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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.

Wednesday, June 22, 2011

The SEC Implements “The Switch” Deadline for Investment Advisers

On Wednesday, June 22, 2011, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules regarding regulatory jurisdiction for mid-sized investment advisers.  Under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a registered investment adviser with between $25 and $100 million of assets under management will be required to “switch” from SEC to state registration with one or more state securities regulators (assuming it is relying upon the AUM as the basis for SEC registration).  According to a press release regarding today’s meeting, during the first quarter of 2012, SEC registered investment advisers will be required to declare that they are eligible to remain registered with the SEC. Investment advisers who will no longer remain eligible for SEC registration will have until June 28, 2012 to complete the switch to state registration. The SEC staff estimated 3,200 investment advisers are anticipated to be required to “switch” to from SEC to state regulation.

Investment advisers with between $25 and $100 million in assets under management, which are located in a state where the investment adviser would not be subject to examination by a state securities regulator, will not be subject to this switch. The SEC staff indicated that it is currently aware of the following three states that will not perform examinations: Minnesota; New York; and Wyoming.

RIA Compliance Consultants (RCC) will be able to assist you through this transition.  Although we are still awaiting the final rule release for all details regarding the switch, we strongly recommend that you begin preparing yourself now.  Waiting until the last minute to begin the state registration process 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.

Wednesday, June 15, 2011

New SEC Pay-to-Play Rules Require Certain Solicitors to Register as Investment Advisers

As a reminder, Rule 206(4)-5 under the Investment Advisers Act of 1940 requires a solicitor to register as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) if it solicits government business for an investment adviser.

SEC Rule 206(4)-5 was enacted in 2010 and is designed to curtail “pay-to-play” practices by registered investment advisers.  “Pay-to-play” is the practice of making political campaign contributions or other payments to public officials or candidates for public office in exchange for the award of any government sponsored or established investment management contract, including pension and qualified tuition plans, to an investment adviser.  To limit this practice, SEC Rule 206(4)-5 imposes a limit on the amount of money an investment adviser can donate to political officials or candidates for public office, prohibits investment advisers and its employees from soliciting campaign contributions, and requires all third party solicitors to register with the SEC as an investment adviser or broker dealer.  If an investment adviser violates SEC Rule 206(4)-5, the investment adviser will be barred from being paid for providing investment advisory services to the government entity for two years.  Please click here for more details.

As a result of this new SEC rule, any firm who solicits a government client on behalf of an investment adviser must register with the SEC.  Similarly, any registered investment adviser that provides or intends to provide investment advisory services to a government entity should update immediately its code of ethics and written supervisory procedures related to political campaign contributions.  If your firm needs any assistance registering as an investment adviser or updating its code of ethics and written supervisory procedures related to political campaign contributions, please click here to schedule a time to speak with one of our compliance consultants.

Monday, June 13, 2011

SEC Alleges Former Employee of Investment Adviser Aided and Abetted the Violation of SEC Rule 204-2 (Books & Records Requirements)

On June 6, 2011, the U.S. Securities and Exchange Commission (“SEC”) charged a long time employee at Bernard L. Madoff Investment Securities LLC (“BMIS”) with “aiding and abetting  violations of Section 204 and Rule 204-2 of the [Investment] Advisers Act [of 1940] (Adviser Books and Records Violations).” The SEC’s complaint alleges that BMIS, “failed to make, maintain on its premises, or keep accurate, certain books and records required by law.” The SEC cites several examples where the firm failed to maintain accurate cash receipts, disbursement records, accurate ledgers, and failed to keep true and accurate bank statements, cancelled checks and cash reconciliations. The allegations against the former employee of BMIS contend that the employee aided and abetted violations of Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder. The SEC contends that as an employee in the investment advisory operations, the former BMIS employee assisted in falsifying documents, making repeated material misrepresentations, and generated fictitious account statements; thus, violating the Investment Advisers Act of 1940, Rule 204-2 and thereunder and perpetuating the firm’s violations.

For more information to help your firm maintain compliance with SEC Rule 204-2 of the Investment Advisers Act of 1940, 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.

 

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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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