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Friday, September 5, 2014

Business Continuity Plan, including Succession Plan

The North American Securities Administrators Association (NASAA) proposed a model rule requiring investment advisers to create and implement written procedures to address business continuity and succession planning in the event of the owner’s and other key personnel’s untimely departure or a natural disaster (http://www.nasaa.org/wp-content/uploads/2014/08/IA-RFPC-Model-Rule-Model-Guidance.pdf).  With this proposal NASAA has caught up with the United States Securities and Exchange Commission’s (SEC) requirements for federally registered investment advisers to establish business continuity and disaster recovery plans.

NASAA is an international organization devoted to investor protection. It is a voluntary association whose membership consists of 67 state, provincial and territorial securities administrators including all 50 U.S. states. NASAA and its participating members create model securities rules that are often similar, but sometimes vary from those of the SEC. While not required to do so, many states adopt these model rules or adopt similar rules. It is important to clarify that just because NASAA drafts a model rule it does not mean a member entity (i.e. state) has to adopt the rule. While many states create their own rules and regulations they commonly defer to those outlined by NASAA

NASAA’s proposed model rule cautions of the realities of business interruptions. Any number of things can halt the daily functions of an investment adviser firm. Natural disasters, fires, floods, deaths, injuries and accidents disrupt business continuity. In the absence of any state-specific requirements, investment advisers have a fiduciary duty to have policies and procedures in place that minimize risk to clients and ensure clients’ access to their assets.

NASAA recognizes the wide range of different business models and structures so its proposal does not mandate specific criteria each firm must follow. The proposal gives discretion for firms to develop customize plans based on their unique circumstances. However, the model rule does provide general expectations of investment adviser firms. These general expectations include:

  1. Data back-up and recovery (hard copy and electronic)
  2. All mission critical systems
  3. Financial and operational assessments
  4. Alternate communications between customers and your firm
  5. Alternate communications between your firm and its employees
  6. Alternate physical location of employees
  7. Critical business constituents, banks and counter-party impact
  8. Regulatory reporting
  9. Communications with regulators
  10. How your firm will assure customers’ prompt access to their funds and securities in the event that you firm is unable to continue its business

The NASAA proposal is now open for public comment until October 1, 2014. RIA Compliance Consultants encourages you to read the proposed rule and to consider its safeguards. Additionally, RIA Compliance Consultants offers template Disaster and Continuity plans and can help your firm draft its own specific recovery plan.

Tuesday, August 19, 2014

SEC Examination Focus on Investment Adviser “Dual Registrants”

Earlier this year the Securities and Exchange Commission (“SEC”) National Exam Program (“NEP”) published its Examinations Priorities for 2014. “Dual Registrants” was listed as one of the most significant initiatives across the entire NEP. This is the second year in a row that the NEP has referenced dually registered investment advisers and broker-dealers in its published examination priorities. This focus does not only apply to firms that have both a broker-dealer registration and an investment adviser registration but it extends to any investment adviser firm whose representatives are also licensed as representatives with a broker-dealer. The 2014 release indicates that, “The convergence among broker-dealer and investment adviser representative activity continues to be a significant risk. For example, representatives of dual registrants, i.e., registrants that are both broker-dealers and investment advisers, and affiliated advisers and broker-dealers may influence whether a customer establishes a brokerage or investment advisory account. This influence may create a risk that customers are placed in an inappropriate account type that increases revenue to the firm and may not provide a corresponding benefit to the customer.”

Investment adviser firms that have individuals who are also registered with a broker-dealer need to be aware of the compliance challenges faced by allowing this activity as well as the conflicts of interests that exist. These investment advisers need to have policies and procedures in place to specifically address these conflicts of interest and to provide its representatives with the investment adviser’s policies for determining when a client should be placed in a brokerage account versus an advisory account. An investment adviser’s policies and procedures should also address how it will supervise and monitor these activities

On August 21, 2014 at 12:00pm CDT, RIA Compliance Consultants will present a webinar, “Compliance for Independent Registered Investment Advisers with Representatives also Registered with a Broker-Dealer.” During this webinar, we will discuss the compliance challenges and conflicts of interests investment advisers face by allowing dual registration. We will provide insight and examples from examination letters of investment advisers that have faced regulatory scrutiny regarding these issues during the examination process. Additionally, we will provide some tips and best practices for implementing compliance policies and procedures to address dual registration as an investment adviser and representative of a broker-dealer. The cost to attend this webinar is only $69.95. Click here to register now.

Thursday, July 24, 2014

South Carolina Registered Investment Adviser’s Deadline to Submit their Written Policies and Procedures Manuals

The U.S. Securities and Exchange Commission (“SEC”) has a long-standing rule requiring registered investment advisers to develop, maintain and periodically assess written compliance policies and procedures.  A majority of state securities regulators also require state registered investment advisers to develop written compliance and supervisory procedures.  For example, South Carolina is one of the many states that requires its state registered investment advisers to develop a written compliance manual.  South Carolina makes this explicit through the South Carolina Uniform Securities Act Regulation 13-408(A)(19), which is found under the subheading “Record Requirements of Registered Investment Advisers.”  This regulation requires a state registered investment advisers to have “…written procedures to supervise the activities of employees and investment adviser representatives that are reasonably designed to achieve compliance with applicable securities laws and regulations.”

RIA Compliance Consultants recently confirmed that the South Carolina Securities Division delivered a notice via email to South Carolina state registered investment advisers requesting a current and complete copy of the compliance manual for investment advisers state registered with South Carolina.  A copy of the compliance manual needs to be submitted by the investment adviser firm to the South Carolina Securities Division by August 4, 2014.  It is our understanding that the South Carolina Securities Division is willing to grant extensions to investment adviser firms that may need more time.  If your investment adviser firm is state registered in South Carolina, you need to ensure a copy of your investment adviser firm’s compliance manual is submitted by the August 4 deadline or obtain an extension.

As we discuss on the Frequently Asked Questions Regarding Written Supervisory & Compliance Policies and Procedures page of our, securities regulators do not define everything that must be covered in a registered investment adviser’s policies and procedures.  However, written policies and procedures should be customized to the registered investment adviser’s unique business model.   The SEC has stated that they expect a registered investment adviser’s compliance policies and procedures, at a minimum, should address all of the following issues to the extent that they are relevant to the investment adviser firm’s practice:

  • Portfolio management processes, including allocation of investment opportunities among investment advisory clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  • Trading practices, including procedures by which the investment adviser satisfies its best execution obligation, use of client brokerage to obtain research and other services (“soft dollar arrangements”), and allocates aggregated trades among investment advisory clients;
    Proprietary trading of the investment adviser and personal securities trading (“PST”) activities of supervised persons;
  • The accuracy of disclosures made to investors, clients, and securities regulators, including account statements and advertisements;
  • Safeguarding of investment advisory clients’ assets from conversion or inappropriate use by advisory personnel;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
    Marketing investment advisory services including the use of solicitors;
    Processes to value investment advisory client holdings and assess investment adviser fees based on those valuations;
  • Safeguards for the privacy protection of investment advisory client records and information; and
  • Business continuity plans.

If your investment adviser firm needs assistance reviewing or updating your compliance manual, RIA Compliance Consultants can help.  We offer compliance manual reviews and can provide updates.  We also build customized investment adviser compliance manuals.  Please contact us or click here to learn more about our compliance manual services and option.

Tuesday, July 8, 2014

SEC Guidance for Investment Advisers on the Testimonial Rule and Social Media

Under Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 (Advisers Act), an investment adviser is prohibited from publishing, circulating, or distributing any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by the investment adviser.  With today’s wide spread use of social media, there has been a lot of concern among investment advisers regarding what would constitute a testimonial when using social media.  In March 2014, the U.S. Securities and Exchange Commission (SEC), Division of Investment Management, issued a Guidance Update to provide some guidance on the testimonial rule and social media.  Through this guidance, the SEC Division of Investment Management is seeking “to clarify application of the testimonial rule as it relates to the dissemination of genuine third-party commentary that could be useful to consumers.”

In this Guidance Update, the SEC Division of Investment Management seeks to assist investment advisers “in applying Section 206(4) of the [Advisers Act] and Rule 206(4)-1(a)(1) thereunder (testimonial rule) to their use of social media.”  Additionally, it seeks to “assist investment advisers in developing compliance policies and procedures reasonably designed to address participation in this evolving technology, specifically with respect to the publication of any public commentary that is a testimonial.”  In order avoid violating this rule, an investment adviser must first understand what constitutes a testimonial.  The term testimonial is not defined under the Advisers Act but the release indicates that the SEC staff has consistently interpreted the term testimonial to include a “statement of a client’s experience with, or endorsement of, an investment adviser.”  In the past, as well as in this guidance, the SEC staff has indicated that whether public commentary on a social media site will constitute a testimonial will depend on the facts and circumstances relating to the statement.  Through a question and answer format, the release provides specific examples of forms of public commentary that may or may not be considered testimonials depending on the facts and circumstances and elaborates on those facts and circumstances that must apply in order to avoid violating the testimonial prohibition. An investment adviser seeking to use social media sites that may include material that could potentially be deemed testimonials are encouraged to read the Guidance Update closely. The investment adviser should then review its policies and procedures to make sure that the policies and procedures adequately address the facts and circumstances specifically related to the investment adviser that could result in a violation of Rule 206(4)-1(a)(1).

On June 19, 2014, RIA Compliance Consultants presented a webinar, “Compliance Requirements for Investment Adviser Advertising and Marketing.” This webinar was presented by our consultants to help investment advisers gain a better understanding of the compliance requirements and prohibited practices for investment adviser marketing and advertising.  Our discussion included some requirements specifically related to performance advertising, as well as, discussion on the use of social media and the prohibitions on the use of testimonials.  We also provided some tips and best practices for preparing, supervising, and approving your investment adviser’s marketing and advertising materials.  A recorded version of this webinar is now available.  If you would like to view the recorded session, click here to purchase it for $69.95.

RIA Compliance Consultants can assist you with your investment adviser’s concerns regarding its advertising and marketing materials.  Our consultants can answer your general questions, review your advertising and marketing materials, or help you develop your investment adviser’s policies and procedures for supervising, reviewing, and approving advertising and marketing materials.  For more information on how we can assist your investment adviser, contact your consultant if you are an existing client or click here to schedule a time to further discuss our services with one of our Senior Compliance Consultants.

Wednesday, February 19, 2014

SEC Examination Priorities for 2014

On January 9, 2014, the Office of Compliance Inspections and Examinations (“OCIE”) National Examination Program (“NEP”) of the U.S. Securities and Exchange Commission (“SEC”) published its examination priorities for 2014.  This report is published to “communicate with investors and registrants about areas the that the staff perceives to have heightened risk and to support the [SEC] mission to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.”

The NEP’s examination priorities address areas that are relevant to the entire market and issues that are specific to particular business models and organizations.  The release indicates that the most significant initiatives across the entire NEP include:

  • Fraud Detection and Prevention
  • Corporate Governance, Conflicts of Interest, and Enterprise Risk Management
  • Technology
  • Dual Registrants
  • New Laws and Regulations
  • Retirement Vehicles and Rollovers

The areas that the NEP will focus on that are specific to investment advisers and investment companies include:

  • Safety of Assets and Custody
  • Conflicts of Interest Inherent in Certain Investment Adviser Business Models
    • Compensation arrangements, with particular focus on undisclosed compensation arrangements and their effect on recommendations made to clients
    • Allocation of investment opportunities
    • Controls and disclosures associated with side-by-side management of performance-based and purely asset-based fee accounts
    • Risk controls and disclosure, particularly for illiquid investments and leveraged investment products and strategies
    • Higher risk products or strategies targeted to retail (and especially retired or elderly) investors
  • Marketing/Performance
  • Never-Before Examined Advisers
  • Wrap-Fee Programs
  • Quantitative Trading Models
  • Presence Exams
  • Payments for Distribution in Guise
  • Fixed Income Investment Companies
  • Money Market funds
  • “Alternative” Investment Companies
  • Securities Lending Arrangements

It is important to keep in mind that the NEP’s examination priorities list is not exhaustive of all areas that may be covered during an examination.  While examination priorities may focus primarily on issues and business practices that are perceived by the OCIE staff to present the highest risks to investors and the integrity of the market, exam scopes will vary from investment adviser to investment adviser.  The actual scope and focus of an exam will be affected by the investment adviser’s business activities and the risks associated with those activities.

All registered investment advisers, especially those that have never been examined, need to make sure that they are ready at all times for the examiner to come knocking on their door.  Although the examination priorities list pertains specifically to SEC registered investment advisers, many of these topics will apply regardless of whether your investment adviser is registered with the SEC or a state securities regulator.  Every investment adviser should review these areas closely and make sure that they are properly addressed in the investment advisers’ compliance programs and disclosures to clients.

RIA Compliance Consultants will be presenting a webinar, “Preparing for a Regulatory Exam,” on February 20, 2014 at 12:00 p.m. CST.  Click here now to purchase and register for this webinar if you would like to learn more about the SEC’s examination priorities and some tips on how you can make sure you are ready at all times for a regulatory examination.

Wednesday, January 1, 2014

New regulation in the state of Massachusetts will now require investment adviser representatives registering with the state of Massachusetts for the first time to complete a criminal background check referred to as Criminal Offender Record Information (CORI) check. The Secretary of the Commonwealth, William Gavin, his office believes such CORI checks will serve to protect investors. Beginning January 1, 2014, each new application for registration as an investment adviser representative will be required to complete the CORI check and submit as part of their application to the state a CORI acknowledgement form to the Massachusetts Security Division as part of the application process. For complete review of the change in Massachusetts Regulations please click here.

Tuesday, December 31, 2013

Investment Advisers Should begin Preparing to Submit their Annual Form ADV Amendment

On Thursday, January 2, 2014, Final Renewal Statements and reports are available viewing and printing. Registered investment adviser firms should download and review these reports as soon as they become available; the deadline for receipt of Final Renewal Statement payments in January 10, 2014. Additionally, investment advisers firms with a fiscal year end of December 31 are encouraged to begin preparing their required Form ADV annual updating amendments. The Form ADV annual amendment must be submitted through the Web CRD / IARD system 90 days from an investment adviser’s fiscal year. An investment adviser needs to understand that failure to update the Form ADV, as required by the Form ADV General Instructions, is a violation of U.S. Securities and Exchange Commission (“SEC”) rules and similar state rules that could lead to an investment adviser’s registration being revoked. A registered investment adviser with a fiscal year end other than December must make sure to file its annual updating amendment within 90 days of the investment adviser firm’s fiscal year end.

RIA Compliance Consultant’s is hosting a webinar to help investments advisers prepare the Form ADV Annual Amendment. During this webinar our consultants will review the Form ADV items that are required to be updated annually. Additionally, our consultants will discuss common mistakes seen when investment advisers are filing their annual amdnement and will address some of the other amendments and filings that may also need to be made with the annual amendment. 

For more information on this webinar or to register for this event, “Preparing Your Form ADV Annual Amendment,” hosted January 16, 2014, at 12:00 CST, click here.

RIA Compliance Consultant’s also offers an ADV Annual Updating Amendment service. For more information or to purchase this service, please click here.

Thursday, December 5, 2013

Deadline for Receipt of Preliminary Renewal Statement Payments Quickly Approaching

The deadline for investment advisers submit their Preliminary Renewal Statement payment is quickly approaching. FINRA must be in receipt of the full payment listed on the Preliminary Renewal Statement by December 13, 2013. Investment advisers with sufficient funds in their Flex-Funding Account to cover the Preliminary Renewal Statement payment will have funds automatically transferred to the Renewal Account to cover total renewal fees owed on December 11, 2013. 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.

Wednesday, December 4, 2013

Developing Your Investment Adviser’s Compliance Calendar for 2014

Determining ongoing compliance requirements may seem overwhelming to many registered investment advisers.  Complying with the rules and regulations under the Investment Advisers Act of 1940 (“Investment Advisers Act”) and similar state investment adviser regulations must be a central part of an investment adviser’s fiduciary duties.  Investment advisers have a variety of duties to perform throughout the year in order to comply with the requirements of the Investment Advisers Act and similar rules of state securities regulators.  Having a well-organized process can help streamline an investment adviser’s ongoing compliance requirements.  To help manage the ongoing compliance process, registered investment advisers should consider developing a compliance calendar that can serve as an effective and proactive tool to assist the investment adviser with meeting its ongoing compliance requirements. Developing a compliance calendar can help strengthen an investment adviser’s written compliance policies and procedures that must be developed pursuant to Rule 206(4)-7 of the Investment Advisers Act and similar state rules to detect, prevent, and correct possible regulatory violations that can occur throughout the year.

Investment advisers that do not have a compliance calendar in place should consider preparing one now for 2014. In order to develop a customized investment advisory compliance calendar, an investment adviser should review its written compliance policies and procedures. A well written, customized compliance program should lay out the investment adviser’s ongoing compliance requirements and the systems and controls the investment adviser has in place to prevent, detect, and correct compliance violations. If the investment adviser’s written compliance policies and procedures indicate that a specific task will be performed, it should be included on the investment adviser’s compliance calendar. When developing the compliance calendar, the investment adviser should indicate when the specific task will be performed as well as who will be responsible for performing the task.  Not performing a task that is specifically included in the investment adviser’s written compliance policies and procedures is an easy red flag to a securities regulator that the investment adviser has not customized or fully implemented its written compliance policies and procedures.  Compliance calendars can help to eliminate uncertainties about an investment adviser’s ongoing compliance requirements and can be used as a tool when an investment adviser conducts an annual compliance review. Compliance calendars should include ongoing investment adviser regulatory requirements such as the annual compliance review, annual renewals, or the annual Form ADV update filing as well as the internal control and ongoing monitoring tasks that the investment adviser performs to prevent and detect violations.

Even if an investment adviser is already using a compliance calendar, as this year comes to an end the investment adviser should review and update its annual compliance calendar to make sure that it addresses all required tasks, reflects any necessary changes due to internal or regulatory developments, and verifies that someone is properly assigned to perform the tasks.

For more information and tips to assist your investment adviser in preparing its compliance calendar, RIA Compliance Consultants is hosting a webinar “Preparing Your Compliance Calendar for 2014,” on December 12, 2013, from 12:00 to 1:00 pm CST.  The fee for this webinar is $69.95. To register, simply click here.

For more information about the compliance support services RIA Compliance Consultants can provide to your registered investment adviser, click here to schedule a time to speak with one of our Senior Compliance Consultants.

Thursday, November 21, 2013

Preliminary Renewal Statements Now Available

As of Monday, November 11, 2013, your investment adviser firm can access its Preliminary Renewal Statement for the upcoming year via its IARD account. Investment adviser 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 adviser representatives and their approved registration statuses. The amount reflected in the Preliminary Renewal Statement is the amount of renewal fees investment advisers 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 December 13, 2013.  Since it takes approximately two business days for payment to post to the IARD account, your firm’s payment should arrive at FINRA no later than December 11, 2013, to ensure that funds are posted to your firm’s IARD account by December 13, 2013.

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 adviser firms and their investment adviser 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 advisers 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 adviser 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 adviser firm’s Form ADV Annual Amendment, which is required to be filed within 90 days following the firm’s fiscal year. 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.

 

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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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