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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

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

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

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: https://www.sec.gov/rules/final/2016/ia-4509.pdf.  Read More

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