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.
Category Archives: Uncategorized
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.
Illinois Becomes Third State to Pass Privacy Law Conflicting with SEC Social Media Compliance Regulations for Investment Advisers
August 01, 2012
Today Illinois Governor Pat Quinn signed a new law that makes it unlawful for employers to request passwords to social media accounts or from demanding access to social media accounts from potential and current employees. Illinois became the third state to pass such legislation after Maryland and Delaware recently adopted similar laws in May and July. After signing the law Governor Quinn said, “Members of the workforce should not be punished for information their employers don’t legally have the right to have. As use of social media continues to expand, this new law will protect workers and their right to personal privacy.”
More Details of the Investment Adviser SRO Bill
May 12, 2012
As we have been discussing, Rep. Spencer Bachus, the Chairman of the U.S. House Financial Services Committee, recently released the Investment Advisers Oversight Act of 2012, which would create a self-regulatory organization (“SRO”) for investment advisers. The Investment Advisers Oversight Act would amend the Investment Advisers Act of 1940 to create a “national investment adviser association” which would be overseen by the U.S. Securities and Exchange Commission (“SEC”). This investment adviser SRO would be given the authority to propose its own rules, subject to SEC approval, and to discipline its members for any violations of current SEC rules.
