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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.

Thursday, June 2, 2011

SEC Finalizes Whistleblower Rules

The United States Securities and Exchange Commission (“SEC”) has finalized the whistleblower rules that were required by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the new rules, whistleblowers are eligible for a reward if they provide the SEC with original information about a securities law violation that leads to a successful enforcement action.  To help the SEC identify credible tips, potential whistleblowers must identify themselves as seeking a reward and provide a sworn statement that the information they provided is true.  If the SEC collects more than $1 million based upon the information provided by the whistleblower, then the whistleblower may receive between 10 to 30 percent of the total amount collected.

In November 2010, the SEC first proposed whistleblower rules and asked for comments.  The SEC received 240 comments and more than 1300 form letters.  Based on this feedback, the final rules included several changes from the original rules.  One of these changes gives whistleblowers a potential bonus if they first report the wrongdoing to their company’s internal compliance department.  The final rule also further defines who is ineligible for a reward.  Those involved in the wrongdoing, lawyers who gain the information from clients, foreign government officials, and internal audit employees are all ineligible to receive a reward.  However, compliance and internal audit workers or public accountants could be eligible to receive a reward as an informant if they observe that a company has not acted on reported wrongdoings and they believe that the company is obstructing an investigation.  To view the complete version of the rule, click here.

Friday, May 20, 2011

Conducting an Annual Compliance Review

It is essential for all investment advisors registered or required to be registered with the U.S. Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940 (“Advisers Act”) to understand that it shall be unlawful under Rule 206(4)-7 of the Advisers Act to provide investment advice unless the investment advisor has adopted and implemented written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.  Rule 206(4)-7 also requires SEC registered investment advisors to review their policies and procedures no less than annually to ensure adequacy and effectiveness of the implementation of the written policies and procedures.    It is important to note that while Rule 206(4)-7 does not apply to most investment advisors that are registered with state securities authorities, many states have adopted similar requirements regarding written policies and procedures; it is essential for all investment advisors to be aware of the compliance requirements of its state in order to prevent regulatory violations.

An investment advisor’s annual compliance review should assess the effectiveness of its written policies and procedures.  When conducting an annual compliance review, at a minimum, investment advisors should take into consideration any compliance matters that may have arose during previous years, changes in the investment advisors business activities or procedures, and any changes to the Advisers Act or the rules thereunder that may have become effective since the investment advisor’s last review.  An investment advisor should determine those areas where new policies and procedures need to be developed or where existing policies and procedures need to be improved.

As part of an examination by a regulatory authority, examiners will expect to find such items as exception and management reports, findings from your review, any resulting corrective actions taken, and/or compliance checklists.  Once an investment advisor has completed its annual compliance review and identified the areas of concern or deficiency, it is equally as important that the investment advisor take appropriate corrective actions in a timely manner.  Examiners will review and assess the effectiveness and timeliness of any corrective actions taken by the investment advisor.  If an investment advisor indicates that it does not have any findings resulting from its annual compliance review, an examiner may be skeptical, which may then result in the examiner conducting additional review and testing to confirm the investment advisor’s lack of findings.

For more details regarding conducting an annual review of your investment advisor’s compliance program, register for the webinar, Conducting an Annual Compliance Review, being presented by RIA Compliance Consultants on June 16, 2011 at 12:00 pm CDT.  A fee of $59.95 will be charged for this webinar.  To register, simple click here.

RIA Compliance Consultants can help your investment advisor conduct its annual compliance review.  For more information on this or any of the other compliance support services provided by RIA Compliance Consultants, click here to schedule a time for one of our senior compliance consultants to call you to discuss your specific needs.

Thursday, May 12, 2011

SEC Proposes Changes to Performance Based Fee Requirements for Investment Advisers

The United States Securities and Exchange Commission (“SEC”) recently proposed a rule that would increase the dollar requirements that must be met before an investment adviser can charge performance based fees.

Currently, under Rule 205-3 of the Investment Advisers Act of 1940, an SEC registered investment adviser can charge a performance based fee if the client is considered a “qualified client”. To meet this standard, the SEC registered investment adviser must manage more than $750,000 for the client or the client needs to have a net worth greater than $1.5 million.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, these amounts are required to be adjusted for inflation. Accordingly, the SEC is proposing the following the new thresholds in order for a client to be considered as a “qualified client”: the investment adviser must manage at least $1 million of assets for the client or the client needs to have a total net worth of greater than $2 million. Included in the proposed SEC rule are details on how future inflation adjustments will be made and a grandfather provision for existing advisory contracts. The proposed SEC rule also contains a provision that would exempt primary residences from the net worth standard.

The SEC is currently seeking public comments on this proposed rule change. Click here to view the full rule.

Wednesday, April 20, 2011

Protecting Against Whistleblower Complaints

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the United States Securities and Exchange Commission (“SEC”) can compensate whistleblowers if they provide original information about a securities law violation.  Further, the Dodd-Frank Act gives whistleblowers protection from employer retaliation for making disclosures that are required under all rules, laws, and regulations subject to the SEC’s jurisdiction. 

While supervised persons are already required to report securities law violations to the firm pursuant to Rule 204A-1 of the Investment Adviser Acts.  Implementing detailed policies and procedures for dealing with customer and employee complaints can reduce the risk of a whistleblower complaint against your firm.  To fully comply with the requirements of the Dodd-Frank Act, these policies and procedures should create a system where employees can submit written complaints to your and your firm can later verify that the employee feels he or she was not retaliated against for making the complaint.

RIA Compliance Consultants can help your firm update its written supervisory to address employee complaints.  Internally addressing any employee complaints reduces the risk that the employee would go to a securities regulator.  So, click here to schedule a time to speak with one of our compliance consultants about updating your written supervisory procedures and reducing the likelihood of a whistleblower complaint against your firm.

Monday, April 18, 2011

SEC May Delay “The Switch” to State Securities Regulators for Mid-Sized Investment Advisors

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), an investment adviser who has between $25 million and $100 million in assets under management will have to withdraw its registration with the U.S. Securities and Exchange Commission (“SEC”) and register with one or more state securities regulators pursuant to the applicable state laws.  When the Dodd-Frank Act was enacted on July 21, 2010, the deadline for an investment adviser to switch its registration was July 21, 2011, the one year anniversary of the bill’s enactment.  However, in a letter dated April 8, 2011, Robert Plaze, the associate director of the SEC’s Division of Investment Management, stated that the deadline for “the Switch” is likely to be extended until the first quarter of 2012.  Click here to view the full letter.

This letter, which was addressed to David Massey, the president of the North American Securities Administrators Association (“NASAA”), stated that the SEC will likely complete implementing rulemaking by July 21, 2011.  The SEC explained that once the SEC adopts the proposed rules, the Investment Adviser Registration Depository system (“IARD”), will need to be re-programmed to facilitate the transition filings.  The SEC anticipates that this re-programming will take until the end of 2011.  Therefore, it is expected that the SEC will consider extending the transition deadline so that SEC registered investment advisers will have to report their eligibility for registration with SEC in the first quarter of 2012.  Investment advisers, who are no longer eligible for SEC registration at that point, will then have a grace period providing them time to register with the appropriate state securities regulators.

This means that investment advisers must continue to comply with current regulations at this time.  As a result, if your investment adviser is currently registered with a state securities regulator and your investment adviser reported more than $30 million in assets under management when you filed your most recent Form ADV Part 1 annual amendment, your investment adviser must register with the SEC and notice file with any required state securities regulators within 90 days of filing your annual amendment.  Once your SEC registration as investment adviser is approved, your investment adviser will need to withdraw its state registration.  Unfortunately, unless your investment adviser reaches the $100 million threshold by time the SEC implements the new requirement, your investment adviser will likely be required to go through the state registration process again and withdraw your investment adviser’s registration with the SEC.  At this point, investment advisers will have to sit and wait until more information is released from the SEC.  RIA Compliance Consultants will continue to provide updates as they become available.

If you need assistance transitioning your investment adviser’s current registration from state to SEC, contact your RIA Compliance Consultant (“RCC”) or click here to schedule a time that one of RCC’s Consultants can call you to discuss your needs.

Wednesday, April 13, 2011

YOUR INVESTMENT ADVISOR NEEDS TO UPDATE POLICIES & PROCEDURES DUE TO NEW FORM ADV PART 2

Now that your investment advisor has completed its new Form ADV Part 2, it’s time to update your investment advisor’s written policies and procedures to reflect the regulatory changes related to the Form ADV Part 2.

If you have not already done so, at a minimum you need to revise your investment advisor’s policies and procedures to disclose the following:

  • the requirement to use the new Form ADV Part 2;
  • the requirements for preparing and maintaining the Form ADV Part 2B supplemental brochures;
  • the new submission requirements for the Form ADV Part 2 through the IARD system;
  • the new initial, annual, and other than annual delivery requirements for Form ADV Part 2A and the Part 2B supplemental brochures; and
  • the annual and other than annual amendment requirements for the new Form ADV Part 2.

It is likely that your investment advisor will have other policies and procedures that need to be updated.  You should carefully review your investment advisor’s policies and procedures to ensure that all required updates are made.

Not maintaining adequate written policies and procedures may result in a violation of Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Advisers Act”).  Additionally, not updating your investment advisors written policies and procedures to reflect the new Form ADV Part 2 requirements may result in violations of Advisers Act Rule 204-1 requiring amendments to your Form ADV; Rule 204-2 requiring the maintenance of true, accurate, and current books and records; and Rule 204-3 requiring the delivery of your written disclosure statement to clients.

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.

For more information on updating your written policies and procedures to reflect the new Form ADV Part 2 and its new deliver requirements, register to attend our webinar, “My New ADV Part 2 Is Filed – Now What?”.  The webinar will be presented on April 19, 2011 at 12:00 pm CDT for a fee of $59.95.  To register now click here.

Tuesday, April 12, 2011

Electronic Delivery of New Form ADV Part 2

 As your investment adviser firm is getting ready to deliver the new Form ADV Part 2 to its investment advisory clients, you may be considering electronic delivery as an option. 

The U.S. Securities and Exchange Commission (“SEC”) will permit an investment adviser to deliver the Form ADV Part 2 electronically; however, certain conditions must be met.  The following are some of the key requirements.

First, prior to electronic delivery, your investment adviser must obtain consent from the client.  A best practice for obtaining consent is to include a specific provision in your investment adviser’s client agreement or utilize a separate form signed by the client.  The SEC has explained that telephonic consent is also acceptable as long as the telephonic consent is recorded and retained (for example via a recorded phone line, or written confirmation of the telephonic consent). 

Second, your investment adviser should take action to ensure that the client knows that the Form ADV Part 2 is available electronically, which may require supplementing the actual electronic communication.

Third, the information available in the electronic format should be comparable to the information available in paper format.  Accessing the Form ADV Part 2 electronically should not be unduly burdensome.  The Form ADV Part 2 may be delivered in pdf format if the client can easily access the documents; for example, your investment adviser could inform the client of the requirement to download pdf files and provide the instructions for downloading pdf viewer software at no cost.

Fourth, your investment adviser is required to have reason to believe that the electronic delivery of the Form ADV Part 2 was successful, which may be evidenced by obtaining evident of the actual receipt (for example, electronic-mail return receipt), or facsimile delivery receipt. 

Click here to view the SEC’s full rules regarding electronic delivery.

Finally, regardless of whether the client has opted for electronic delivery, you investment adviser is required provide a paper copy of the Form ADV Part 2 whenever a paper copy is specifically requested by the client.

Friday, April 8, 2011

NEW FORM ADV PART 2 DELIVERY REQUIREMENTS

If your investment advisor has filed the new Form ADV Part 2A, you can breathe a brief sigh of relief.  However, now it is time to focus on the new delivery requirements.  If your investment advisor is registered with the U.S. Securities and Exchange Commission (“SEC”) and filed the new Form ADV Part 2A, your investment adviser must now begin to deliver the new brochure to its investment advisory clients.  Under the revised SEC Rule 204-3, an SEC registered investment advisor is generally required to deliver a disclosure brochure and one or more brochure supplements that contain all information required in Form ADV Part 2 to each client and prospective client.

SEC Rule 204-3 requires an investment advisor registered with the SEC to deliver the disclosure brochure and brochure supplement(s) to perspective clients prior to or at the time the investment advisor enters into an advisory contract with the client.  Typically this means that the investment advisor will deliver the Form ADV Part 2A and Form ADV Part 2B supplement(s).  If your investment advisor sponsors a wrap-fee program, the investment advisor may need to provide the clients with the Form ADV Part 2A-Appendix 1 Wrap-Fee Brochure (formerly known as the Schedule H of the Form ADV) and the required Form ADV Part 2B brochure supplement(s).

As an SEC registered investment advisor transitions to the new Form ADV Part 2, the investment advisor must deliver the new Form ADV Part 2 to existing clients within 60 days of the date that the investment advisor was required to file it.  Going forward, SEC Rule 204-3 requires an investment advisor to make an annual delivery to its clients if there are material changes to its brochure since its last annual updating amendment.  Within 120-days of an investment advisor’s fiscal year end, the investment advisor must deliver either (1) a current brochure or (2) the summary of material changes to its brochure with an offer to provide a copy of the brochure upon request.  This is different than the past requirement that on an annual basis at approximately the same time each year, an investment advisor must simply offer its clients a copy of its brochure.  There are additional requirements under this SEC Rule that may necessitate deliveries more frequently than annually.

Although there has been an extension for SEC registered investment advisors for delivering the new Form ADV Part 2B supplement brochure(s), investment advisors are going to need to familiarize themselves with the new Form ADV Part 2B supplement brochure delivery requirements as well.  Generally, an investment advisor must deliver to each client a brochure supplement for a supervised person at or before the time that supervised person begins providing advisory services to the client.  It is important to note that the extension only applied to the Form ADV Part 2B supplement brochures and not the Form ADV Part 2A or the Form ADV Part 2A Appendix 1 Wrap-Fee Brochure.

An investment advisor registered with one or more state regulators will need to check with the state securities regulator to determine the delivery requirements.  Many state securities regulators will have to update their state rules and regulations in order to require a state registered investment advisor to follow new delivery requirements.  Some state securities regulators have recommended that a state registered investment advisor comply with the SEC requirements until the state securities regulator’s new rules are released.  In contrast, some state securities regulators do not want a state registered investment advisor using or delivering the new Form ADV Part 2 to clients until it has been reviewed by the state securities regulator and the state securities regulator has granted approval for the investment advisor to deliver the new Form ADV Part 2.

Regardless of whether your investment advisor is registered with the SEC or a state securities regulator, the filing of the new Form ADV Part 2 will result in new delivery requirements.  It is important you’re your investment advisor understand the new requirements to ensure that it is making proper delivery of the Form ADV Part 2A and Form ADV Part 2B brochure supplement(s).  For more information on the new delivery requirements and other guidance on how regulatory changes may affect your investment advisor, please register to attend RIA Compliance Consultants’ webinar, “My ADV Part 2 is Filed – Now What?”, which will be presented on April 19, 2011 at 12:00 pm CDT.  A fee of $59.95 will be charged for this webinar.  To register (click here).

For more information or to speak with someone regarding the services provided by RIA Compliance Consultants (click here) to access an on-line calendar and schedule a time for a consultant to call you.

 

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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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