As we previously indicated, many investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) still have trouble meeting the requirements of Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act”). Pursuant to Rule 206(4)-7, investment advisers registered with the SEC are required to establish and maintain written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and the rules under the Investment Adviser Act. Most state securities regulations have similar requirements and many state registered investment advisers also have trouble complying with these requirements.
Category Archives: SEC
Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Investment Advisers Act) requires registered investment advisers to have in place written supervisory policies and procedures. Although the rule does not specifically indicate the areas that must be addressed in an investment adviser’s written supervisory policies and procedures, the final rule release indicated some issues that should be addressed in all investment advisers’ written supervisory policies and procedures to the extent they are relevant to the investment adviser; one of these issues is business continuity plans. As a fiduciary, an investment adviser has a responsibility to take the appropriate steps to protect the clients’ interests from risks resulting from the investment adviser’s inability to provide advisory services due to a disruption in business, like a natural disaster; therefore, all investment advisers should have a business continuity and disaster recovery plan. The business continuity and disaster recovery plan should provide guidance regarding the steps and actions that should be taken in the event of an unanticipated interruption of normal business operations. When developing a plan specific to the advisory firm, each investment adviser is encouraged to consider all of the firm’s advisory services and functions, consider any possible significant business disruptions that may occur, and determine a plan of action for each of these potential disruptions.
Registered Investment Adviser Recordkeeping Requirements
August 28, 2013
Rule 204-2 (the “Books and Records Rule”) under the Investment Advisers Act of 1940 (“Investment Advisers Act”) requires investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) to make and keep true, accurate, and current certain books and records relating to its investment advisory business. Most books and records requirements for state registered investment advisers are the same as or similar to the SEC requirements, but each investment adviser needs to make sure that it is familiar with the requirements of the appropriate governing authority. Generally, investment advisers will be required to maintain and preserve most books and records in an easily accessible location for five years from the end of the fiscal year during which the last entry was made on the record or, in the case or marketing pieces or other forms of communications, from the end of the fiscal year during which the investment adviser last published or otherwise disseminated the document. The most recent two years of the required books and records must be maintained in an appropriate office location of the investment adviser. Information must be provided on the Form ADV Part 1 if any of the investment adviser’s books and records are kept in a location other than the investment adviser’s principal office location.
Fee Deduction = Custody for Registered Investment Advisers
August 13, 2013
Under Rule 206(4)-2 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), custody means “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” An investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) will be deemed to have custody of a client’s assets if it meets this definition or if a related person of the investment adviser holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients. Examples of custody include: “possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them; any arrangement (including a general power of attorney) under which [the investment adviser] is authorized or permitted to withdraw client funds or securities maintained with a custodian upon [the investment adviser’s] instruction to the custodian; and any capacity (such as general partner of a limited partnership, managing member of a limited liability company or comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives [the investment adviser] or [its] supervised persons legal ownership of or access to client funds or securities.”
Over the past year, we have written several articles warning investment advisers to prepare for regulatory examinations as both the U.S. Securities and Exchange Commission (“SEC”) and state securities regulators have indicated that investment advisers should expect to see an increase in the number of exams being conducted. RIA Compliance Consultants is seeing the effects of more frequent investment adviser exams. Lately, we have experienced an increase in the number of calls from clients and prospective clients because they have recently been trough an SEC or state investment adviser exam or have been notified by an SEC or state securities regulator that their investment advisers will be audited in the near future. One of the most common inquiries we are receiving is regarding what we can do to assist with preparing or updating the investment adviser’s written policies and procedures. Too often, we are hearing that, although the investment adviser has been registered for some time, the investment adviser does not have customized written supervisory policies and procedures or has not properly maintained current and customized policies and procedures.
Rule 204-(2)(a)(7) of the Investment Advisers Act of 1940 (“Investment Advisers Act”) requires investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”), to preserve “all written communications received and copies of all written communications sent by such investment adviser relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities, or (iii) the placing or execution of any order to purchase or sell any security . . . .” The SEC has stated that electronic communications are considered written communications and are subject to the supervisory and record keeping requirements. Most books and records requirements for state registered investment advisers are the same as or similar to the SEC requirements, but each state registered investment adviser needs to make sure that it familiarizes itself with the requirements of its securities regulator.
The SEC Urged to End Mandatory Arbitration Clauses within Investment Advisory Client Agreements
June 04, 2013
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was signed into law on July 21, 2010, provides the U.S. Securities and Exchange Commission (“SEC”) with the authority under the Investment Advisers Act of 1940 to prohibit or impose conditions upon the use of pre-dispute, mandatory arbitration clauses within investment advisory client agreements.
As Regulators Prepare to Conduct More Examinations, Registered Investment Advisers Should Make Sure They are Prepared
May 29, 2013
Registered investment advisers must make sure that they have strong compliance programs in place and they are prepared for regulatory examinations as regulators expect to increase the number of examinations being conducted. In recent testimony before the U.S. House of Representatives Committee on Financial Services, Chairman Mary Jo White of the U.S. Securities and Exchange Commission (“SEC”) discussed some of the recent activities of the SEC. The testimony addressed several key areas of SEC oversight and focus including the areas of SEC enforcement and the SEC’s inspection and examination program. During the testimony, Chairman White stated, “the [SEC] needs to further strengthen the enforcement and examination functions of the SEC. Strong enforcement of the securities laws is necessary for investor confidence and is essential to the integrity of our financial markets. Successful enforcement actions result in sanctions that deter and punish wrongdoing and protect investors, both now and in the future. Similarly, our National Examination Program is critical to improving compliance by regulated entities, preventing and detecting fraud, and monitoring market risks.”
A Registered Investment Adviser Needs to Ensure that Power of Attorney Over Client’s Account is Limited
May 08, 2013
In order to trade or otherwise access a client’s account held by a custodian, a registered investment adviser must be granted written authorization by the client. Such authorization is generally granted in the form of a power of attorney. Although a power of attorney over a client’s account is necessary for a registered investment adviser to manage the client’s account, it is important for an investment adviser to ensure that the power of attorney is limited to only the functions actually intended by the client and the investment adviser.
The U.S. Securities and Exchange Commission (“SEC”) recently released the final rules and guidelines for Identity Theft Red Flags Rules. Some investment advisers will be affected by the new Identity Theft Red Flags Rules and will be required to develop and implement a written identity theft prevention program.
