In February 2017, the Division of Investment Management of the U.S. Securities and Exchange Commission (“SEC”) issued a Guidance Update “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority.” In this Guidance Update, the SEC explained that an investment adviser may have custody of client funds or securities because of provisions in a custodial agreement entered into by the investment advisory client and a qualified custodian.
SEC Guidance: Robo-Advisers and the Investment Advisers Act of 1940
February 27, 2017
The U.S. Securities and Exchange Commission (“SEC”) recently issued new guidance for investment adviser firms and individual investors considering the use of robo-advisers. Robo-advisers are becoming increasingly popular among investment adviser firms and clients alike, due to their ability to provide targeted investment advice for a lower investment advisory fee, which increases the accessibility of professional investment advice for frugal investors or investors whose account balances may not meet an investment adviser firm’s required minimum account balance. Robo-advisers are not suitable for every client, however, leading the SEC to issue guidance for investment adviser firms seeking to utilize this new technology.
The U.S. Securities and Exchange Commission (SEC) issued a press release announcing that an investment adviser, Morgan Stanley Smith Barney, agreed to pay an $8 million penalty to settle charges under the Investment Advisers Act of 1940 relating to single inverse ETF investments it had recommended to investment advisory clients. Click here to for the entire press release and here for the SEC’s order.
A former investment adviser firm and its principal recently settled claims by the U.S. Securities and Exchange Commission (SEC), admitting that the investment adviser firm principal cherry picked profitable trades for a select number of favored friends, clients, and family members of the firm’s principal.
Additions to RIA Compliance Consultants’ Sample Forms Library
January 17, 2017
RIA Compliance Consultants added four new Sample Forms to our Sample Forms Library. The new Sample Forms are:
FINRA Fines Firms for Deficiencies in Cybersecurity and Recordkeeping
December 29, 2016
The Financial Industry Regulatory Authority (“FINRA”) recently announced fines against 12 broker-dealers for alleged deficiencies related to their cybersecurity and record retention practices. In each case, the firms – who have consented to the fine without admitting or denying the charges – allegedly failed to properly store electronic records in a “write once read many” format that is meant to protect records from illicit alteration. The “write once read many” format is required by FINRA rules and protects broker-dealers against malicious interference with their vital business records, whether by outside hackers or disgruntled insiders.
Updates to Cybersecurity Identity Theft Best Practices Checklist
November 29, 2016
RIA Compliance Consultants updated it Cybersecurity Identity Theft Best Practices checklist in light of the U.S. Department of Treasury Financial Crimes Enforcement Network’s (FinCEN) Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime. On October 25, 2016, FinCEN issued an advisory on reporting requirements for cyber-events. FinCEN issued the advisory because,
SEC Enforcement Action Alleges Cherry-Picking, Double-Dipping, and Fund Mismanagement
October 25, 2016
The U.S. Securities and Exchange Commission (“SEC”) recently instituted administrative cease-and-desist proceedings against a Washington-based registered investment adviser. The SEC alleges the investment adviser engaged in several schemes meant to defraud clients and unjustly enrich the investment adviser’s personal accounts. Among the alleged wrongdoing was the investment adviser’s scheme to “cherry pick” favorable trades for his personal accounts while allocating unfavorable trades to client accounts. During one relevant period, the SEC claims the investment adviser’s accounts showed a return of 1.39% while the affected client accounts had a -0.78% return. In total, the SEC asserts that the investment advisor profited almost $500,000 while client accounts suffered losses of more than $2 million.
Addition to RIA Compliance Consultants’ Sample Forms Library – Non-Access Person Acknowledgement Form
October 13, 2016
RIA Compliance Consultants added a new Sample Form to our Sample Forms Library. Our new Non-Access Person Acknowledgement Form is for investment advisers to document employees who are “non-access persons.” According the Securities and Exchange Commission (SEC), an investment adviser’s “access persons” are, “any of the investment adviser’s supervised persons who have access to non-public information regarding any investment advisory client’s purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund or any person who is involved in making securities recommendations to investment advisory clients, or who has access to such recommendations that are nonpublic.”
SEC Focuses On Wrap Fee Disclosures and “Trade Away” Costs
September 13, 2016
The United States Securities and Exchange Commission (“SEC”) recently fined two investment adviser firms nearly $1 million for alleged failures related to wrap account fee disclosures. As the name implies, a wrap account “wraps” brokerage fees and account management fees together; a customer will generally pay a single fee to the investment adviser, as agreed upon in advance, regardless of how many (or how few) brokerage transactions are placed on the customer’s behalf so long as the trades are placed with the sponsoring broker. For customers with a pattern of active trading, a wrap account can be a cost effective choice. The benefits disappear at an increasing rate, however, each time the customer’s trades are directed to a non-sponsoring broker whose fees are billed in addition to the normal wrap fee.
