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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.

Tuesday, May 17, 2016

Nebraska Private Fund Adviser Exemption

On May 11, 2016, the Securities Bureau of the Nebraska Department of Banking and Finance (NDBF) adopted a new administrative rule that excludes investment advisers to private funds from the definition of “investment adviser”. This means that an investment adviser who solely advises private funds will not be subject to Nebraska’s investment adviser books and records requirements among other requirements for state registered investment advisers.

Nebraska has now joined 11 states (MA, MI, TX, CA, WI, UT, IN, VA, WA, & RI) who have exempted an investment adviser to only private fund(s) from being required to register with the state securities regulator as a state registered investment adviser. This private fund investment adviser registration exemption applies only to entities that exclusively provide advice to private funds. (For a full definition of a private fund, see SEC Rule 203(m)-1.) Private fund advisors who are registered or required to be registered with the U.S. Securities and Exchange Commission (“SEC”) are not eligible for this exemption.

To receive this state investment adviser registration exemption the investment adviser must file an “exempt registered adviser” filing with the Securities Bureau of the Nebraska Department of Banking and Finance. This filing is an abbreviated version of the Form ADV. While private fund investment advisers are exempt from registering as investment advisers with Nebraska, they must meet the following requirements:

  • The private fund’s investors must meet the definition of “qualified client” according to SEC Rule 205-3.
  • The private fund adviser must disclose all services to be provided to the owner(s) of the private fund.
  • The private fund adviser must obtain audited financial statements of each fund and deliver a copy of the financial statement to each owner of the fund on an annual basis.

Please understand this blog post is not a substitute for reading the administrative rule in its entirety. RIA Compliance Consultants encourages you to read the full text of this rule for all of its details and requirements. Contact your consultant if you have questions about what this rule means for your investment advisor firm.

Monday, December 14, 2015

SEC Risk Alert-Outsourcing CCO

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

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

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

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

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

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

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

Thursday, December 10, 2015

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

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

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

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

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

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

Tuesday, December 8, 2015

Deadline for Receipt of Preliminary Renewal Statement Payments Quickly Approaches

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


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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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