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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.

Wednesday, November 20, 2013

Minnesota Investment Adviser Representatives Required to Register

As we have discussed in previous articles, effective August 31, 2013, Minnesota law requires registration for investment adviser representatives.  An Order dated October 31, 2013, has been issued by the Minnesota Department of Commerce regarding the “Implementation of Registration Process for Investment Adviser Representatives.”  According to this Order, the initial registration period in Minnesota for investment adviser representatives is November 1, 2013 through January 31, 2014.  Under Minnesota law, the application for initial registration as an investment adviser representative is made by completing Form U4 and filing the Form U4 with the IARD.  The application for initial registration must also include proof of compliance by the investment adviser representative with the following examination requirements:

(A)   The Uniform Investment Adviser Law Examination (Series 65); or

(B)   The General Securities Representative Examination (Series 7) and the Uniform Combined State Law Examination (Series 66)

However, the Order issued by the Minnesota Department of Commerce indicates that the CFP®, ChFC®, CFA®, PFS, or CIC designations shall be accepted in lieu of the examination requirements so long as the designations are current and in good standing.

The order indicates that as of November 1, 2013, the IARD system is able to accept registrations for Minnesota investment adviser representatives.  It also states that proof of registration in another state shall be accepted in lieu of the examination requirements for all investment advisers representatives registered in Minnesota on or before January 31, 2014, as long as the other state required the applicant to past the Series 65 exam or the Series 66 and Series 7 examinations or specifically waived this requirement for the investment adviser representative when the investment adviser was registered by that state.  Any investment adviser representative required to meet the Minnesota registration requirements that was initially employed after August 1, 2013, as an investment adviser representative must pass the Series 65 examination or the Series 66 and Series 7 examinations in order register as an investment adviser representative in Minnesota unless the representative has one of the previously referenced designations that is current and in good standing.  Investment adviser representatives requesting registration in Minnesota after January 31, 2014, will be required to meet the previously referenced examination requirements or demonstrate that they have one of the professional designations previously referenced that is current and in good standing.

Individuals meeting the definition of investment adviser representative under Minnesota Statutes §80A.41(17) should review these new requirements closely to determine the steps that will need to be taken in order to ensure that you are properly registered by the January 31, 2014 deadline.  If you have questions regarding these new registration requirements, you should contact the Minnesota Department of Commerce, Securities Unit.

If you need assistance registering as an investment adviser representative, RIA Compliance Consultants can assist you.  For more information, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our Senior Compliance Consultants.

Tuesday, November 19, 2013

Identity Theft and Wire Fraud Policies and Procedures

The compliance date, November 20, 2013, for the SEC’s Regulation S-ID: Identity Theft Red Flags Rule is quickly approaching.  If your investment adviser is required to comply with these new rule requirements, you must have policies and procedures in place to address risks of identity theft by the November 20, 2013, compliance date.  Every investment adviser should take the appropriate steps to protect its clients from identity theft and wire order fraud, even if it is not required to comply with Regulation S-ID.

RIA Compliance Consultants presented a webinar on October 17, 2013, to discuss the SEC’s new rule requirements and best practices all investment advisers should consider to protect their clients and clients’ assets from identity theft and third-part wire fraud.  If you would like more information on the new rule requirements or steps your investment adviser should take, a recorded version of this webinar is now available through our online store.  Additionally, we have prepared template policies and procedures that investment advisers can use to develop their identity theft and wire fraud prevention policies and procedures.  RIA Compliance Consultants has the following options available for investment advisers looking for assistance with understanding the requirements and steps that should be taken and developing the new policies and procedures:

  • Click here for more information or to purchase for only $69.95 access to our “Identity Theft & Third Party Wire & Check Fraud” recorded webinar.
  • Click here for more information or to purchase for only $295 access to our “Identity Theft & Third Party Wire & Check Fraud” recorded webinar and our template policies and procedures for identity theft and wire fraud.
  • Click here for more information or to purchase for only $595 access to our “Identity Theft & Third Party Wire & Check Fraud” recorded webinar and our template policies and procedures for identity theft and wire fraud plus one-hour consulting time with one of our consultants to assist you with customizing your identity theft and wire order policies and procedures. 

If you would like more information about these or any of the services offered by RIA Compliance Consultants, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our Senior Compliance Consultants.

Wednesday, November 6, 2013

Preliminary Renewal Statement Available Monday

Starting Monday, November 11, 2013, a registered investment adviser firm can access its 2014 Preliminary Renewal Statement via its IARD account.  The Preliminary Renewal Statement must be paid, in full, by Friday, December 13, 2013.  Since it takes approximately two days for payment to post to the IARD account, your firm’s payment should arrive at FINRA no later than Wednesday, 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 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 $545 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 access the IARD Renewal and ADV Annual Amendment consulting agreement.  Please complete and return the consulting agreement to RIA Compliance Consultants by November 11, 2013, along with a payment of $545 (either by check or credit card here). Agreements received after November 11, 2013, are subject to availability and additional fees may be assessed.

Tuesday, November 5, 2013

Repeat Compliance Program Deficiencies Result in SEC Enforcement Actions for Investment Advisers

On October 23, 2013, the U.S. Securities and Exchange Commission (“SEC”) issued a press release (Release No. 2013-226) indicating that it sanctioned three investment adviser firms “for repeatedly ignoring problems with their compliance programs.” The SEC’s enforcement actions are the result of the investment adviser firms each failing to effectively act upon previous warnings and correct compliance deficiencies that had been previously identified.  In the press release Andrew Bowden, director of the SEC’s National Examination Program, stated that, “After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination. Firms must fix deficiencies identified by our examiners.”

Under Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), SEC registered investment advisers must adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations; designate a chief compliance officer responsible for administering the policies and procedures; and review the policies and procedures at least annually for the adequacy and effectiveness of their implementation. Many state securities regulations also require state registered investment advisers to adopt and implement written supervisory policies and procedures. An investment adviser’s compliance program must be developed and implemented to prevent securities law violations that could harm investors.  In a November 2011 release announcing enforcement actions against three investment adviser firms for violations related to their compliance policies and procedures, Robert Khuzami, former Director of the SEC’s Division of Enforcement, stated, “Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies.” Investment advisers must ensure that they maintain adequate compliance programs to prevent the violations and must test the effectiveness of these compliance programs on an ongoing basis to ensure that they are properly implementing the written policies and procedures that the investment adviser has in place.

Failure to conduct an annual compliance review was among the various deficiencies in all three of the recent enforcement actions. Under Rule 206(4)-7, SEC registered investment advisers are required to conduct reviews at least annually but, regardless of whether it is a requirement or not, it is in every investment adviser’s best interest to conduct periodic reviews. These periodic reviews should be viewed as opportunities for an investment adviser to identify areas in the investment adviser’s policies and procedures where improvements or updates are needed before they result in regulatory deficiencies or violations.  In order to avoid repeat offenses, an investment adviser’s review process should incorporate evaluations and testing of areas where deficiencies were previously identified by the investment adviser or a securities regulator.

On Thursday, November 14, 2013, at 12:00 CST, RIA Compliance Consultants is hosting a webinar “Conducting an Annual Compliance Review,” to further discuss the annual review requirement under Rule 206(4)-7.  During this webinar, our consultants will discuss who should be involved in the annual compliance review process and the purpose of conducting the review. We will also provide practical tips for conducting an annual review and documenting findings. For more information or to register for this event, please click here.

RIA Compliance Consultants can assist investment advisers with conducting their annual compliance reviews through our RIA Express – Compliance Review tool or through a consultant led compliance review.  For more information regarding these services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our senior 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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