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SEC IM Guidance Update 2017-01 Inadvertent Custody: Advisory Contract versus Custodian Contract Authority

By | New in Compliance, SEC

March 9, 2017:  The law of unintended consequences has struck again … this time its target is the investment advisory community wherein advisers who eschew custody and indeed have written policies which prohibit custody, may in fact retain custody and therefore be noncompliant with U.S. Securities and Exchange Commission (“SEC”) Rule 206(4)-2 pursuant to the Investment Advisers Act of 1940, as amended (“Advisers Act”).

The occurrence of unintended custody is a process wherein the custodian and the client, without adviser participation or direct knowledge, execute a custodian agreement which conveys to the adviser access to client funds. Advisers prohibiting client custody under this scenario are now deemed to have client custody.  If you are such an adviser, the SEC wants you to know that your firm has the obligation to fully comply with Custody Rule 206(4)-2. Read More

SEC IM Guidance Update 2017-02 Robo-Adviser: The New Model on the Block

By | New in Compliance, SEC

March 3, 2017:  The evolution of investment adviser business models to reflect “robo-adviser” services represents a fast-growing trend within the advisory industry.  Initially perceived as a service offering directed to the millennial target market, in an era of rising competition in the asset management industry, this business model is now perceived as having the real potential to be a “win-win” for both advisers and retail investors across the board. The robo-model is rapidly gaining traction with the adviser industry as it provides the means to arrest and possibly reverse compressed fee schedules while introducing significant efficiencies in the business of marketing, developing, and executing invest advice.

As always, there is a catch to the happy-ending, in this case, the SEC and its oversight of all registered investment advisers.  The SEC has been monitoring and engaging with robo-advisers to evaluate how robo-advisers meet their compliance obligations under the Investment Advisers Act.  Additionally, the Commission held a “Fintech Forum” in 2016 that included an informative panel on the robo-adviser evolution. Collectively, these efforts have informed the SEC to the point where the Commission was comfortable issuing IM Guidance Update 2017-02 “Robo-Advisers” in late February 2017, focusing upon the robo-adviser business model and the unique compliance challenges it places upon registered advisers. Read More

The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers

By | New in Compliance

February 7, 2017:  The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) published their latest Risk Alert – “The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers” – which provides interesting insight into the Commission’s 2016 examination results for investment advisers.  We have summarized this alert to apprise our clients of the ongoing regulatory scrutiny to which advisers have become accustomed after many years of SEC oversight.

Worthy of note is that the OCIE continues to find deficiencies and refer for enforcement actions on issues which have been attendant to the regulatory regime since the inception of the Compliance Rule in 2004. One exception to this observation is the topic of custody, where the Staff cites ongoing compliance problems with the custody rule, which was substantially amended in 2010.

Given the ongoing ascendancy of compliance within the client due diligence process, it behooves advisers to take note of these findings and to amend policies, procedures, and internal controls to address these issues. Read More

SEC Announces 2017 Exam Priorities

By | New in Compliance, SEC

January 17, 2017:  The SEC recently announced 2017 exam priorities with an expansion of 2016 exam priorities to include electronic investment advice (aka “robo-advisers”) and a continuation of the ongoing effort to protect senior investors as the Commission continues to focus upon products and sales practices which target senior investors.

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) retains primary responsibility along with the Asset Management Unit for examining federally registered investment advisers which include separate account managers, as well as hedge fund and private equity managers. Additionally, the OCIE examines and inspects investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisors.

The 2017 priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing systemic macro risks posed by products and or business practices. In the words of outgoing Chair Mary Jo White: “These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice. Whether it is protecting our most vulnerable senior investors or those investing in the trillion-dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation’s securities laws.” Read More

Risk Alert: OCIE is Scouting Investment Advisory Branch Offices

By | New in Compliance, Risk Alert

December 12, 2016:  The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) announced via Risk Alert its new Multi-Branch Adviser Initiative. The initiative is no surprise given that the 2016 Examination Priorities published in January highlighted OCIE’s interest in examining advisers’ supervisory practices over advisory personnel located in branch offices.

OCIE’s interest is prompted by the fact that advisers are increasingly expanding their geographical footprints, staffing personnel in locations far removed from the adviser’s principal place of business. The Staff is worried about the risks of the “out of sight, out of mind” mentality.

Accordingly, OCIE has launched its Multi-Branch Adviser Initiative to examine advisers operating multiple branch offices to ascertain compliance with federal securities laws in view of the additional and unique risks that arise when operating in this manner. Read More

The OCIE Finds its Voice – and it’s a Whistle

By | New in Compliance, Risk Alert

October 27, 2016:  The U.S. Securities and Exchange Commission (“SEC” or “Commission”) has been proclaiming near and far that its whistleblower program has surpassed $100 million in awards and payments to whistleblowers. Enforcement chiefs have touted the value of the whistleblower program for generating quality leads since the whistleblower rule became effective in 2011.

Advisers and Broker-Dealers Take Note

Well…what exactly does this mean for advisers and broker-dealers? Read More

Amendments to Form ADV and Books and Records Rule

By | New in Compliance, SEC

August 25, 2016:  The SEC adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to enhance the disclosure of information by investment advisers. These changes include reporting of social media sites, Regulatory Assets under Management (RAUM) by client category, SMA AUM by custodian, outsourced CCO information, use of derivatives, and retention of performance advertising records, among others.

The rule takes effect 10/31/16, with a compliance date of 10/01/17. Any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after 10/01/17 will be required to provide responses to the form revisions. For advisers with a 12/31 year-end, the real impact will come in the first quarter of 2018. Amendments to Books and Records Rule 275.204-2 will apply to communications circulated or distributed after 10/01/17. Details of new and amended sections of Form ADV and record retention rules are outlined below. Access the final rule here: More

Proposed SEC Rule 206(4)-4 Adviser Business Continuity and Transition Plans

By | New in Compliance, SEC

June 28, 2016:  The U.S. Securities and Exchange Commission (“SEC”) announced a proposed new rule to require advisers to formally develop business continuity and transition plans.  Proposed Rule 206(4)-4 under the Investment Advisers Act and amendments to Rule 204-2 under the Act are now under consideration during the registrant comment period. Under the proposed rule, it would be unlawful for an SEC-registered investment adviser to provide investment advice unless the adviser adopts and implements a written business continuity and transition plan and reviews that plan at least annually. Read More