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.
SEC’s Passes New Rule Requiring Additional Information from Investment Advisers on the Form ADV
September 12, 2016
The United States Securities and Exchange Commission (“SEC”) recently announced changes to the Form ADV used by investment adviser firms to register with the SEC and state securities regulators. Two changes are of particular note. First, investment adviser firms will now be required to disclose all social media platforms the firm uses for business purposes, such as pages on Facebook, Twitter, or LinkedIn. In the event of a regulatory exam, investment adviser firms should also be prepared to produce records related to the content of those sites at any given point in time. The SEC rule does not require investment adviser firms to provide information about personal social media accounts held by employees or about social media sites whose content is generated by third parties and not controlled by the investment adviser. It is important to remember, however, that client communications made by the investment adviser firm’s employees on a personal account would still be subject to other applicable record keeping requirements, such as those relating to performance claims or solicitation. Click here to read the SEC rule release detailing the new requirements.
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.
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.
The Securities and Exchange Commission (SEC) has proposed a new business continuity and transition plan rule that would require investment advisers to develop business continuity and transition plans tailored to the specific needs of their investment advisory business. In its guidance on the new rule, the SEC noted that investment advisers increasingly rely on technology to carry out both vital and day to day functions. When those technological processes are not available, either due to severe weather, system failure, or other causes, investment advisers should have a plan in place to minimize any harm or disruption to their clients’ interests. An investment adviser should also consider what it would do if key personnel are lost or unavailable, or if the investment adviser’s physical office is temporarily or permanently unusable. Click here to read the SEC’s proposed rule in its entirety.
SEC Revises Performance Fee Rules
July 05, 2016
The U.S. Securities and Exchange Commission (“SEC”) recently finalized revisions to Rule 205-3 under the Investment Advisers Act of 1940, raising the net worth requirements for individuals who are charged performance fees. The SEC increased the threshold requirements for “qualified clients” to account for inflation, which the Dodd-Frank Act and section 205(e) of the Advisers Act require it to do every 5 years.
