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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.

Tuesday, August 9, 2011

SEC Director Discusses the New Whistleblower Program and the Role Internal Investigations Will Play

In a recent speech, Robert Khuzami, the Director of the Division of Enforcement for the U.S. Securities and Exchange Commission (“SEC”), discussed the SEC’s new whistleblower program and the role internal investigations will play.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has created a whistleblower program that allows the SEC to reward whistleblowers by giving them up to 30% of any recovery above $1 million.  The SEC Enforcement Director stated that the purpose of this whistleblower program is to “incentivize insiders and others who possess useful information regarding unlawful conduct to come forward early and assist the SEC with identifying and bringing enforcement actions against companies and individuals that have violated the securities laws.”

One issue that has received a lot of attention is whether potential whistleblowers would be required to first file their complaint with their employer or the company in question.  The SEC has decided against such a requirement.  According to Khuzami, the SEC determined that making internal reporting a prerequisite to filing a complaint with the SEC would “place an undue and additional burden on the whistleblower…and likely would deter others from coming forward.”  The SEC Enforcement Director cited “pump and dump” schemes run by boiler room operations and Ponzi schemes as examples of corrupt organizations where internal reporting would be futile.

However, the SEC did structure the rules so that whistleblowers would be incentivized to report complaints to internal compliance programs.  The amount awarded to a whistleblower may be increased if the whistleblower files a complaint with the company’s internal compliance office.  Also, if the whistleblower originally files the complaint with the company, any information provided by the company to the SEC will be attributed to the whistleblower.  On the other hand, interference with internal investigations can decrease the amount awarded to a whistleblower.

To access the full transcript of the SEC Enforcement Director’s speech, click here.

RIA Compliance Consultants strongly recommends that all investment adviser firms implement a system to handle internal whistleblower complaints. If your investment adviser firm needs help implementing complaint procedures or would like help reviewing your existing system, any of our compliance consultants would be happy to assist your investment adviser.

Thursday, August 4, 2011

GAO Studies Feasibility of SRO for Investment Advisers to Private Funds

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the U.S. Government Accountability Office (“GAO”) recently released a study regarding the feasibility of forming a self-regulatory organization (“SRO”) to oversee investment advisers to private funds.   Click here for a copy of the study.

The GAO found that the general consensus is that “the formation of a private fund adviser SRO would require legislation” and would face challenges such as raising start-up capital and reaching agreement upon fees and structure.  The GAO noted that the advantages of a private fund adviser SRO included supplementing SEC’s oversight and capacity challenges; however, the GAO explained that even with a private fund adviser SRO, the SEC would still have to examine the majority of investment advisers, which do not manage private funds, and there could be regulatory gaps depending upon whether the investment adviser manages a private fund.

If your firm is a private fund adviser and needs assistance registering with the U.S. Securities and Exchange Commission (“SEC”) as investment adviser in accordance with the new requirements of the Dodd-Frank Act, please click  here to schedule an appointment with one of our senior compliance consultants to discuss our investment adviser registration services.

Tuesday, August 2, 2011

Frequently Asked Questions About the Switch of Mid-Sized Investment Advisors from the SEC to State Securities Regulators

Click here to view our answers to frequently asked questions about the switch of mid-sized investment advisors from the SEC to state securities regulators.

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.


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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.

About RIA Compliance Consultants, Inc.
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