-box, paper-based approach,” where as the proposed amendments would require more of a “plain English narrative discussion of an adviser’s conflicts, compensation, business activities, and disciplinary history.” Finally, the proposed amendment would require this same information to be available through the SEC’s Investment Adviser Public Disclosure (IAPD) website, so that investors, as well as the general public, would have access to this information.
The SEC is delaying the publication of the revised Form ADV Part 2 for five business days in order to work with state securities regulators on technical, state-specific changes to items and instructions. Ideally, all issues will be resolved and the same Form ADV Part 2 can be used by both SEC and state registered investment adviser firms.
According to the SEC’s press release, “[t]he amended rules and forms will be effective 60 days after publication in the Federal Register. Most investment advisers will begin distributing and publicly posting new brochures in the first quarter of 2011.” Based upon the explanation during today’s open meeting, it appears that an SEC registered investment adviser firm will be required to submit the new Form ADV Part 2 through Web IARD when filing its Form ADV Part 1 Annual Amendment submitted for the fiscal year ending on or after December 31, 2010. Form ADV Part 1 Annual Amendments must be filed no later than 90 days after a firm’s fiscal year ends. The SEC registered investment adviser will then be required to deliver the new brochure to all clients within 60 days after filing the new brochure on IARD. It appears an SEC registered investment adviser may choose to begin using the new Form ADV Part 2 before the compliance date. Investment advisers seeking initial registration with the SEC will be allowed to use the old Form ADV Part II through the end of the year, but new investment adviser firms seeking initial registration after January 1, 2011 will be required to use the new Form ADV Part 2.
Stay tuned to RIA Compliance Consultants for more information regarding the new Form ADV Part 2.
The General Assembly of the Commonwealth of Kentucky recently made several changes to the Securities Act of Kentucky which affect investment adviser representatives and their registration requirements.
First, the definition of “investment adviser representative” has been slightly changed. The term is now defined as “an individual employed by or associated with an investment adviser…and who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendations or advice regarding securities should be given, provides investment advice or holds himself or herself out as providing advice, receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice or supervises employees who perform any of the foregoing.”
The other major change relates to the registration of investment adviser representatives. All investment adviser representatives are now required to be registered unless they are exempt from registration under the Kentucky Securities Act. Prior to the recent changes, an individual who was a partner, officer, or director, (hereinafter “executive”) of a registered investment adviser or a person occupying a similar status or performing similar functions with an investment adviser was not required to register as an investment adviser representative. However, this exemption for executives of investment advisers is no longer valid. Therefore, all executives of registered investment advisers who meet the revised definition of investment adviser representative must complete and file a Form U4, the Uniform Application for Securities Industry Registration or Transfer, through the Central Registration Depository (CRD) system in order to remain registered as an investment adviser representative.
The final date to comply with Kentucky’s new investment adviser representative registration requirement is October 15, 2010. If you need advice or assistance regarding registration as an investment adviser representative in the State of Kentucky, any of our compliance consultants are willing to assist you.
A registered investment advisor is required to make and keep true accurate and current certain books and records relating to its investment advisory business. For investment advisors registered with the U.S. Securities and Exchange Commission (SEC), these required books and records are outlined in Rule 204-2 of the Investment Advisers Act of 1940 (“Advisers Act”). Each investment advisor registered with the SEC should familiarize itself with the requirements of this rule in relation to the documents and reports that need to be maintained, where and for how long the documents must be maintained, and how the documents may be maintained. Most books and records requirements for state registered investment advisors are the same as or similar to the SEC requirements, but you need to make sure that you familiarize yourself with the requirements of the appropriate governing authority.
Maintenance of books and records is something that should be covered in an investment advisor’s compliance program. It is not enough just to know what you need to maintain, an investment advisor should perform periodic testing to make sure that it is maintaining and can provide the appropriate documents. One effective method of doing this is to have a mock examination performed of your investment adviser. Take the list of required books and records and test to whether you are prepared to present all required documents and if you can do so in a timely manner. This is something that can be performed by an investment advisor’s own Compliance Department or you can hire RIA Compliance Consultants to perform this service for you.
The following are some examples of common books and records deficiencies that we find during mock examinations of investment advisors:
- Not maintaining an order memorandum or not maintaining complete information in the order memorandum as outlined in Rule 204-2(a)(3) the Advisers Act;
- Not maintaining current financial or complete financial records;
- Not maintaining proper documentation to support performance advertising figures;
- Not maintaining a list of all access persons for the past five years;
- Not maintaining access person holdings reports;
- Not maintaining records to support the firm’s duty of best execution;
- Not maintaining or unable to locate contracts the firm has executed with service providers, sub-advisors, or solicitors;
- Not able to easily or timely produce copies of requested email records; and
- Not having complete or adequate written compliance programs or having written compliance programs that are not consistent with what the firm is actually doing.
For more information and guidance on maintaining the appropriate books and records for your investment advisor, register for the Maintaining Required Books and Records webinar that will be presented by RIA Compliance Consultants on July 28, 2010.
On June 30, 2010, the United States Securities and Exchange Commission (“SEC”) unanimously adopted Rule 206(4)-5 under the Investment Advisers Act of 1940 which is designed to curtail “pay to play” practices by registered investment advisers. (Click here for a link to the SEC press release). “Pay to play” is the practice of making contributions to public officials in exchange for the award of pension management contracts. The SEC believes that these practices favor large investment advisors over smaller ones, reward political connections rather than investment skill, and give consumers sub par performances for superior prices. Therefore, the SEC adopted Rule 206(4)-5 which is designed to eliminate the pay to play practice and to level the field for investment advisers so that management contracts are awarded based upon investment skill and quality of service.
The adopted SEC Rule 206(4)-5 contains three main elements:
- First, the Rule prohibits an investment advisor from providing advisory services, either directly or through a pool investment vehicle, for two years if the investment adviser or its employees make a political contribution to an individual in a position to influence the award of a management contract. There is a de minimis exception to this rule which allows for individuals to contribute up to $350 to a candidate per election if the contributor is allowed to vote for the candidate and up to $150 per candidate per election if the contributor is not allowed to vote for the candidate.
- Second, the Rule prohibits investment advisors and its employees from soliciting or coordinating campaign contributions for candidates or political parties.
- Finally, the Rule prohibits investment advisers from paying third party solicitors, unless the third party solicitors is an SEC registered brokers dealer or registered investment adviser who will be subject to similar pay to play restrictions.
In addition to these requirements, the adopted Rule 206(4)-5 contains a provision which makes it unlawful for an investment adviser or its employees to do anything indirectly, which if done directly would violate the rule. This provision ensures that investment advisers can not use third parties to circumvent the new rule. Also, with the enactment of Rule 206(4)-5, investment advisers will need to maintain certain records regarding political contributions and payments.
The Rule, as originally introduced last July, would have banned the use of third party solicitors. However, due to responses during the “Comments” period, the SEC backed away from this position and will allow the use of third party solicitation to continue, however the solicitors must be registered with the SEC as investment advisers or broker dealers. Further, the SEC stated if third party solicitors continue to have a corruptive influence on the pension industry, then the SEC will ban the use of third party solicitors all together.
The adopted Rule 206(4)-5 applies to registered advisers as well as advisers who rely on the private adviser exception (less than 15 clients) and to unregistered advisers. Investment advisers will need to be in compliance with the Rule within six months from the date the Rule is published in the Federal Register; except for the third party ban provisions which investment advisers will have to comply within one year.
RIA Compliance Consultants recommends that all investment advisers implement politician contributions policies and procedures to ensure compliance with the adopted Rule. Also, most investment adviser policy manuals will need to be updated because of new solicitor and record keeping requirements. If you need advice or assistance in implementing procedures or updating policy manuals to ensure compliance with the adopted Rule, any of our compliance consultants are willing to assist you.
On June 30, 2010, the Commissioners of the Securities and Exchange Commission (“SEC”) will vote on whether to restrict investment advisers from participating in “pay to play” transactions with public officials. The purpose of the proposed rule is to eliminate potential corruption from the process of awarding management contracts for public retirement funds. If approved, the rule would prohibit investment advisers from making or soliciting political contributions to or for officials who are in a position to award the management of pension funds.
Last July, in an effort to limit pension fund corruption, the SEC considered a rule that would have banned the use of “placement agents,” individuals or firms hired by investment advisers to influence politicians who are responsible with awarding pension management contract. However, the SEC has backed away from this position and is seeking to restrict investment advisers from participating in “pay to play” practices, which according to the SEC undermines the fairness of the government’s selection process of investment advisers.
Currently, the SEC does not prohibit investment advisers from making political contributions to government entities or officials. A contribution is defined as “any gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing an election for a federal, state or local office, including any payments for debts incurred in such an election. It would also include transition or inaugural expenses incurred by a successful candidate for state or local office.” “Government entities” include “all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective government funds.” “Government officials” includes “an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or an influence the outcome of the selection of an investment adviser.”
Pursuant to Release 2010.2 published on June 28, 2010 by the Investment Adviser Registration Depository (“IARD”), the Investment Adviser Public Disclosure (“IAPD) database now allows users to search for investment adviser representatives. Prior to the release, investment advisers and investment adviser representatives submitted registration and licensing information to the IARD; however, only information for investment adviser firms was available on the IAPD database. With Release 2010.2, effective June 28, 2010, the information investment adviser representatives have provided on Form U4 is publicly available through the IAPD database.
The information published by the IAPD includes qualifications, such as licenses, professional designations, and any exams passed; previous employment, including a list of firms where the investment adviser representative was previously registered, as well as any employment within the last ten years both inside and outside the securities industry; and a disclosure section which details any customer disputes or disciplinary events on the investment adviser representative’s record. The published information is obtained through Form U4, which is a registration and licensing form used by securities regulators to collect information about investment adviser firms and investment adviser representatives. Both investment adviser firms and investment adviser representatives are required to ensure this information is accurate and up-to-date.
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