The U.S. Securities and Exchange Commission (SEC) recently fined thirteen investment adviser firms for promoting performance information for a third party investment product that the SEC alleges the investment adviser firms knew, or should have known, was false. At the heart of the enforcement actions were claims made by a third party money manager who purported to have a time tested investment program that consistently and greatly exceeded standard market returns. The SEC alleged that in fact, the mathematical algorithm underlying the investment program had only been in existence a short period of time and the third party money manager was using selective, back-tested (“hypothetical”) data to promote its new program. Compounding the problem, the investment performance calculations contained an error that further inflated the product’s artificial performance statistics. Despite being notified of the calculation error and knowing the algorithm’s investment performance data was not from actual accounts, the SEC alleged that third party money manager claimed in marketing materials given to investment adviser firms and investment adviser firm clients that the data was genuine. Click here to read the SEC enforcement action on the third party money manager.
Category Archives: Uncategorized
Wyoming to Start Requiring IA Registration
August 15, 2016
In March of 2016 the state of Wyoming signed into law its Uniform Securities Act. The biggest take away from Wyoming’s Uniform Securities Act is that Wyoming will require investment advisers to register with Wyoming securities regulators if the investment adviser has less than $100 million Assets Under Management (AUM). The new legislation will take effect on July 1, 2017.
SEC RISK ALERT FOR INVESTMENT ADVISERS – SHARE CLASS INITIATIVE
August 09, 2016
The Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) recently announced a new initiative focusing on investment advisers’ recommendations regarding mutual fund share class purchases. According to the SEC, investment advisers have a fiduciary duty to recommend the lowest cost mutual fund share class available and appropriate for the client, and must avoid inducing clients to purchase shares in a more expensive share class merely because it generates more revenue for the investment adviser or its affiliates. The investment adviser’s ability to influence its own compensation or that of its affiliates by recommending a more expensive share class creates a conflict of interest that the investment adviser must manage or risk regulatory intervention by the SEC. Click here to read the SEC’s Risk Alert on the Share Class Initiative.
SEC Continues to Focus on Cybersecurity for Investment Advisers
August 02, 2016
As in 2015, the Securities and Exchange Commission (“SEC”) Examination Priorities for 2016 identify cybersecurity as an area of “potentially heightened [market-wide] risk.” Citing the Office of Compliance Inspections and Examinations (“OCIE”) 2015 Risk Alert, the SEC promised to continue using its exams to evaluate investment adviser firms’ cybersecurity preparedness. Click here to read our blog on the OCIE Cybersecurity Risk Alert.
SEC Enforcement Action – Forgivable Loans
July 27, 2016
The U.S. Securities and Exchange Commission (“SEC”) recently fined an investment adviser firm located in Cedar Rapids, IA for its alleged failure to disclose $3 million in forgivable loans that the investment adviser firm received from its broker-dealer. In addition to allegedly failing to disclose the forgivable loan or the resulting conflict of interest to its clients as required under Rule 206(2), the investment adviser allegedly violated Rule 207 when it omitted any discussion of the forgivable loan from its filings with the SEC. In the enforcement action, the SEC noted that the first disclosures regarding the forgivable loan were made on the investment adviser firm’s Form ADV 2A a full three years after first receiving the loan. And even then, the SEC alleged that the disclosures were not truthful or complete: they failed to discuss terms or origin of the forgivable loan; stated that that new representatives “may” receive payments pursuant to the forgivable loan rather than stating that all representatives had in fact already received such payments; did not explain the conflict of interest arising from the payments and the investment adviser firm’s continued use of the broker-dealer; and failed to explain how the investment adviser firm managed this conflict of interest. Click here to read the SEC enforcement action.
Preliminary Renewal Statement Now Available
November 17, 2015
As of yesterday, Monday, November 16, 2015, your investment adviser firm can access, via its Investment Adviser Registration Depository (IARD) account, its Preliminary Renewal Statement for the upcoming year. Investment advisor firms are assessed individual registration fees based on the state(s) that the firm is notice filed or registered in and the number of investment advisor representatives and their approved registration statuses. The amount reflected in the Preliminary Renewal Statement is the amount of renewal fees investment advisors must pay in order to maintain active registration for the firm and its investment adviser representatives.
NASAA Report on Common Investment Adviser Deficiencies
October 02, 2015
The North American Securities Administrators Association (NASAA) released a new report revealing a reported number of state registered investment adviser compliance regulation deficiencies. Every two years, state securities examiners voluntarily report sample data from their investment adviser examinations to NASAA’s Investment Adviser Operations Project Group. State examiners reported 4,983 deficiencies in 22 areas of compliance in 2015. The last time NASAA conducted this report in 2013 state examiners reported 6,482 deficiencies in 20 areas of compliance.
Under Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 (Advisers Act), an investment adviser is prohibited from publishing, circulating, or distributing any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by the investment adviser. With today’s wide spread use of social media, there has been a lot of concern among investment advisers regarding what would constitute a testimonial when using social media. In March 2014, the U.S. Securities and Exchange Commission (SEC), Division of Investment Management, issued a Guidance Update to provide some guidance on the testimonial rule and social media. Through this guidance, the SEC Division of Investment Management is seeking “to clarify application of the testimonial rule as it relates to the dissemination of genuine third-party commentary that could be useful to consumers.”
According to Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) are required to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and the rules that the SEC has adopted under the Investment Advisers Act. An investment adviser’s written policies and procedures must also be designed to detect and promptly correct violations that have occurred. Most state securities regulators have adopted similar rules requiring investment advisers to develop and implement written compliance policies and procedures. Identifying the areas of risk related to the investment adviser’s practice and business model is the first critical step an investment adviser should take to develop strong written policies and procedures. This process of identifying risks that make the investment adviser vulnerable to violations of the Investment Advisers Act is often referred to as a “Risk Assessment,” a “Gap Analysis,” or the compilation of a “Risk Inventory.”
RIA Express – Compliance Manual Drafter
January 04, 2013
Have you ever thought about drafting on your own the compliance manual for your investment adviser but didn’t know where to start? RIA Express – Compliance Manual Drafter is a cost effective solution that provides you an efficient way to do it yourself and create a highly customized compliance manual.
