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Tuesday, September 13, 2011

Congress Holds Hearing Concerning Investment Adviser SRO

Today, September 13, the House Committee on Financial Services conducted a hearing to discuss forming a self-regulatory organization (“SRO”) for investment advisers.  There were three oversight options discussed,  (1) having the U.S. Securities and Exchange Commission (“SEC”) charge a user fee to provide funds for more frequent regulatory examinations; (2) creating an independent SRO; and (3) giving FINRA the authority to serve as the investment adviser SRO.  Eight individuals testified in front of the House Committee.  The following chart shows which of the three approaches the individuals thought would be most effective.

Name Organizaiton/Employer SEC User Fee Independent SRO FINRA as SRO
William Dwyer Chairman, Financial Services Institue and Managing Director/President of LPL Financial, LLC X
Ken Ehinger President and CEO, M Holdings Securities, Inc., on behalf of the Association for Advance Life Underwriting X
Terry Headly President, National Association of Insurance and Financial Advisors X
Steve Irwin Commissioner, Pennsylvania Securities Commission, on behalf of NASAA X
Richard Ketchum Chairman and CEO, FINRA X
Barbara Roper Director of Investor Protection, Consumer Federation of America X* X*
John Taft CEO, RBC Wealth Management, on behalf of the Securities Industry and Financial Markets Association X
David Tittsworth Executive Director and Executie VP, Investment Adviser Association X

*Barbara Roper stated that the best option would be to supply the SEC with the appropriate funding to improve investment oversight and to increase the frequency of regulatory examinations.  However, she felt this option would not be achieved so she supported forming an independent SRO.

Based upon the testimony of the witnesses and the Congressmen conducting the hearing, the most popular choice is having FINRA serve as the investment adviser SRO.  Those advocating for this approach felt it would be the most effective and cost efficient approach.  However, those advocating for an SEC user fee felt that creating an investment adviser SRO would create an additional layer of bureaucracy.  They also felt that SROs create conflicts of interest because they are run by their members and are accountable to their members, not the general public.

For more information on the hearing and to view the full remarks of each witness, click here.

Monday, September 12, 2011

Congress to Hold Hearing To Discuss Creating an SRO for Investment Advisers

On Tuesday, September 13 the House Committee on Financial Services will conduct a hearing to discuss forming a self-regulatory organization (“SRO”) for investment advisers.  The hearing will take place at 10 AM ET and is entitled “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight.”  The Committee has already posted a draft bill on its website.  This bill would amend the Investment Advisers Act of 1940 to create an unnamed SRO for investment advisers.  The following people will testify during this hearing:

  • Mr. William E. Dwyer III, Chairman, Financial Services Institute
  • Mr. Ken Ehinger, President and Chief Executive Officer, M Holdings Securities, Inc., on behalf of the Association for Advanced Life Underwriting
  • Mr. Terry Headley, President, National Association of Insurance and Financial Advisors
  • Mr. Steven D. Irwin, Commissioner, Pennsylvania Securities Commission, on behalf of the North American Securities Administrators Association
  • Mr. Richard G. Ketchum, Chairman and Chief Executive Officer, Financial Industry Regulatory Authority
  • Ms. Barbara Roper, Director of Investor Protection, Consumer Federation of America
  • Mr. John G. Taft, Chief Executive Officer, RBC Wealth Management, on behalf of the Securities Industry and Financial Markets Association
  • Mr. David Tittsworth, Executive Director/Executive Vice President, Investment Adviser Association

At the hearing the Committee will also discuss whether to impose a fiduciary standard on everyone who offers retail investment advice.  Imposing this fiduciary standard would require investment professional to always act in the best interest of their clients.  This means that broker dealers would be held to the same fiduciary standards that investment advisers are currently held to.

Again, the hearing will begin at 10 AM ET on Tuesday, September 13.  If you would like to watch the hearing, click here to access the Committee’s webpage for this hearing.

Friday, September 9, 2011

The Benefits of Being Prepared for a Regulatory Examination

The best approach for an investment adviser firm to prepare for a regulatory examination begins with ongoing compliance training. A report released by the U.S. Securities and Exchange Commission (“SEC) on February 2011, stated “In most cases, the staff considers the quality of the [investment adviser’s] compliance systems and its internal control environment when determining the scope of the examination and the areas to be reviewed.” Investment advisers with a vigorous compliance program, including training and preparing for regulatory examinations, will find that regulatory audits are more likely to progress smoothly. Investment adviser firms that fail to demonstrate a solid understanding of their investment adviser’s compliance program will likely leave the securities regulator with concerns that the investment adviser is failing to protect the safety of its client’s assets. The examiners may deem it necessary to seek further information and request additional documentation from the investment adviser. Failure to provide requested documentation and a display of an inadequate compliance program will likely be the result of a deficiency letter, and/or remedial or enforcement action against your investment adviser firm. In the same report discussed above, the SEC has stated that unfortunately, “most examinations conclude with a deficiency letter.”

Investment advisers need to be aware that regulatory examinations, both SEC and state securities regulators, may be conducted on a surprise basis with no advance notice. These surprise examinations can easily be conquered with advance preparation on the part of the investment adviser. Understanding the regulatory examination process, being prepared for the requests of the securities regulator, having a solid knowledge of your investment adviser’s operations, and knowing your federal or state laws and regulations will elevate much of the stress of the investment adviser examination process. Consider that the securities regulators have the right to request your investment adviser’s books and records, conduct interviews with your firm’s management and employees, and have the right to an on-site visit of your investment adviser’s offices. Regulatory examinations are not designed to hinder investment advisers, but rather seek to protect the best interests of your clients.

RIA Compliance Consultants has a wealth of regulatory knowledge. If your investment adviser is concerned about preparing for a regulatory examination, our Senior Compliance Consultants can work with you to identify regulatory risks in this rapidly changing compliance environment. On Thursday, September 15, 2011 RIA Compliance Consultants is hosting a webinar, “Preparing for a Regulatory Examination,” in which our Senior Compliance Consultants discuss the regulatory examination process and provide you with general guidance and tips for preparing and getting through the examination. If you would like to join this live webinar, click here to register. Or if your investment adviser would like assistance with creating and implementing a customized and more comprehensive compliance program, click here to schedule a time to speak to one of our Consultants to see how RIA Compliance Consultants can assist your investment adviser firm.

Tuesday, August 30, 2011

Would Your Registered Investment Adviser be Prepared for a Regulatory Exam?

With the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), mid-sized investment adviser firms (firms with assets under management between $25 million and $100 million in assets under management) will now be required to switch from federal to state regulation.  One of the anticipated outcomes resulting from this change that should be notice by all registered investment advisers is more frequent regulatory examinations.  As stated by the North American Securities Administration Association (“NASAA”), “Firms switching to state regulation for the first time can expect thorough inspections generally on a more frequent basis than they may have had experienced before. Most advisers should find that thorough inspections and strong internal compliance benefit customer and firm alike.”  Additionally, in a study conducted by the staff of the U.S. Securities and Exchange Commission (“SEC”) under the requirements of Section 914 of the Dodd-Frank Act, released January, 2011, it was indicated that, “The Staff expects that the frequency of examinations of registered investment advisers could increase following the effective date of Title IV as a result of a substantial decrease in the number of registered investment advisers, many of whom will transition from federal to state registration.”

An SEC or state investment adviser examination can be conducted as an announced exam, where the investment adviser receives prior notice of the examination (generally only one or two weeks notice) or as a surprise exam, where the regulatory examiners show-up unannounced to conduct the examination.  The time for an investment adviser to prepare for a regulatory examination is not when the examination notice is received or when the state or SEC examiners arrive to conduct the examination.  All registered investment advisers should be continuously prepared and in a constant state of readiness for a regulatory exam.  Some of the things to consider when determining if your registered investment adviser is prepared for an examination are:

  • Is your investment adviser aware of and can it “promptly” provide all of the documents routinely requested during an SEC or state examination?
  • Are your investment adviser’s policies and procedures current and have they been customized to the specific facts and circumstances of your investment adviser?  Are they written to prevent, detect, and correct violations of the Investment Advisers Act of 1940 or, if applicable, similar state rules and regulations and to address all identified areas of risk specific to your investment adviser?
  • Do your investment adviser’s Chief Compliance Officer and other staff members know their roles during the regulatory examination process?  Do they know what to do and how to act if an SEC or state examiner arrives to audit your investment adviser?
  • Is your investment adviser prepared to demonstrate how it has enforced a strong culture of compliance throughout the firm?

If you would like more information to help you determine your investment adviser’s readiness for a regulatory exam, RIA Compliance Consultants is hosting a webinar, “Preparing for a Regulatory Exam,” presented by one of our Senior Compliance Consultants on Thursday, September 15, 2011 from 12:00 pm – 1:00 pm Central.  During this webinar, one of our Senior Compliance Consultants will give you an overview of the examination process along with some guidance and tips for preparing for and surviving a regulatory exam.  The webinar will last approximately 60 minutes can be purchased for a fee of $59.95.  To register for this webinar now click here.

To speak with RIA Compliance Consultants about the services we can provide to assist your investment adviser in assessing its readiness for a regulatory exam or any of your investment adviser’s other compliance needs, please click here to schedule a time to speak to one of our consultants.

Monday, August 29, 2011

Follow-up Information for the Webinar, “The Switch Is On Again For RIAs”

A lot of important information regarding the upcoming requirement for mid-sized advisors to switch from SEC to state registration was provided during the recent webinar, “The Switch is On Again for RIAs,” hosted by Advisor4Advisor and presented by Tammy Emsick of RIA Compliance Consultants.  Therefore, we would like reiterate a few of the main points presented during this webinar.

Investment advisors with less than $25 million in assets under management will continue to be state registered and advisors that qualify for SEC registration will continue to notice file with the appropriate state regulatory authorities.  Investment advisors with assets under management between $25 million and $100 million (“mid-sized advisors”) will need to switch from SEC to state registration unless the advisor is not required to be registered as an investment advisor with the state securities authority in the state where it maintains its principal office and place of business; the advisor is not subject to examination as an advisor in the state where it maintains its principal office and place of business; or the advisor qualifies for an exemption under Rule 203A-2 of the Investment Advisers Act of 1940.

The following are the key dates that all investment advisors currently registered with the SEC will need to be aware of:

  • All mid-sized investment advisors registered with the SEC as of July 21, 2011, must remain SEC registered until after January 1, 2012.
  • All investment advisors registered with the SEC as of January 1, 2012 are required to file an amendment to their Form ADV Part 1 by March 30, 2012.  This is regardless of the firms fiscal year end, although it may coincide with the Form ADV annual update filing for many SEC investment advisors.
  • By June 28, 2012, all mid-sized investment advisors that no longer qualify for SEC registration after January 1, 2012 must become state registered and file a Form ADV-W to withdraw from SEC registration.
  • After June 28, 2012 the SEC will cancel registrations of investment advisors no longer eligible to register with the SEC that fail to file the Form ADV amendment or withdraw their registrations.

Mid-sized advisors may be able to start applying for registration with state securities regulators at this time, but the investment advisor should first check with the appropriate state securities regulator(s) to make sure the state will not object to the investment advisor´s dual registration as an investment advisor with the state securities regulator and the SEC until the firm is able to withdraw from SEC registration after January 1, 2012. Every state securities regulator has its own investment advisor registration requirements and additional documentation may be required to be submitted along with the Form ADV.  In the SEC final rule release regarding the switch, the SEC indicated that they estimate approximately 3,200 SEC registered investment advisors will be required to withdraw their registrations and register with one or more state securities authorities.  This will likely mean that state regulators are going to be extremely busy reviewing registration applications during the first six-months of 2012.  Investment advisors that need to switch to SEC registration should plan accordingly so that they will meet all of the required deadlines.

Finally, investment advisors that switch to state registration must keep in mind that along with making changes to the Form ADV, advisors’ client agreements and written supervisory procedures will probably need to be updated.

Friday, August 26, 2011

Broker Dealers and Investment Advisers Need to Have Policies and Procedures in Place for Social Media Use

A recent FINRA Action highlighted the need for broker dealers and investment advisers to implement policies and procedures for social media use.  FINRA brought this action because the registered representative had created websites related to her firm without obtaining firm approval, on several occasions she falsely stated online that she was not affiliated with any broker dealer, and she was using her Twitter account to give stock recommendations without making the necessary disclosures.  As a result of this conduct, FINRA fined her $10,000 and suspended her from associating with a broker dealer for one year.

This FINRA Action should serve as another remind that if you have not already done so, it is time to implement policies and procedures that address social media use.  These policies and procedures should address retention of online communication, supervision of representatives’ use of social media, and how your firm will be represented online.  While the US Securities and Exchange Commission (“SEC”) has not released any guidance on social media use, FINRA has issued Regulatory Notice 10-06 and Regulatory Notice 11-39 which provide guidance on using social networking sites for business communications.

If you would like to discuss how RIA Compliance Consultants, Inc. can help your registered investment advisor update its written policies and procedures, please schedule a time through our online calendar.  Simply click here and select an available time that is convenient for you.  One of our consultants will then give you a call at your selected time.

Friday, August 12, 2011

The “Switch” Webinar Hosted by advisors4advisors.com

Join our senior compliance consultant, Tammy Emsick, as she discusses the upcoming regulatory switch for mid-sized investment advisors in today’s advisors4advisors.com webinar. To join click here.  Note: advisors4advisors.com does require users to register as a member; however, members of advisors4advisors.com can replay any webinar 24/7.

Thursday, August 11, 2011

Does Your Investment Adviser Firm Have a Written Information Security Plan?

Based upon the formal and informal expectations of state and federal securities regulators, every investment adviser should consider developing a written information security plan.  Rule 30 of Regulation S-P issued by the U.S. Securities and Exchange Commission (“SEC”) requires SEC registered investment advisers to adopt written policies and procedures designed to ensure the security and confidentiality of client information.  The enforcement of Rule 30 was highlighted by a recent SEC enforcement action against an investment adviser who had their trading system hacked.  A year before the hacking occurred, an internal audit showed that the adviser did not utilize strong passwords.  When the hacking occurred a year later, the investment adviser had taken no action to increase password security.  Thus, the adviser was fined $275,000 for failing to safeguard customer information.

While state registered investment adviser firms are not subject to Regulation S-P, the Federal Trade Commission (“FTC”) has enacted Safeguard Rules which are similar to Regulation S-P and apply to state registered investment advisers.  In addition some states have enacted their own requirements.  In 2010, the Commonwealth of Massachusetts enacted detailed and comprehensive laws to prevent client data security breaches.  These requirements apply to all investment advisers who have clients who are residents of Massachusetts.  Further, the State of Nevada has enacted information encryption laws that apply to all investment advisers located within the state.  As legislators and regulators continue to make protecting customer information a priority, investment adviser firms need to enact comprehensive information security plans to remain compliant with regulatory requirements.

Some specific information security safeguards that should be included in any plan are utilizing strong alphanumeric passwords to access firm computers, securing wireless connections and smart phones, encrypting laptops and external hard drives and physically locking client files when they’re not being used.  A comprehensive information security plan should also designate an individual to be in charge of information security, identify reasonably foreseeable risks, implement safeguards to control those risks, train employees on how to protect client information, audit whether safeguards have been implemented and are effective, and outline actions to be taken in the event of a security breach.

If your investment adviser needs help developing and implementing a written information security plan or would like help reviewing an existing plan, click here to schedule a time to speak with one of our compliance consultants.

Wednesday, August 10, 2011

Connect with the Facebook Page of RIA Compliance Consultants

RIA Compliance Consultants has set up a Facebook page (www.facebook.com/riacompliance) to maximize our ability to communicate with investment advisors.

We are posting items of interest, regulatory alerts, best practice tips, complimentary webinars and free forms to investment advisors on the page as they become available. To stay up to date with our latest posts on investment advisor compliance, go to the page and click on the “Like”.

Please understand that clicking the “Like” button does not constitute and should not be considered a testimonial for or an endorsement of RIA Compliance Consultants, any associated person, or our services; the clicking of the “Like” button is merely a mechanism to circulate our Facebook page.

Tuesday, August 9, 2011

Do You Understand the Responsibilities Related to Serving as an Investment Adviser’s Chief Compliance Officer?

Your investment adviser’s chief compliance officer (“CCO”) must be knowledgeable regarding the Investment Advisers Act of 1940, competent in regard to administering your compliance program and empowered to enforce compliance with your policies and procedures.

Your investment adviser’s CCO is responsible for administering your investment advisers’ policies and procedures. This does not necessarily mean that the CCO has to be the sole party responsible for performing all the investment adviser’s supervisory functions.  In order to properly delegate some of the supervisory functions, an investment adviser’s CCO must: (i) adopt procedures that are reasonably designed to prevent and detect violations of the federal securities laws; (ii) ensure that a system is in place for applying the procedures; and (iii) make sure that all supervisory responsibilities are reasonably discharged in accordance with the investment adviser’s written policies and procedures in such a manner that the investment adviser’s CCO has no reason to believe that the supervised persons are not complying with the procedures.  It is the ultimate duty of the CCO to develop, implement, maintain, and enforce your investment adviser’s written compliance policies and procedures. The CCO does not need to be responsible for all policies and procedures of your investment adviser firm; however, your firm’s CCO needs to understand Rule 206(4)-7 well enough to know what his/her responsibilities are under the rule.

“Rule 206(4)-7 requires each adviser registered with the Commission to designate a chief compliance officer to administer its compliance policies and procedures. An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.”

-Securities and Exchange Commission (full text here)

RIA Compliance Consultants is hosting a webinar, “Basic Training for a CCO,” on Thursday, August 18, 2011.  This webinar will provide valuable information and tips regarding ongoing responsibilities for your investment adviser’s chief compliance officer in order to avoid violating SEC Rule 206(4)-7.

RIA Compliance Consultants is a team of industry experienced professionals dedicated to working with investment advisers who are also committed to implementing good compliance and risk management strategies. By working together, RIA Compliance Consultants helps investment advisers navigate the maze of investment adviser compliance regulations and find the best ways to satisfy their obligations.

Webinar: Basic Training for a CCO

Date: Thursday, August 18, 2011

Time:  12:00 p.m. to 1:00 p.m. Central

Cost: $59.95

To register, 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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