Not Maintaining a Current and Accurate Form U4 Can Result in Disciplinary Actions

July 27, 2012

The Form U4, the Uniform Application for Securities Industry Registration or Transfer, is the form used by investment advisers, broker-dealers, or issuers of securities to register representatives in the appropriate jurisdictions and/or with the appropriate self-regulatory organizations.  As a registered investment adviser, you must make the determination of which individuals in your firm will meet the definition of an investment adviser representative, complete a Form U4 for each individual, and submit it to the applicable state securities regulators in order for the investment adviser representatives to be properly licensed under the firm.  However, it is important to understand that the obligation for completing the Form U4 does not stop once the investment adviser representative is licensed.  Investment adviser representatives are obligated to amend and update the information required by the Form U4 as changes occur and not doing so can result in disciplinary actions.

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Investment Adviser Examination Improvement Act of 2012 Introduced

July 26, 2012

Representative Maxine Waters (D – CA) introduced the Investment Adviser Examination Improvement Act of 2012 (“Investment Adviser Examination Improvement Act”) on July 25, 2012. The Investment Adviser Examination Improvement Act enables the U.S. Securities and Exchange Commission (“SEC”) to charge user fees from investment advisers. The Investment Adviser Examination Improvement Act is a response to the Dodd-Frank Wall Street Reform and Consumer Protection Act which requested more stringent and frequent examination of investment advisers.

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Bi-Partisan Senate Bill Seeks to Give SEC Power to Levy Tougher Fines on Investment Advisers

July 26, 2012

U.S. Senators Jack Reed (D – RI) and Chuck Grassley (R – IA) introduced the Stronger Enforcement of Civil Penalties Act (“SEC Penalties Act”) on Monday to “strengthen the U.S. Securities and Exchange Commission’s (“SEC”) ability to crack down on securities laws violations.” The SEC Penalties Act could have a serious impact on investment advisers and broker/dealers who violate securities laws.

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FSI CEO Responds to DOL Letter on Study to Expand Definition of Fiduciary under ERISA

July 24, 2012

Dale Brown, President and CEO of the Financial Services Institute (“FSI”), wrote a letter to Representative John Kline, (R – MN) Chairman of the U.S. House Education and Workforce Committee and to ranking member George Miller, (D – CA) in response to comments made by Phyllis Borzi, Assistant Secretary of the Department of Labor, (“DOL”) in a letter to the same members of the Committee. Borzi told the ranking members she was disappointed with the lack of participation in the DOL’s request for data as part of its “effort to expand the definition of fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”).”In Brown’s letter he is critical of DOL Assistant Secretary Borzi for what he calls an impractical request.

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States Passing Privacy Laws that Conflict with FINRA and SEC Social Media Compliance Regulations

July 17, 2012

Keeping up on the new rules and regulations regarding social media use can be a difficult task for investment advisers and broker-dealers.  Recently, the U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have each issued alerts and notices to investment advisers and broker-dealers offering guidance on social media use.  The SEC issued an alert in January of this year and FINRA has issued Regulatory Notice 10-06 and Regulatory Notice 11-39; these alerts and notices generally require investment advisers and broker/dealers to monitor and archive any business communications their employees have with clients.  Now, many states and even the federal government have bills under consideration that would limit employers’ access to its employees’ social media accounts.  If these laws are passed they could make it even more difficult for investment advisers and broker-dealers to keep adequate records and ensure compliance with the social media rules and regulations.

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New Suitability Rule for Broker-Dealers is Similar to Fiduciary Duty of Investment Advisers

July 16, 2012

There has been a lot of discussion over the last year on the different standards for broker-dealers and investment advisers. Under current regulatory requirements, broker-dealers do not have a fiduciary duty to their clients. Broker-dealers must abide by the anti-fraud provisions of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) and must follow rules instituted by exchanges they are members of and the rules of the Financial Industry Regulatory Authority (“FINRA”). Investment advisers are largely governed by the Investment Advisers Act of 1940 (“Investment Advisers Act”), rules promulgated under the Investment Advisers Act, and state laws. Pursuant to the Investment Advisers Act, investment advisers have a fiduciary duty to their clients. Having a fiduciary duty to clients means that by regulation investment advisers are held to a higher standard than the standard that applies to broker-dealers. A study conducted by the U.S. Securities and Exchange Commission (“SEC”) in 2011 found that the average investor did not understand the difference between a broker-dealer and an investment adviser.

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The Executive Compensation Clawback Full Enforcement Act

July 11, 2012

Barney Frank (D – MA) recently introduced a bill that would prohibit individuals working for financial institutions from insuring against possible losses, including from having to repay illegally-received compensation or from having to pay civil penalties. The Executive Compensation Clawback Full Enforcement Act (“the Act”) holds “officers, directors, employees or other institution related parties personally liable” and does not allow them to hedge against the personal liability with insurance.

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SEC Guidance for Investment Adviser Due Diligence When Using Services Providers

July 10, 2012

Due diligence can be defined as the level of judgment and care a reasonable person would take before entering into an agreement or transaction.  As part of an effective compliance program investment advisers must conduct due diligence not only when selecting investments for clients but also when outsourcing services to third-party service providers.   The importance of outside service provider due diligence was discussed as an examination focus area by the  U.S. Securities and Exchange Commission (“SEC”) during their 2009 CCOutreach Regional Seminars.   During the seminar, the SEC noted that “advisers should review each service provider’s overall compliance program for compliance with the federal securities laws and should ensure that service providers are complying with the firm’s specific policies and procedures.”  During a routine examination,  SEC examiners will  “review an adviser’s disclosures, contracts with clients, and contracts with service providers to determine whether the services and reporting obligations are consistent with disclosures and that all obligations are adequately addressed and overseen by the adviser.”

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De-registration Looms for Mid-Sized Financial Advisers that Have Not Filed

July 05, 2012

Mid-sized investment adviser firms that did not register with one or more state securities regulators by the June 28, 2012, deadline are in danger of being de-registered by the U.S.  Securities and Exchange Commission (SEC) as early as this week.  However, the first wave of terminations may not occur until September according to a staff member from the SEC who spoke with one of our Senior Compliance Consultants earlier this year.  Investment advisers that did not file an amendment to Form ADV Part 1 confirming their registration status by the March 31, 2012, deadline and/or have not filed a state registration application, if no longer SEC eligible; face the highest risk for untimely termination.

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