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Friday, June 1, 2012

SEC Investment Advisors: Time for a Final AUM Calculation

With the deadline for “the Switch” approaching, investment advisors that are currently registered with the U.S. Securities and Exchange Commission (“SEC”) should conduct one final calculation of their assets under management (“AUM”) to ensure that their investment advisor remains eligible for SEC registration.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act investment advisors with between $25 million and $100 million of regulatory assets under management are required to switch from the SEC to state registration.   Specifically, if an investment advisor that is currently SEC registered does not have $90 million in AUM then they are required to become registered with the appropriate state(s) and withdraw their SEC registration by filing a Form ADV-W by no later than June 28, 2012.  After June 28, the SEC will cancel the registration of investment advisors that are no longer eligible to remain registered with the SEC.  After this June 28th deadline, if an investment advisor that is no longer eligible for SEC registration has not registered with the appropriate states, the investment advisor will not be able to conduct business until its registration is approved.

If you have questions about how to calculate your assets under management, the SEC has provided detailed guidance in their instructions for Form ADV Part 1A, Item 5.F. The SEC uses a multi-level test to determine what investment advisory client assets should be reported as assets under management.  For a detailed discussion about this multi-level test, click here.

RIA Compliance Consultants can assist you with switching from SEC to state registration.  If you are an existing client of RIA Compliance Consultants interested in discussing how we can assist your investment advisor, please contact your consultant. If you are a new client that would like to speak with us regarding the services we can provide, please click here to schedule a time to speak with one of our consultants.

Thursday, May 31, 2012

What Disclosures Are Required Under the New ERISA 408(b)(2) Regulation?

Under the new ERISA 408(b)(2) regulation a covered service provider is required to disclose in writing to the responsible plan fiduciary of an ERISA covered plan the services to be provided, its fiduciary status to the plan, and what compensation the service provider is to receive in connection with services provided.  The deadline for covered service providers to make these disclosures is July 1, 2012.

A covered service provider must provide the ERISA covered plan with a clear and understandable description of the services provided to the plan.  It is recommended that the disclosure identify which services are fiduciary and which are non-fiduciary.  Investment advisors who are covered service providers also must disclose their status as a fiduciary under ERISA section 3(21) and, if applicable, under section 3(38) as an “investment manager”.  Additionally, investment advisors who are covered service providers are required to disclose their investment advisor registration status, meaning the investment advisor is required to indicate whether the investment advisor is registered under the Investment Adviser’s Act of 1940 or under state law.

Regarding compensation, covered service providers must provide a description of all direct and indirect compensation received in connection with services provided to the ERISA covered plan.  This includes compensation received by an affiliate or subcontractor and any termination compensation that would be received.  Direct compensation is compensation received directly from the plan.  Indirect compensation is compensation received from any source other than the plan or plan sponsor.  Service providers must disclose how they will receive the compensation and, if the service provider will receive any indirect compensation, the service provider must disclose the relationship with the party providing the indirect compensation.  Additionally, in order to avoid a prohibited transaction, indirect compensation must be offset by the direct compensation received.

The July 1st deadline is fast approaching and RIA Compliance Consultants can help you meet the ERISA 408(b)(2) disclosure requirements.  Our consultants can help your investment advisor create a 408(b)(2) disclosure guide and review and update the service and fee descriptions in your Form ADV Part 2A Disclosure Brochure to ensure that your retirement plan services disclosure language meets the 408(b)(2) requirements.  To schedule a time with one of our consultants, click here.

Wednesday, May 30, 2012

Enforcement Actions Related to Advertising / Marketing for Investment Advisors

Marketing materials can be very helpful in attracting business for an investment advisor, but investment advisors should be aware of the regulatory requirements that apply to the use of marketing materials. Common issues with investment advisory marketing materials include using marketing materials that include testimonials (which investment advisors are generally prohibited from using); publishing past recommendations (without following the restrictions and disclosure requirements for publishing past recommendations); using language that makes promises or guarantees; and making untrue or misleading statements.

In one recent enforcement action published by the U.S. Securities and Exchange Commission (“SEC”) related to marketing materials, an investment advisor solicited investors with marketing materials that cited a successful investment history based on actual performance in managed accounts, the use of proprietary qualitative pricing models developed to invest in Exchange Traded Funds (ETFs), and the experience and knowledge of a particular investment advisor representative in managing the investments.

The SEC found the marketing materials contained material misrepresentations.  The SEC concluded that the performance information that the investment advisor had represented as performance based upon actual trades was, in fact, performance that was based upon back-tested hypothetical trades. The SEC also found the investment advisor had misrepresented the use of qualitative pricing models to make investment decisions, had misrepresented the investments actually made by the investment advisor, and had misrepresented which individual was actually managing the investments.

In another recent SEC enforcement action, an investment advisor created marketing materials to attract investors at conferences. The investment advisor distributed a brochure that included a 10-year track record that represented 11% average returns.  The investment advisor had not been in existence for 10 years, so not only was the timeframe represented inaccurate and misleading but the investment advisor had also failed to maintain accurate records to support the claimed returns.  The marketing information included additional misrepresentations, including a statement that the investment advisor had grown assets under management in another fund to $300 million when the named fund never had assets under management. Also, the marketing brochure indicated that the investment advisor conducted “thorough” due diligence in selecting managers; however, the SEC found that the investment advisor’s due diligence was “virtually nonexistent.”

For more information and guidance regarding the use of marketing materials for your investment advisor, join RIA Compliance Consultants on Thursday, June 14, 2012 at 12:00pm, CDT, as we present the webinar “Approving Marketing Materials.” During the webinar our consultants will be discussing examples of marketing materials that included prohibited promises, guarantees, and untrue statements. The consultants will also provide best practice recommendations and sample disclosures. If you would like to sign up for this webinar, click Approving Marketing Materials. RIA Compliance Consultants can provide assistance with reviewing your investment advisor’s marketing materials.  If you are an existing client of RIA Compliance Consultants, contact your consultant for more information.  If you are a new client interested in assistance, click here to schedule a time for one of our consultants to contact you to discuss your needs.

Thursday, May 24, 2012

ERISA 408(b)(2) Deadline Approaching

The final deadline for ERISA covered service providers to meet the 408(b)(2) disclosure requirements is July 1, 2012.  Failure to provide the required disclosures will result in a prohibited transaction under ERISA and the Internal Revenue Code.  For an investment advisor who is a service provider to an ERISA covered plan this would likely result in the investment advisor having to repay any compensation received after July 1, plus interest.  Additionally, the investment advisor could face a fine from the U.S. Department of Labor (“DOL”).

RIA Compliance Consultants can help your registered investment advisor create a 408(b)(2) disclosure guide that will satisfy all of the disclosure requirements of the new 408(b)(2) regulations.  Additionally, we can review and update the language in Items 4 and 5 of your Form ADV Part 2A Disclosure Brochure to ensure that you are properly disclosing your retirement plan services.

With the July 1st compliance deadline fast approaching, it is important not to delay!  If you are an existing client of RIA Compliance Consultants, please contact your consultant. If you are a new client, please click here to schedule a time to speak with one of our consultants.

Wednesday, May 23, 2012

Approving Marketing Materials for Investment Advisors

Under the anti-fraud provision of the Investment Advisers Act of 1940 (“Investment Advisers Act”) investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”) must comply with the provision’s requirements concerning advertising and marketing materials. In efforts to prevent fraudulent, deceptive, or manipulative acts, your registered investment advisor should have in place strong supervisory and compliance policies and procedures designed to approve and monitor advertising and marketing materials. Federally registered investment advisors are routinely cited examination deficiencies for issuing non-compliant advertising materials. Much less, investment advisor firms have been cited for simply not establishing reasonably designed compliance policies and procedures for the creation, review and approval of advertising materials.

The importance of strong compliance controls for advertising and marketing materials is not limited to SEC registered investment advisor firms. In 2011, the North American Securities Administrators Association (“NASAA”) conducted an examination of 825 state-level advisers that revealed 3,543 deficiencies in 13 categories. Of the reported deficiencies, 21.6% of all investment advisers had at least one advertising deficiency. The result of the examination prompted NASAA to recommend best practices for investment advisers and specifically recommends investment advisers “review all advertisements, including websites and performance advertising, for accuracy.” (For a complete look at the examination results and best practices guidelines, click here.)

For many registered investment advisors, advertising materials can generate increased risk exposure. Using advertising claims that cannot be supported or proven, that are promissory, that are misleading or materially inaccurate must be avoided. Investment advisors should avoid specifically prohibited items, including: testimonials; the use of past specific recommendations that were profitable, unless the advisor includes a list of all recommendations made during the past year; a representation that any graph, chart, or formula can in and of itself be used to determine which securities to buy or sell; and advertisements stating that any report, analysis, or service is free, unless it really is free. An advertisement could include both a written publication (such as a website, blog newsletter or marketing brochure) as well as oral communications (such as an announcement made on radio or television).

All registered investment advisors should have detailed policies and procedures regarding advertising materials memorialized within their compliance program. It is advisable for investment advisors, as part of their on-going compliance program, to have in place policies requiring the pre-approval of all marketing materials. Investment advisors should be prepared for a thorough review of advertising materials during a regulatory examination.

For more information on the use of marketing materials for your investment advisor, join RIA Compliance Consultants on June 14, 2012, at 12:00 Central for our webinar, “Approving Marketing Materials.” During this webinar RIA Compliance Consultant will review SEC rules, no-action letters and enforcement actions related to marketing materials used by investment advisors. We will discuss examples of prohibited promises, guarantees and untrue statements. Our consultants will discuss best practices and sample disclosures related to client testimonials, client references, third-party rankings, top advisor lists, news article reprints and past investment recommendations. This webinar includes guidance about the regulatory considerations when an investment advisor uses a professional designation or social networking sites. Finally, our consultants will briefly explain the SEC’s requirements in order to show model or actual investment performance in advertising and marketing materials. To register for this webinar, please click here. This webinar is eligible for one credit hour towards the CFP professional designation continuing education requirements.

Saturday, May 12, 2012

More Details of the Investment Adviser SRO Bill

As we have been discussing, Rep. Spencer Bachus, the Chairman of the U.S. House Financial Services Committee, recently released the Investment Advisers Oversight Act of 2012, which would create a self-regulatory organization (“SRO”) for investment advisers.  The Investment Advisers Oversight Act would amend the Investment Advisers Act of 1940 to create a “national investment adviser association” which would be overseen by the U.S. Securities and Exchange Commission (“SEC”).  This investment adviser SRO would be given the authority to propose its own rules, subject to SEC approval, and to discipline its members for any violations of current SEC rules.

Every investment adviser currently registered with the SEC or a state securities regulator would be required to register with the SRO. Limited exceptions to the membership requirement would be granted to broker/dealers as well as investment advisers who primarily advise mutual funds, foreign clients, and private funds.

While, section (g)(1) states that the bill will not “limit or detract from or otherwise preempt the authority of any State securities commission…to adopt rules, investigate possible violations of state law, initiate enforcement proceedings, or otherwise regulate any investment adviser that is subject to state authority.”  State registered investment advisers would be required to join the SRO.  However, they would not be examined by the SRO if their state securities regulator conducts on-site examinations of all of its registered investment advisers at least every four years.  Nonetheless, the SRO will still have the authority to conduct “for cause” examinations of all members of the SRO.

Additionally, each year, after the conclusion of an “annual conference”, the national SRO would need to submit a report to Congress identifying which state regulators have an examination plan in place and a description of how well the state regulators have been meeting their examination plan.

One interesting provision of the Investment Advisers Oversight Act states that “[n]o investment adviser shall be required to be a member of more than one registered national investment adviser association.”  This means there could potentially be more than one SRO and that investment advisers would have a choice as to which one they register with.  However, the bill also states that any SRO would need to have “capacity.”  This limits the likelihood of the formation of two SROs because “capacity” essentially means adequate funding, and it seems unlikely that two SROs could exist given the projected costs of just a single SRO.

Ultimately, this investment adviser SRO bill seems unlikely to pass this year.  It is not even clear if this bill will make it out of the House Financial Services Committee. While it has bi-partisan support (it is co-sponsored by Rep. Carolyn McCarthy, a Democrat from New York), the ranking Democrat on the committee Rep. Barney Frank opposes the bill.  In the event the bill does make it out of committee it would have to pass the Republican controlled house and would then be sent to the Senate, where it is not likely to go anywhere.  However, if this bill is not passed during this congressional term expect to see a similar version when Congress reconvenes next January.

Wednesday, May 9, 2012

DoL Issues Further Guidance on Compliance with ERISA 408(b)(2) Compliance

On Monday May 7th, the U.S. Department of Labor’s Employee Benefits Security Administration (“EBSA”) issued Field Assistance Bulletin No. 2012-02 to provide further guidance on compliance with the new 408(b)(2) regulations, which impose disclosure requirements on service providers, such as investment advisers, to retirement plans covered under the Employee Retirement Income and Security Act of 1974 (“ERISA”).

This Department of Labor bulletin, which addresses topics in a questions and answer format, further clarifies who is considered a covered service provider under ERISA 408(b)(2) regulations and how covered service providers should disclose their fee information.  The bulletin also provides guidance on the ERISA 404(a) regulations, which require plan administrators to make certain disclosures to plan participants.

On Thursday, May 10, 2012, at 12:00 CDT, our affiliated law firm, Bryan Hill Attorney at Law, will be conducting a webinar, New 408(b)(2) Disclosure Requirements Affect Investment Advisers to ERISA Plan Accounts.  During this webinar, we will review the new 408(b)(2) regulations and provide an in-depth discussion on who the regulations apply to and what the disclosures requirements for an investment adviser are under the regulation.  To register for this webinar, click here.

Wednesday, May 9, 2012

Upcoming Compliance Webinar for New ERISA 408(b)(2) Disclosure Requirements

The July 1, 2012, deadline for ERISA service providers to be in compliance with the new 408(b)(2) regulation requirements is quickly approaching. Under the 408(b)(2) regulation requirements, ERISA service providers are required to deliver written disclosures to the plan sponsor to describe the service provider’s services to the plan, the service provider’s fiduciary status to the plan, and the total compensation received by the service provider that is related to the service provider’s services to the plan. Service providers who fail to make the required 408(b)(2) disclosures by the July 1, 2012, deadline may be forced to repay to the plan any compensation received and ultimately can be subject to a twenty percent civil penalty imposed by the Department of Labor.

To assist service providers in complying with the Final Rule “Reasonable Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure,” RIA Compliance Consultant’s will be hosting a webinar that is presented by its affiliated law firm, Bryan Hill Attorney at Law.  During this webinar, the presenters will provide:

  • A review of the Final Rule 408(b)(2) regulation including discussion on the specific disclosure obligations for plan service providers, including investment advisers;
  • A discussion on what service providers and plans are covered under 408(b)(2);
  • An overview of the disclosure information that must be provided; and
  • A look at the procedural history of the 408(b)(2) regulation.

Sign-up today for our upcoming webinar, “New 408(b)(2) Disclosure Requirements Affect Investment Advisers to ERISA Plan Accounts.”  Time is quickly running out to enroll!

Date: Thursday, May 10, 2012

Time: 12:00 pm CDT

Cost: $69.95

This webinar will provide up to one hour of Continuing Education credit to meet the ongoing requirements for maintaining the Certified Financial Planner (“CFP”) certification, approved by the CFP Board of Standards, Inc. To register for this webinar, please click here.

Monday, May 7, 2012

Sample Client Request/Delivery Log for Code of Ethics Rule Available on Facebook

Under Rule 204A-1 (“Code of Ethics Rule”) of the Investment Advisers Act of 1940 (“Investment Advisers Act”), each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) is required to adopt and implement a code of ethics that sets forth required standards of conduct for all supervised persons of the registered investment adviser and addresses conflicts that arise from personal trading by advisory personnel. Most state securities regulators have similar requirements.

The Code of Ethics Rule does not require investment advisers to adopt a particular standard of conduct, but does necessitate that each investment adviser adopt a code that reflects the fiduciary obligations of the investment adviser and its supervised persons as applicable to the investment adviser’s business model.

Additionally, each investment adviser must describe its code of ethics in its Form ADV Part 2 and provide a copy of its code of ethics to any prospective or current clients, upon request. Any amendments made to the investment adviser’s code of ethics must be provided to all supervised persons of the investment adviser and should be updated in Form ADV Part 2 accordingly. RIA Compliance Consultants would like to offer your investment adviser a complimentary sample Code of Ethics Client Request/Delivery log for use when a client requests a copy of your investment adviser’s code of ethics. To receive your complimentary Client Request/Delivery Log, simply “like” RIA Compliance Consultants on our Facebook page (www.Facebook.com/riacompliace) by clicking here.

Friday, May 4, 2012

NASAA Releases Statement on SRO Bill

Jack Herstein, the president of the North American Securities Administrators Association (“NASAA”) and Assistant Director of the Nebraska Department of Banking and Finance’s Bureau of Securities, has released a statement regarding the Investment Adviser Oversight Act of 2012, recently introduced by Rep. Spencer Bachus, the Chairman of the U.S. House Financial Services Committee.

As we discussed earlier, the proposed bill would amend the Investment Advisers Act of 1940 (“Advisers Act”) to create the “National Investment Adviser Associations” (“NIAAs”), which would be overseen by the U.S. Securities and Exchange Commission (“SEC”).  Investment advisers that are currently registered with the SEC or a state securities regulator would be required to join NIAA.  However, state registered advisers would still be examined by their state securities regulator if the state regulator regularly examines investment advisers.

Jack Herstein’s statement was critical of the bill because it would require state registered advisers to join the SRO regardless of the level of oversight currently provided by their state regulator.  According to Herstein, “[t]here has never been any evidence to suggest that states have failed in their mission of regulating smaller investment advisers.”  He also calls the bill “an astonishing attack on our system of federalism with no demonstrated justification.”

To view the complete statement, click here.


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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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