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.
Category Archives: SEC
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.
SEC Risk Alert-Outsourcing CCO
December 14, 2015
The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) recently issued a risk alert regarding outsourcing compliance activities to third parties. The SEC’s OCIE conducted nearly 20 examinations focusing on SEC-registered investment adviser firms that outsource the position of the Chief Compliance Officer (CCO) to third parties. The risk alert shares SEC staff’s observations and identifies areas of risk associated with an investment adviser firm outsourcing the role of CCO. This SEC Risk Alert comes on the heels of a new rule the SEC proposed in May of 2015, which would require investment advisers to disclose if they outsource the role of CCO. These two actions indicate that the SEC is seriously scrutinizing the effectiveness of an investment adviser firm’s outsourced CCO.
NASAA Announces IARD System Process Fee Waiver for State Registered Investment Adviser Firms
November 05, 2015
The North American Securities Administrators Association (NASAA) announced that the Investment Adviser Registration Depository System (IARD), the national database sponsored by NASAA and the U.S. Securities and Exchange Commission (SEC) that provides investment adviser firms and their investment adviser representatives a single source for filing state and SEC investment adviser registration and notice filings, will waive the IARD system processing fees for state registered investment adviser firms in 2016. While waiving IARD system processing fees for state registered investment adviser firms in 2016, NASAA will continue charging a $10 IARD system processing fee for each investment adviser representative (IAR).
The U.S. Securities and Exchange Commission (SEC) continues to promote the importance of cybersecurity and protecting confidential investor information. On September 22, 2015 the SEC’s Office of Investor Education and Advocacy issued an Investor Alert regarding investment accounts if they become victims of identity theft or a data breach. This Investor Alert came one week after the SEC issued a Risk Alert on the topic of its Cybersecurity Exam Initiative (September 15, 2015).
The SEC’s Cybersecurity Enforcement Action and Risk Alert
September 25, 2015
The Securities and Exchange Commission (SEC) had a busy week regarding investment adviser and broker-dealer cybersecurity. On September 15, 2015 the SEC’s Office of Compliance Inspections and Examination (OCIE) issued a Risk Alert on the topic of its Cybersecurity Examination Initiative. The Risk Alert provides information on the areas of focus for OCIE’s cybersecurity examination (more on this below). The SEC followed up its Risk Alert with an enforcement action against an investment adviser for a cybersecurity incident. The SEC censured the investment adviser and imposed a fine of $75,000. The SEC found that the investment adviser failed to adopt written policies and procedures reasonably designed to protect customer records and information, in violation of Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)) (the “Safeguards Rule”).
To the extent your investment adviser firm claims that its principal office and place of business is located in Wyoming and therefore eligible for registration with U.S. Securities and Exchange Commission (“SEC”) regardless of the amount of assets under management since the State of Wyoming does not register investment advisers, you should pay close attention to a recent SEC administrative proceeding. The SEC found that the sole investment adviser representative/owner of the investment adviser firm resided in another state where he maintained a home office and operated as his primary base. The investment adviser representative/owner utilized the Wyoming offices on an infrequent basis and did not generally direct, control or coordinate activities from Wyoming. Consequently, the SEC found the investment adviser firm violated Section 203A of the Investment Advisers Act of 1940 by improperly registering with the SEC based upon its misrepresentations that the investment adviser firm’s principal office and place of business was in Wyoming. The SEC ordered the investment adviser to cease and desist, censured the investment adviser firm, fined the investment adviser in the amount of $10,000 and required the investment adviser to establish its principal office and place of business in Wyoming and provide evidence thereof.
SEC’s 2015 Examination Priorities for Investment Advisers
January 13, 2015
The Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) released its selected 2015 examination priorities for investment advisers, broker-dealers and transfer agents. Click here to view.
