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Monday, July 25, 2011

Investment Adviser Compliance Tip – Supervising Personal Securities Transactions

When establishing a compliance program, an investment adviser is required to review and monitor the personal securities transactions by “access persons” in order to prevent inappropriate trading.

In order to supervise personal securities transactions, the first question is determining which individuals are access persons.  The U.S. Securities and Exchange Commission (“SEC”) defines an “access person” as any supervised person:

(A) Who has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, or

(B) Who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic.

In essence, these individuals are considered access persons by the SEC because they are in the position to inappropriately utilize client information.  This typically includes all of the investment adviser’s employees in addition to its directors, officers, investment adviser representatives (IARs) and any employees of the IARs (if IARs are independent contractors).

Once an investment adviser has determined its access persons, the next step is to establish a procedure for supervising the personal securities transactions of those identified as access persons. An access person is required to report his or her personal securities holdings (existing securities positions) to the investment adviser upon becoming an access person and on an annual basis thereafter. In addition, each access person needs to report his or her personal securities transactions (direct and indirect beneficial ownership) within 30 days of the end of each calendar quarter. All private placements and initial public offering of the access person must be pre-approved by your investment adviser.

RIA Compliance Consultants recommends that these personal securities transactions and holdings be placed in a database so that each access person’s records may be cross-referenced easily against the transactions of the investment advisory clients. An investment adviser should review these personal securities transactions for inappropriate conduct like front-running, scalping, insider trading or other misuses of confidential client information.  Also, depending on the investment adviser’s specific procedures, the investment adviser’s review should focus upon whether there are violations of any restricted lists, black-out periods, or other conditions placed on access person’s personal trading activities or holdings.

Finally, the investment adviser must maintain the following records for the last five years: lists of its access persons; each quarterly personal securities transactions report and initial and annual personal securities holdings report made by an access person; the review and approval of each personal securities transactions or holdings report; any violation and corrective action; and any decision and supporting reasons to approve any initial public offering or private placement for an access person.

If you would like to purchase a sample policy and procedure for supervising personal securities transactions, please contact us at your convenience.

Thursday, July 21, 2011

SEC Publishes Frequently Asked Questions Regarding Switch of “Mid-Size” Investment Advisers

The U.S. Securities and Exchange Commission (“SEC”) posted a webpage with frequently asked questions regarding the switch of “mid-size” investment adviser ($25 million to $100 million of assets under management) from the SEC to state securities regulator(s).

Although the initial information about the “mid-size” investment adviser switch on this webpage is somewhat limited, there are at least two new pieces of information worthy of discussion.

First, the SEC only identifies New York and Wyoming as the states where a “mid-size” investment adviser would not be subject to examination by a state securities regulator.  (Under the SEC’s new switch rule, a “mid-size” investment adviser with a principal place of business in a state that does not require the investment advisor to register or does not examine investment advisers is required to remain registered with the SEC.)   This appears to be contrary to the comments of the SEC staff during the Commission’s open meeting on the final rule a few weeks ago and the adopting release dated June 22, 2011 when Minnesota was also mentioned by SEC staff as a state where a “mid-size” investment adviser would not be subject to an examination by a securities regulator.   As result, it currently appears as if a “mid-size” investment adviser with a principal place of business in Minnesota will be subject to the regulator switch from the SEC and be required to register as an investment adviser with the State of Minnesota Department of Commerce.

Second, although not well publicized by the securities industry press, the SEC has made several changes to the Form ADV Part 1.  The Form ADV Part 1 items have been amended to reflect the new investment adviser registration requirements.  Additionally, there are several items that have been revised that are not related to the new investment adviser registration requirements for mid-size investment advisers.  When filing an amendment to the Form ADV Part 1 after the new updated form is released on IARD, all (even if not a “mid-size”) investment advisers will need to review the entire Form ADV Part 1 and provide the additional information requested.  It is expected that the IARD will be able to accept filings of the revised Form ADV Part 1 by January 1, 2012.  Click here to view a PDF file of the amended Form ADV Part 1.

If your firm falls into the definition of a “mid-size” investment adviser, RIA Compliance Consultants is presenting a complimentary webinar, “Understanding and Preparing for the ‘Switch’ of Mid-Sized Advisors,” on Wednesday, August 25, 2011 at 12:00 p.m. Central.  This webinar will provide an overview of the SEC’s new switch rule and discuss timing for any new requirements under this rule.  During this webinar, we will also discuss which investment advisers will be covered by these changes and what actions these investment advisers will need to take in order to comply with the new requirements to switch from SEC to state registration.  If you would like to attend this complimentary webinar, click here to register.

Monday, July 18, 2011

The “Switch” for Mid-Size Investment Advisers from SEC to State Registration

Click here for the abbreviated (9 minutes) version of our video about the new SEC rule switching certain mid-size ($25 million – $100 million of assets under management) investment advisers from SEC to state registration.  For the full (1 hour) version of this video, please click here.

In this abbreviated version of our video, our senior compliance consultant discusses certain key requirements under the SEC’s new switch rule and the deadlines for mid-size investment advisers.

If your investment adviser falls into the SEC’s definition of a mid-size investment adviser, RIA Compliance Consultants is able to assist you with the transition from SEC to state registration.  If you would like to discuss engaging RIA Compliance Consultants, please click here to schedule a time for one of our consultants to call you.

Monday, July 18, 2011

SEC Issues Order Raising Thresholds for Investment Advisers to Charge Performance Fees

On July 12, 2011 the U.S. Securities and Exchange Commission (“SEC”) issued an order that effectively raises two of the thresholds that determine whether an investment adviser can charge a performance fee.  Under section 205(a)(1) of the Investment Advisers Act of 1940 (“Investment Advisers Act”) investment advisers are generally prohibited  “from entering into, extending, renewing, or performing any investment advisory contract that provides for compensation to the adviser based on a share of capital gains on, or capital appreciation of, the funds of a client (also known as “performance compensation” or “performance fees”).”  Section 205(e) of the Investment Advisers Act authorizes the SEC to exempt any investment advisory contract from the performance fee prohibition if the contract is with a person the SEC determines does not need the protections of the prohibition.

SEC Rule 205-3 of the Investment Advisers Act exempts an investment adviser from the prohibition against charging performance fees in certain circumstances.  SEC Rule 205-3 allows investment advisers to charge performance fees so long as a client meets certain criteria, including: the client must have at least $750,000 under management of an investment adviser immediately after entering into an advisory contract (“assets-under-management test”) or an investment adviser must have reasonable belief that the client has a net worth of more than $1.5 million at the time the contract is entered into (“net worth test”).  These thresholds had not be revised since 1998.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 205(e) of the Investment Advisers Act to provide that, by July 21, 2011 and every five years after, the SEC shall adjust for inflation of the dollar amount thresholds in the rules under section 205(e).  Under the July 12, 2011 SEC order, the client must have $1 million under management immediately after entering into an advisory contract 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 million at the time the advisory contract is entered into to satisfy the net worth test.

This SEC order, carrying out a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, will be effective September 19, 2011. As required, the thresholds will be adjusted by the SEC for inflation every five years post this order.

Tuesday, July 12, 2011

Maintaining Investment Advisor Books and Records

A registered investment advisor is required to make and keep true, accurate, and current certain books and records relating to its investment advisory business.  For investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”), these required books and records are outlined in Rule 204-2 of the Investment Advisers Act of 1940 (“Advisers Act”).  Each investment advisor registered with the SEC should familiarize itself with the requirements of Rule 204-2 in relation to the documents and reports that need to be maintained, where and for how long the documents must be maintained, and how the documents may be maintained.  Most books and records requirements for state registered investment advisors are the same as or similar to the SEC requirements, but you need to make sure that you familiarize yourself with the requirements of the appropriate regulatory authority for your investment advisor.

Books and records requirements should be covered in an investment advisor’s written compliance policies and procedures.  Each time there are changes to the rules under the Advisers Act, it is likely that Rule 204-2 will be affected.  A registered investment advisor should review and determine how those changes affect Rule 204-2 and should update its written policies and procedures accordingly.  Investment advisor’s books and records will be reviewed as part of a regulatory examination.  It is important for all investment advisors to periodically review and test to ensure that they are maintaining accurate and current books and records.

The SEC recently adopted new rules and amendments to existing rules under the Advisers Act to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  Regulators have indicated that one of the expected results of these rule changes will be increased regulatory oversight of investment advisors.  One of the changes resulting from the Dodd-Frank Act is the reallocation of regulatory oversight to the state securities authorities for certain smaller investment advisors.  Investment advisors with between $25 million and $100 million of assets under management (“mid-sized investment advisors”) will now be required to register with the states, if they are subject to an examination by state securities authorities.  Many investment advisors that are currently registered have not had a regulatory exam for a number of years, if at all.  It is expected that the reallocation of regulatory oversight will result in more frequent examinations for both SEC and state registered investment advisors.  Investment advisors should make sure that they are prepared for a regulatory examination by reviewing and testing their written policies and procedures to make sure that they reflect the current practices of the investment advisor and that they are consistent with the books and records requirements of the appropriate regulatory authority.

For more information and guidance on maintaining the appropriate books and records for your investment advisor, please register to attend our webinar, “Maintaining Investment Advisor Books and Records.” The webinar will be presented on July 14, 2011 at 12:00 pm CDT for a fee of $59.95.  To register now click here.

Thursday, July 7, 2011

Kansas Securities Commissioner Issues Guidance Regarding SEC’s New Switch Rule for Mid-Size Investment Advisers

On July 5, 2011, the Kansas Securities Commissioner issued a letter to investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) that are also notice filed in Kansas regarding the SEC’s new rule switching mid-size investment advisers (with assets under management between $25 million to $100 million) from the jurisdiction of the SEC to state securities regulators.

The letter confirmed that the Office of the Kansas Securities Commissioner conducts investment adviser examinations, including a thorough review of investment adviser applications before becoming effective.  As a result, a mid-size investment adviser with a principal place of business in the State of Kansas will be required to register as a state investment adviser with the Kansas Securities Commissioner, unless it meets an exemption permitting SEC registration.

The Kansas Securities Commissioner is encouraging any mid-size investment adviser moving to state investment adviser registration under the SEC’s new “switch” rule to provide the required documents as early as possible so the Office of the Kansas Securities Commissioner can complete a review of these registration documents before the June 28, 2012 deadline to withdraw from SEC registration.

The Office of the Kansas Securities Commissioner will allow a mid-size investment adviser to request that its application to register as a state registered investment adviser be kept in a pending status until the mid-size investment adviser is ready to withdraw its investment adviser registration with the SEC.  This will avoid dual federal and state registration as an investment adviser.  However, an investment adviser will need to send a letter to the Office of the Kansas Securities Commissioner requesting the wavier of the Kansas statutory requirement that an investment adviser’s application to register to become effective on the 45th day after it is filed.  If the state investment adviser application is pending at the time that the mid-size investment adviser files the required SEC amendment (between January 1, 2012, and March 30, 2012), the mid-size investment adviser will need to notify the investment adviser/broker-dealer registration manager at the Office of the Kansas Securities Commissioner.

Tuesday, July 5, 2011

Commonwealth of Virginia Notice of Delay for Annual Updating Amendments

State registered investment advisors in the Commonwealth of Virginia have been instructed by the Virginia Division of Securities to continue to use the old Form ADV Part II and Schedule F until the Virginia Division of Securities has approved an investment advisor’s new Form ADV Part 2. The Virginia Division of Securities has indicated that it is encountering delays in Form ADV amendment reviews which may last up to six months.  According to the Virginia Division of Securities, a state registered investment advisor in the Commonwealth of Virginia should continue to use the last accepted Form ADV, unless material changes have occurred. If there have been material changes, the state registered investment advisor is asked to notify the Virginia Division of Securities, which will advise the state registered investment advisor when the 2010 Form ADV annual updating amendment has been accepted.  To access the website of the Virginia Division of Securities, please click here.

Thursday, June 30, 2011

Conducting An Annual Compliance Review of SEC Registered Investment Adviser

RIA Compliance Consultants recently prepared a brief (lasting approximately 9 minutes) webcast identifying a few tips for conducting an annual compliance review of an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”).  Please click here to view our complimentary webcast.  If you would like to view the expanded version of our recorded webcast (lasting approximately 1 hour), you can purchase a seat for $59.95 by clicking here.

Friday, June 24, 2011

SEC Approves New “Switch” Rule for Mid-Sized Investment Advisors

Earlier this week, the U.S. Securities and Exchange Commission (“SEC”) approved a new rule “switching” regulatory responsibility from the SEC to state securities regulators for mid-size investment advisers (between $25 million and $100 million of what will now be known as “regulatory” assets under management).

Here is a summary of certain key aspects of the SEC’s new switch rule for mid-size investment advisers.

  • A mid-size investment adviser registered with the SEC as of July 21, 2011 will be required to remain an SEC registered investment until January 1, 2012.
  • As of July 21, 2011, any state or new investment adviser with assets under management between $25 million and $100 million will not be permitted to register with the SEC and must register with the applicable state securities regulator(s).
  • Each existing investment adviser, registered with the SEC on January 1, 2012, must file by March 30, 2012 an amendment to its Form ADV identifying whether the SEC registered investment adviser is a mid-size adviser and is no longer eligible to remain registered with the SEC.
  • “Regulatory” assets under management will include proprietary and family accounts managed by the investment adviser even if no investment advisory fees are charged.
  • The SEC is permitting an existing SEC registered investment adviser to select the date (within 90 days before this Form ADV filing described above) for purposes of calculating “regulatory” assets under management.
  • After making this Form ADV filing in first quarter of 2012, an ineligible mid-size investment adviser must withdraw its SEC registration by filing the Form ADV-W within 90 days (no later than June 28, 2012).
  • In order to avoid frequent switches, there will be an assets under management buffer.  A state registered investment adviser will not be required to register with the SEC until it reaches $110 million of “regulatory” assets under management.  Once an investment adviser is registered with the SEC, the investment adviser will not be required to file the Form ADV-W and de-register with the SEC until the investment adviser has less than $90 million of “regulatory” assets under management.
  • The threshold for the pension consultant exemption available for an investment adviser to register with the SEC has been increased from $50 million to $200 million of pension plan assets under advisement.
  • The number of states requiring registration under the multi-state exemption available for an investment adviser to register with the SEC has been lowered from 30 states to 15 states.

RIA Compliance Consultants will be presenting a complimentary webinar, “Understanding and Preparing for the ‘Switch’ of Mid-Sized Advisors”, on Wednesday, June 29, 2011 at 12:00 pm CST to provide more details regarding the new requirements for mid-sized advisors.  One of our consultants will provide an overview of the new rules and changes to existing rules and discuss timing for any new requirements under these rules.  We will also discuss which investment advisors will be affected by these changes and what actions these investment advisors will need to take in order to comply with the new requirements to switch from SEC to state registration.  If you would like to attend this complimentary webinar, click here to register.

If your investment advisor is affected by these new requirements, RIA Compliance Consultants (RCC) will be able to assist you through the transition from SEC to state registration.  Although you will not be able to complete your new SEC filings until after January 1, 2012, RCC recommends that you begin to prepare your investment advisory documents for this transition as soon as possible. Waiting until the last minute to begin preparing your documents to apply for state registration may result in you not meeting the appropriate regulatory deadlines.  If you would like to engaging RCC to assist you with this process, contact your RCC consultant or click here to schedule a time for one of our consultant’s to call you.

Thursday, June 23, 2011

SEC Rule Release Explaining Switch for Mid-Sized Investment Advisers

The U.S. Securities and Exchange Commission (“SEC”) posted a link to the new rule release explaining the “switch” for mid-sized investment advisers ($25 million – $100 million of assets under management) from the SEC to state securities regulators. Click here to view the details of the switch.

 

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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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