Wednesday, January 4, 2012
The U.S. Securities and Exchange Commission (“SEC”) has modified the rules used to determine whether an individual is qualified to invest in certain unregistered securities offerings. The amendments were adopted as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
To invest in unregistered securities offerings, an investor must meet the “accredited investor” standards. Typically, to qualify as an “accredited investor” an investor must have a net worth, alone or with a spouse, greater than or equal to $1 million. The new rule modified the $1 million threshold to exclude the value of a person’s home. The rule also excludes from the $1 million net worth calculation, any liabilities secured by the individual’s primary residence with certain limitations. If secured liabilities exceed the fair market value of the residence, then the indebtedness that is greater than the value of the residence is applied against the individual’s net worth. In addition, secured loans must have originated more than 60 days prior to the purchase of the unregistered security to prevent individuals from taking out a second line of equity on their home in order to invest in unregistered securities. Individuals who qualified as “accredited investors” under the prior Securities Act of 1933 standards (pre-adoption of the SEC’s Dodd-Frank Act standards) may use the prior net worth standard for certain “follow-on investments.”
This new rule will go into effect 60 days after it has been published in the Federal Register. To view the full rule release, click here.
For most registered investment advisers, it is now time to file an amendment to your Form ADV. Pursuant to Rule 204-1 under the Investment Advisers Act of 1940 (“Advisers Act”), all investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) must file an amendment to the Form ADV at least annually, within 90 days of the investment adviser’s fiscal year end and more frequently if required by the instructions to Form ADV. Most state securities regulators have similar rules and the Form ADV Instructions specifically indicate that the update instructions apply to “SEC and State Registered Advisers.”
Many investment advisers have a December fiscal year end, which would mean that the 2011 annual amendment filing is due by March 30, 2012. This year is a little different for all investment advisers registered with the SEC. Due to changes to the Advisers Act resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act, all investment advisers registered with the SEC must file an amendment to Form ADV by March 30, 2012 indicating the reason it will remain eligible for SEC registration or that it is no longer eligible for SEC registration and will need to become state registered. For SEC investment advisers with a fiscal year end of October, November, or December 2011, this filing can be done in connection with your annual amendment as long as you have not done the annual amendment filing prior to January 1, 2012. For all other SEC investment advisers, this filing should be done as an other-than-annual amendment filing.
The Form ADV instructions provide specific details regarding which Items must be updated only annually; which items must be updated “promptly” if the information becomes inaccurate in any way; and which items must be updated “promptly” if the information becomes “materially” inaccurate. When filing an amendment to your Form ADV, all investment advisers should review the entire Form ADV to determine what information needs to be updated. This year a review of the entire Form ADV will be especially important because the Form ADV has been revised in several ways. The Form ADV revisions include new items, changes to existing items so as to request additional information or information to be provided in a different manner than in the past, and modifications to the instructions for completing the Form ADV, which most notably includes revisions to the instructions for calculating “regulatory” assets under management.
Failure to update your Form ADV, in accordance with the Form ADV instructions, is a violation of SEC Rule 204-1 and similar state rules and could lead to an investment adviser’s registration being revoked. RIA Compliance Consultants will be presenting a webinar, “Preparing Your Form ADV Annual Amendment” on January 12, 2011 at 12:00 pm CST if you would like more information regarding preparing your Form ADV amendments. The cost for this webinar is $69.95. Click here to register for the webinar.
RIA Compliance Consultants can assist you with your Form ADV amendments. If you are interested in this service, click here to schedule a time to speak with one of our consultants. Existing RIA Compliance Consultants’ clients should contact their consultant directly.
Wednesday, December 21, 2011
Earlier this year, the U.S. Securities and Exchange Commission (“SEC”) adopted rule changes under the Investment Advisers Act of 1940 in order to implement Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the more significant rule changes impacts all registered investment advisers as it centers on revisions to the Form ADV Part 1. Beginning January 1, 2012, all investment advisers registered with the SEC will have 90 days to complete and submit the revised Form ADV Part 1 confirming their eligibility to remain SEC registered. Investment advsiers registered with the SEC with November, December, January and February fiscal year ends are reminded they must also file their official Form ADV Part 1 Annual Amendment within 90 days of their fiscal year end and will likely choose to file their SEC eligibility amendment and annual amendment in conjunction.
There are numerous changes that have been made to the Form ADV Part 1 and registered investment advisers need to devote sufficient time and resources to review, understand and properly respond to the new Form ADV Part 1 items.
Item 1 – Identifying Information
An investment adviser must now disclose:
- the name and contact information of the investment adviser’s Chief Compliance Officer;
- if a person other than the Chief Compliance Officer is authorized to receive information and respond to questions about the Form ADV;
- if the investment adviser is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934 and provide their SEC assigned CIK number (Central Index Key number that the SEC assigns to each public reporting company); and
- if the investment adviser has $1 billion or more in assets on the last day of your most recent fiscal year and the investment adviser’s Legal Entity Identifier if applicable.
Item 2 – SEC Registration
An investment adviser is now required to disclose if they are eligible to register (or remain registered with the SEC.
The vast majority of SEC registered investment advisers will be required to indicate the following.
- If a large investment adviser firm:
An investment adviser is considered to be a large firm if the investment adviser has regulatory assets under management of $100 million (in U.S. dollars) or more, or has regulatory assets under management of $90 million (in U.S. dollars) or more at the time of filing its most recent annual updating amendment and is registered with the SEC.
- If a mid-sized investment adviser firm:
An investment adviser is considered to be a mid-sized investment adviser firm if it has regulatory assets under management of $25 million (in U.S. dollars) or more but less than $100 million (in U.S. dollars) and the investment adviser is either not required to be registered as an adviser in its home state or not subject to examination by the state securities regulator of its home state.
- If no longer eligible to remain registered as an investment adviser with the SEC:
Such investment adviser firms ares required to switch to state registration.
An investment adviser must complete Item 2.B. if it is reporting to the SEC as an exempt reporting adviser and disclose if it:
(1) qualifies for the exemption from registration as an investment adviser solely to one or more venture capital funds; qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;
(2) qualifies for the exemption from registration because it acts solely as an investment adviser to private funds and has assets under management in the United States of less than $150 million;
(3) acts solely as an investment adviser to private funds but it isno longer eligible to check box 2.B.(2) because it have assets under management in the United States of $150 million or more.
Item 5 - Your Advisory Business
An investment adviser must now disclose:
- The number of employees rather than just a range;
- The number of “employees” that are registered representatives of a broker-dealer;
- The number of “employees” that are investment adviser reps of your investment adviser firm;
- The number of “employees” that are investment adviser reps of another investment adviser firm; and
- The number of “employees” that are licensed insurance agents.
Other Item 5 Changes:
- The definition of an individual client has been change to include trusts, estates, 401(k) plans, and IRAs (but not sole proprietorships).
- The types of clients disclosed has been updated to include business development companies, other investment advisers and insurance companies.
- An investment adviser is now required to not only list the percentage of clients by number, but also by the percentage of clients based upon its regulatory assets under management.
- The definition of regulatory assets under management has also been amended to include securities portfolios for which they provide continuous and regular supervisory or management services, regardless of whether these assets are family or proprietary assets, assets managed without receiving compensation, or assets of foreign clients.
- The types of investment advisory activities has also been amended to include management of pooled investment vehicles and “educational seminars/workshops”
- An investment advisor must also indicate if the investment adviser provides investment advice with respect to only limited types of investments.
Item 6 - Other Business Activities
- Listed other business activities now include futures commission merchant (broken out from commodity pool operated or trading advisor), trust company, registered municipal advisor, registered security-based swap dealer, major swap participant, accountant/accounting firm, and lawyer/law firm.
- If another business activity uses a different name from the IA name, it must be furnished on Schedule D.
- If you sell products or services other than investment advice to your clients, that business must be described on Schedule D.
Item 7 - Financial Industry Affiliations and Private Fund Reporting
- The related persons list has been changed to remove investment company and add municipal advisor, swap dealer, major swap participant, futures commission merchant trust company, and sponsor of pooled investment vehicles.
- Foreign affiliates (registered or unregistered) must be reported
- Item 7 of the Form ADV Part 1A has been changed to request more detail on services provided by firms and related persons including custodians, private funds and seminar providers.
Item 8 – Participation or Interest in Client Transactions
- An investment adviser must now disclose whether they receive of any compensation for client referrals.
Item 9 – Custody
- An investment adviser is required to identify the number of custodians used in connection with those assets where the firm has custody and Schedule D of the Form ADV has been revised in order for firms to provide more detail about these arrangements.
Item 11 – Disclosure Information
An investment adviser will be required to indicate if any of the responses in Item 11 relate to any of their supervised persons.
Schedule D of Form ADV
Section 6 of the Schedule D has had significant changes that will require an investment adviser to provide details of their business activities
- Section 6.A. must disclose the name of any other business (if different from your investment adviser’s name).
- Section 6.B. must describe your investment adviser’s primary business (if not investment advisory) or other products and services.
Section 7 of the Schedule D has been added to require private fund managers and those investment advisers with related or affiliated entities that are private funds to provide responses to another 40 to 60 questions depending upon the investment adviser’s activities.
- Under Section 7.A., an investment adviser must identify the type of each related person (same as Item 7.A.), describe the control relationship with each related person, and disclose the registration status of each related person.
- Section 7.B(1) covers any private fund your firm advises. An investment adviser must identify the name and exemption status of each private fund; describe the ownership, advisory services, and private offering of each private fund; and identify each fund’s auditors, prim broker, custodian, administrator and marketer(s).
Section 7.B(2) requires an investment adviser to disclose whether the investment adviser solicits clients to invest in each private fund.
Registered investment adviser may soon be required to monitor client accounts for money laundering activities. James Freis, the director of the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”), recently announced that FinCEN and the U.S. Securities and Exchange Commission (“SEC”) are working together to finalize anti-money laundering regulations that would apply to investment advisers. The proposed rule would likely require investment advisers to implement anti-money laundering policies and procedures and would also require them to report suspicious activity to the appropriate authorities.
Currently, broker-dealers and investment companies are subject to anti-money laundering rules. A rule that would have subjected investment advisers to the similar anti-money laundering requirements was proposed in 2003. However, the rule did not receive much attention from regulators and was withdrawn in November of 2008.
Stay tuned to RIA Compliance Consultants for further updates as we will continue to follow this story.
Wednesday, November 30, 2011
In order for an investment adviser to maintain active state registration or notice filing statuses, as well as active state registration statuses for investment adviser representatives licensed under an investment adviser firm, renewal fees must be paid, in full, by all investment advisers by no later than December 12, 2011. Investment advisers need to be sure to allow sufficient time for submitted funds to be processed and reflected in the renewal account; it is highly encouraged that investment advisers submit their renewal payments electronically by no later than December 8, 2011. If renewal fees are submitted by check via the U.S. postal service, the investment adviser must account for delivery and processing time. It is important to remember that failure to pay renewal fees in full and on time may result in the termination of your investment adviser firm and its investment representative’s active registration statuses. Additionally, many jurisdictions also impose fines against investment advisers that fail to renew properly.
As the renewal process begins to wrap up, most investment advisers should also be preparing for filing the annual Form ADV updating amendment. Investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) and state registered advisers must file a Form ADV annual amendment within 90 days of the investment adviser’s fiscal year. Between January 1, 2012 and March 30, 2012 all SEC registered investment advisers must file a Form ADV Part 1 amendment (annual amendment or other than annual amendment, as applicable) to confirm the investment advisers qualification to remain SEC registered or to indicate that the investment adviser is no longer eligible for SEC registration. Investment advisers that are no longer eligible for SEC registration must register with the appropriate state regulator(s) and must file a Form ADV-W to withdraw registration with the SEC by June 28, 2011. Please note, an investment adviser’s failure to update Form ADV is considered an SEC violation or similar state rules violation and may result in the investment advisers registration being revoked.
If your investment adviser firm would like additional information in regards to RIA Compliance Consultants renewal service, annual amendment services, or services to assist with switching from SEC to state registration, please click here to schedule a time to speak to one of our Senior Compliance Consultants regarding our services. If you are an existing client of RIA Compliance Consultants, you should contact your consultant directly to discuss how your consultant can assist you.
Tuesday, November 29, 2011
For many registered investment advisers, the task of determining ongoing compliance requirements can seem overwhelming. Carrying out an investment adviser’s ongoing compliance duties can be a very manageable process if the investment adviser is aware of its requirements and organizes and assigns responsibilities for the various compliance functions. A compliance calendar can be a valuable tool to assist investment advisers in carrying out their ongoing compliance duties throughout the year. Developing a compliance calendar can help strengthen an investment adviser’s compliance program that must be developed to detect, prevent, and correct possible regulatory violations that can occur throughout the year.
As 2011 comes to an end, investment advisers should review their annual compliance calendars to determine if they should be updated or revised due to internal or regulatory changes that have occurred throughout the year. As your investment adviser develops its compliance calendar, it should consider including all items that should be completed on a monthly, quarterly, and annual basis. Investment advisers should not only think in terms of those items that the regulators have designated as tasks that should be completed each year such as the annual compliance review, annual renewals, or the annual Form ADV update filing but investment advisers should also consider those internal controls and checks that are in place to prevent and detect violations. The following are a few examples of things investment advisers should consider including on their compliance calendars:
- Ongoing reviews and monitoring for proper firm registration and investment adviser representative licensing
- Quarterly fee audits to check that client fees are being billed correctly
- Ongoing compliance training
- Due diligence reviews (e.g., solicitors, third party money managers, service providers)
Investment advisers should use their written compliance policies and procedures as their guide to begin developing a customized compliance calendar. A well written, customized compliance program should lay out the investment adviser’s ongoing compliance requirements and the systems and controls the investment adviser has in place to prevent, detect, and correct compliance violations. Compliance calendars can help to eliminate uncertainties about your investment adviser firm’s activities and can be a great way to preemptively prepare for the investment adviser’s annual compliance review.
As the year quickly comes to an end, make a resolution to prepare for 2012 by creating and implementing a compliance calendar for your investment adviser. For more information and for tips to assist your investment adviser in preparing its compliance calendar, RIA Compliance Consultants is hosting a webinar “Getting Your Compliance Calendar Ready for 2012,” to be held on December 8, 2011 at 12:00 CST. The fee for this webinar is $69.95 and it will last approximately one hour. To register, simply click here.
For more information on our services, click here to schedule a time to speak with one of our Senior Compliance Consultants.
Monday, November 21, 2011
The STOCK Act, a bill that is designed to restrict the ability of elected officials to make securities trades based on non-public inside information, is gaining support in Congress.
The STOCK Act which stands for “Stop Trading on Congressional Knowledge” was originally authored by Rep. Louise Slaughter, a Democrat from New York. Under Rep. Slaughter’s version of the Stock Act, public officials and their employees would be prohibited from trading based on private information obtained through the legislative process and Members of Congress and their employees would have to report their personal securities transactions on a quarterly basis.
In a letter to Congressman Spencer Bachus, the U.S. House of Representatives Chairman for the Committee of Financial Services, Representative Barney Frank urged the Chairman to act on the legislation. While Rep. Frank stated that in his view the problem was not widespread he still felt that the bill was important because of “the importance of those whom [they] represent being fully assured that [they] are behaving appropriately.” After receiving this letter, Chairman Bachus agreed to host a hearing on the issue. Opponents of the bill say that it is unnecessary because elected officials and their staff are subject to the same insider trading laws as the rest of the population.
Stay tuned to RIA Compliance Consultants for further updates as we will continue to follow this story.
Thursday, November 17, 2011
The U.S. Securities and Exchange Commission (“SEC”) recently announced that during its previous fiscal year, enforcement actions against registered investment advisers increased thirty percent over the 2010 fiscal year. During the 2011 fiscal year, which ended in September, the SEC filed a total of 146 enforcement actions against investment advisers and investment companies. For a point of reference, from 2006-2009 the SEC filed on average 82 enforcement actions against registered investment advisers.
The SEC attributed this increase to a “significant reorganization” to the SEC’s Enforcement Division. According to the SEC, in the 2009 and 2010 fiscal years, the Enforcement Division “flattened its management structure, revamped the way it handles tips and complaints, facilitated the swift prosecution of wrongdoers through a formal program that encourages cooperation from individuals and companies in the SEC investigations, and created national specialized units in five priority areas involving complex and higher risk areas of potential securities laws violations.” These changes appear to be effective because the Enforcement Division filed more enforcement actions in 2011 than it ever had before.
Wednesday, November 9, 2011
Investment adviser firms and investment adviser representatives must maintain active registrations and/or notice filing statuses with applicable jurisdictions/states. Investment advisers should be aware that renewing registrations includes paying all applicable renewal fees by December 12, 2011. Unless properly renewed, all investment adviser firm and representative registrations will expire on December 31st of each calendar year. Failure to maintain active registration or failing to properly renew registration may be detrimental to an investment advisor firm. Investment adviser firms and investment adviser representative that are not properly renewed may become ineligible to conduct business affected jurisdictions effective January 1, 2012. Additionally, certain regulators may assess fines against those firms or representatives that fail to properly renew.
Most jurisdictions participate in the IARD Automatic Failure to Renew Program. If your investment adviser firm or representatives are registered or noticed filed in a jurisdiction that participates in the IARD Automatic Failure to Renew Program, your jurisdiction has authorized FINRA to automatically terminate your investment adviser firm and investment adviser representative registrations on December 31, 2011 if your IARD account was not funded in full by the Renewal Deadline. As of September 1, 2011, 44 Jurisdictions are participating in the IARD Automatic Failure to Renew Program.
Beginning November 14, 2011, firms may retrieve their Preliminary Renewal Statements using the IARD/Web CRD system. Your investment adviser’s Preliminary Renewal Statement will reflect the full payment your investment adviser firm must provide to FINRA by Monday, December 12, 2011. Investment adviser firms and representatives with an active “Approve” registration status will have a Preliminary Renewal Statement available.
If you would like help filing any necessary forms to your firm’s IARD account or want to discuss how RIA Compliance Consultants can assist you with your IARD renewals, click here to schedule a time to speak to one of our consultants.
Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) required the U.S. Securities and Exchange Commission (“SEC”) to review the frequency of investment adviser examinations and to consider various ways to increase the frequency of such examinations, such as forming an investment adviser self-regulatory organization (“SRO”). As a result, Congress has begun to look at different ways to increase the frequency of examinations of investment advisers. The solutions that have been proposed and are being debated include forming an independent SRO, giving FINRA the authority to serve as the investment adviser SRO, increasing the SEC’s funding, charging investment advisers a user fee, or shifting the regulatory authority to the Bureau of Consumer Financial Protection. James Angel, a professor at Georgetown University’s McDonough School of Business has proposed another solution. In his article titled “On the Regulation of Investment Advisory Services: Where do we go from here?” Angel suggests that the best solution to provide increased regulatory oversight of investment advisers is to require investment advisers to hire external auditors to conduct compliance reviews. Angel’s research paper was supported by a grant from TD Ameritrade and his research paper indicates that his research included numerous conversations with broker, regulators, advisors, scholars and industry trade groups.
According to Angel, requiring investment advisers to hire external auditors is the best solution for several reasons. Angel suggests that requiring audits by external auditors would increase the frequency of examinations and would allow the SEC staff to focus more on “for-cause examinations.” Also, he suggests that allowing investment advisers to choose their auditor would lower the prices for such services and result in better service. Angel stated that the SEC has already “started down this path by requiring RIA firms that have custody of customer assets to have surprised audits once a year.”
Under Angel’s suggested plan, external compliance reviews would be conducted every five years and compliance audits would be “tailored to the size and risk of the firms.” These reviews would be conducted by qualified industry professionals who hold certain designations like the CFA or CPA and have experience working as an examiner.
Angel dismissed the use of an SRO for several reasons. He notes that SROs have “a strong financial incentive to side with the industry against the consumer.” He references that one of the findings of the investment adviser oversight study that was required by Section 914 of the Dodd-Frank Act was that the only area where the SEC’s investment adviser oversight is deficient is in examination frequency. According to this study, the SEC is still meeting expectations for the rulemaking process and is adequately addressing other industry deficiencies. Based on this, Angel concludes that forming an SRO or allowing FINRA to serve as the SRO for investment advisers is the wrong approach. According to Angel, “[An] SRO’s industry expertise makes it, in theory a better rule-setter,” but the SEC does not have an issue with serving as a rule-setter. Therefore, Angel states that “[e]stablishing a new SRO with new rulemaking authority whose rules must be approved (and likely micromanaged) by the SEC merely adds another level of bureaucracy.”
Stayed tuned to RIA Compliance Consultants for further updates as we will continue to follow this story.
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