Navigating the Regulatory Maze for Registered Investment Advisors

House Financial Services Committee Advances Investor Protection Act

noreply@blogger.com (bhill) — Fri, 06 Nov 2009 04:29:00 +0000

Here's our update regarding proposed changes to the regulation of investment advisers.

The Financial Services Committee of the U.S. House of Representatives advanced H.R. 3817, the Investor Protection Act, out of committee yesterday. According to the Financial Services Committee's press release, key provisions of this bill include the following:

an independent study of the regulatory structure for the securities industry;
a doubling of the authorized fund for the U.S. Securities and Exchange Commission ("SEC") over five years;
a requirement that every financial imtermediary who provides advice will have a fiduciary duty towards the customer; and
an authorization for the SEC to prohibit mandatory arbitration provisions in customer contracts.

Although there was no reference in the Financial Services Committee's press release concerning the amendment to H.R. 3817 approved last week, which raises assets under management requirement from $25,000,000 to $100,000,000, this amendment will effectively result in many registered investment advisors being regulated at the state instead federal level.

Investment News is reporting that H.R. 3817 advanced out of committee with the controversial amendment that gives Financial Industry Regulatory Authority ("FINRA") regulatory authority over registered investment advisors, which are also dually registered as broker-dealers. According to Investment News, Financial Services Committee Chairman opposes this provision and will offer an amendment during the floor debate to strip out this provision from H.R. 3817.

Once the House releases a mark-up of H.R. 3817 as passed out of committee, RIA Compliance will share with its readers additional details about the proposed legislation.

2010 IARD Renewal & Form ADV Annual Amendment Requirements

noreply@blogger.com (bhill) — Mon, 02 Nov 2009 02:24:00 +0000

Beginning Monday, November 16, 2009, registered investment advisor firms can access their 2010 Preliminary Renewal Statements via their IARD account. The Preliminary Renewal Statement must be paid, in full, by Friday, December 11, 2009. Because it takes approximately two days for payment to post to the IARD account, the funds should arrive no later than Wednesday, December 09, 2009, to ensure the money is posted to your IARD account by December 11.

RIA Compliance Consultants also wants to remind registered investment advisor firms of their obligation to update Form ADV on at least an annual basis in the form of an Annual Amendment. This is required under U.S. Securities and Exchange Commission ("SEC") Rule 204-1 of the Investment Advisers Act of 1940 and similar rules of state securities regulators. The Form ADV Annual Amendment must be completed within 90 days after a registered investment advisor firm's fiscal year end. Since the majority of investment advisor firms coordinate their fiscal year end with the end of the calendar year, the Form ADV Annual Amendment has become a requirement that must be completed at the beginning of each year for most advisor firms. The main item that must be updated on the Form ADV Annual Amendment is the investment advisor firm's assets under management. Other items such as, but not limited to, the number of accounts, clients, employees, and investment advisor representatives ("IARs") should also be updated. The Form ADV Annual Amendment can also be used to disclose any material changes. Keep in mind, however, that material changes need to be disclosed within 30 days no matter when they take place. Material changes include items such as, but are not limited to, reportable disciplinary and financial disclosures, changes in contact information, changes to custody disclosures and changes due to successions and ownership arrangements.

RIA Compliance Consultants is offering a special package that includes assistance with completing both the annual renewal requirement and filing the Annual Amendment to Form ADV Part 1. For the low price of $450, RIA Compliance Consultants will help your firm confirm its registration status in all necessary jurisdictions and confirm the registration status of all investment advisor representatives for 2010. You will also receive an Annual Amendment Questionnaire for you to complete so that we may prepare and file your Form ADV Part 1 Annual Amendment within the necessary time frame.

Engagements received by RIA Compliance Consultants after November 16 are subject to availability so complete and return the Agreement for Services today! Click below to view the Consulting Agreement for IARD Renewal and Annual Amendment Services.

*If you are an existing hourly retainer client of RIA Compliance Consultants, you do not need to complete the Agreement for Services. Simply contact your lead consultant to sign-up for this service.

**If you are an annual retainer client of RIA Compliance Consultants, this service is included in your retainer agreement. To learn more about our retainer services and fees, please contact us at 877-345-4034.

IARD%20Renewal.Annual%20Amendment.2010.pdf

Deadline Approaching for Investment Advisers to Complete the New Form U4 Regarding Regulatory Actions

noreply@blogger.com (bhill) — Thu, 29 Oct 2009 16:49:00 +0000

Registered investment adviser firms must file amended Form U4s for all their investment adviser representatives to provide answers to the new regulatory action disclosure questions. The North American Securities Administrators Association ("NASAA") has published notice clarifying that the new questions on the FINRA Form U4 and the deadline of November 13, 2009 applies to investment adviser representatives.

Six regulatory action disclosure questions were added to the Form U4 on May 18, 2009. The new disclosure questions are Questions 14C(6)(7) and (8) and Questions 14E(5)(6) and (7). These questions are recorded with a blank answer on an investment adviser representative’s Form U4 filing, and investment adviser firms must provide answers to these new disclosure questions by not later than November 13, 2009. In order to respond to the new disclosure questions, a firm will need to submit Form U4s with responses to these new questions for all of the firm’s investment adviser representatives. If the firm determines that a “yes” response is required for any of the new disclosure questions, then the U4 filing would need to include a corresponding completed disclosure reporting page regarding the “yes” answer.

For additional details regarding the new Form U4 regulatory action questions, you may review information published on the FINRA website at the Approved Changes to Forms U4 & U5 web page and in the FINRA Regulatory Notice 09-23.

RIA Compliance Consultants, Inc. can help you file updated Form U4s for your investment adviser representatives. If you would like our assistance in updating the Form U4s for your investment adviser representatives, please contact our office at 877-345-4034.

House Financial Services Committee Votes to Raise Assets Under Management for SEC Registration as Investment Adviser from $25 Million to $100 Million

noreply@blogger.com (bhill) — Thu, 29 Oct 2009 01:26:00 +0000

Investment News is reporting that the Financial Services Committee of the U.S. House of Representatives passed today an amendment to the Investor Protection Act, H.R. 3817, whereby the general assets under management requirement to register with the U.S. Securities and Exchange Commission ("SEC") as an investment adviser would increase from $25 million to $100 million.

This proposed change to the current regulatory structure would make state securities regulators the primary regulator for registered investment advisers with less than one hundred million dollars ($100,000,000) of assets under management (assuming the adviser didn't qualify for exemption to the general AUM requirement). Investment News is also reporting that the Committee passed an amendment to H.R. 3817 authorizing a study of whether investment advisers should be subject to self-regulatory organization.

However, what's unclear is whether the Investor Protection Act, H.R. 3817, has been advanced out of the Financial Services Committee. As of Wednesday evening, it appears the bill is still in mark-up since the website for the Financial Services Committee does not indicate that the Investor Protection Act has been passed by the Committee.

Private Investment Advisers Registration Act is Passed by House Committee on Financial Services

noreply@blogger.com (bhill) — Wed, 28 Oct 2009 03:46:00 +0000

The Financial Services Committee of the U.S. House of Representatives passed H.R. 3818, the Private Fund Investment Advisers Registration Act, which requires advisers to private funds to register with the U.S. Securities and Exchange Commission ("SEC").

The Wall Street Journal reported that the Committee agreed that private funds managing less than $150 million would be exempt from the SEC registration requirement. The WSJ noted that small business investment companies ("SBICs") subject to the oversight of the U.S. Small Business Administration along with venture capital fund managers will be exempted from SEC registration. However, it appears that private equity funds and single family offices will be required to register with the SEC in the bill passed by the Financial Services Committee. MarketWatch reported that Rep. Susan Kosmas explained that this bill includes a one-year transition period before registration with the SEC is mandatory for private funds.

The next stop for H.R. 3818 is the floor of the U.S. House of Representatives. RIA Compliance Consultants will continue to keep readers abreast of the status of the bill in the House and its counterpart in the Senate.

Upcoming Webinar: Supervising Gifts & Political Contributions of Investment Adviser Representatives

noreply@blogger.com (bhill) — Mon, 26 Oct 2009 16:03:00 +0000

Although the U.S. Securities and Exchange Commission (“SEC”) does not currently have any specific rules associated with the giving or receiving gifts or political contributions by representatives affiliated with a federally registered investment adviser, the influencing of others through gifts and political contributions in the context of an investment advisory relationship creates a potential conflict of interest, which must be addressed and mitigated by an investment adviser.

If you are interested in learning more about recent enforcement actions against investment advisers which lacked safeguards related to gifts and political contributions, please consider purchasing a seat for only $59.95 to our upcoming webinar, “Supervising Gifts and Political Contributions,” on Wednesday, October 28, 2009 from 12:00 – 1:00 p.m.

During this webinar, our speaker, Bryan Hill, will share best practices for supervising gifts and political contributions while reviewing recent SEC enforcement actions against investment advisers, the proposed political contribution rule for investment adviser reps, current rules of FINRA and the U.S. Department of Labor which may apply to some investment adviser representatives and guidance from certain professional accrediting organizations on this subject.

Purchase your webinar seat for $59.95: www.RIA-Compliance-Consultants.com/webinars.

Is Your RIA Supervising the Gifts and Political Contributions of Its Investment Adviser Reps - Learn About the SEC's Proposed Pay-to-Play Rule

noreply@blogger.com (bhill) — Wed, 07 Oct 2009 01:41:00 +0000

The U.S. Securities and Exchange Commission ("SEC") recently proposed new SEC Rule 206(4)-5 under the Investment Advisers Act of 1940. According to the SEC, the proposed rule is intended to curtail "pay to play" practices by registered investment advisers that seek to manage money for state and local governments.

This SEC proposal relates to money managed by state and local governments under public programs such as public pension plans for government employees, retirement plans in which teachers and other government employees can invest monies, and 529 plans that allow families to invest money for college. The state and local governments often hire and pay outside registered investment advisers to provide advisory services such as direct investment management or recommendations about which investments to make. The outside registered investment advisers often are selected by one or more trustees who have been appointed by elected officials. The term "pay to play" has been coined because the selection of such trustees can be undermined if elected officials ask investment advisers for political contributions or if elected officials otherwise make it understood that only investment advisers who make contributions will be selected to provide advisory services to the public programs subject to the control of the elected official.

Pay to play practices have been recognized as a significant problem. During the past several years, the SEC has brought enforcement actions in New York, New Mexico, and Connecticut, and likewise, there also have been criminal prosecutions in New York, New Mexico, Illinois, Ohio, Connecticut, and Florida over pay to play schemes.

If you are interested in learning more about recent actions related to registered investment advisers involved in "pay to play" schemes and the SEC's proposed rule to limit "pay to play" practices, please purchase your seat for only $59.95 to our upcoming webinar, "Supervising Gifts and Political Contributions," on Wednesday, October 28, 2009 from 12:00 - 1:00 p.m. CST.

NASAA President Appears on Fox News as an Advocate of Raising the AUM Requirement for SEC Registration as an Investment Adviser

noreply@blogger.com (bhill) — Mon, 05 Oct 2009 20:08:00 +0000

Denise Voigt, the Texas Securities Commissioner and incoming President of the North American Securities Administrators Association ("NASAA"), recently appeared on Fox News to discuss why state securities regulators have the experience and will to take on more regulatory authority with respect to registered investment advisers.

In particular, the Texas Securities Commissioner repeated her previous call for raising the required assets under management from $25 million to $100 million in order to register as an investment adviser with the U.S. Securities and Exchange Commission ("SEC"). She explained that the SEC is overwhelmed, understaffed and lack the will to regulate and protect the smaller investor.

To view a video of Ms. Voigt's appearance on Fox News, you can visit the following page on NASAA's website: http://www.nasaa.org/nasaa_newsroom/11313.cfm.

A Registered Investment Adviser Needs to Ensure that Power of Attorney Over Client's Account Is Limited

noreply@blogger.com (bhill) — Fri, 02 Oct 2009 00:19:00 +0000

In order to trade or otherwise access a client’s account held by a custodian, a registered investment adviser must be granted written authorization by the client. Such authorization is generally granted in the form of a power of attorney. Although a power of attorney over a client’s account is necessary for a registered investment adviser to manage the client's account, it is important for an investment adviser to ensure that the power of attorney is limited to only the functions actually intended by the client and the investment adviser.

Typically, an investment adviser’s limited power of attorney will grant a registered investment adviser the ability to only (1) trade the client’s account; (2) receive statements, confirmations and other documents such as proxies related to the account; and (3) make withdrawals from the account solely for the purpose of deducting the agreed upon investment advisory fees. Any additional authority over a client’s account is generally not needed or wanted by an investment adviser and subjects the investment adviser to additional regulatory scrutiny.

Unfortunately, registered investment advisers are occassionally granted full power of attorney on client accounts, but do not realize the ramifications that results from a full power of attorney. In addition to trading and receiving account documents, full power of attorney allows the investment adviser to transfer money to third parties, change the registration of the account, and completely liquidate and close the account. Under a full power of attorney, this can be done without the client’s consent. A full power of attorney is generally not needed and not desired by an investment adviser. Regardless of whether such authorization is intended or not, the investment adviser with a full power of attorney over a client's account will be deemed by most securities regulators as to have custody over the client account. When a state registered investment adviser is granted full power of attorney, the firm must comply with its state’s often onerous custody requirements. Under such circumstances, the SEC also performs greater scrutiny of custody situations during routine examinations.

Are you certain your firm’s power of attorney is limited to only the authorizations the firm needs to perform its investment advisory functions and does not provide for authorization that the firm does not want or use thus potentially subjecting the firm to needless regulatory requirements and scrutiny?

On October 8, 2009, RIA Compliance Consultants will be presenting its webcast titled “Auditing Investment Advisory Fee Calculations, Deductions and Refunds” during which some attention will be given to an investment adviser’s legal authority to withdraw advisory fees from client accounts and ensuring such authority is limited to only what is necessary. The webcast will also discuss custody ramifications relating to the deduction of advisory fees directly from client accounts.

Join Our Webinar - Auditing Investment Advisory Fee Calculations, Deductions & Refunds

noreply@blogger.com (bhill) — Mon, 21 Sep 2009 20:04:00 +0000

Earlier this year, the U.S. Securities and Exchange Commission ("SEC") proposed new requirements for registered investment advisor firms that have custody of clients funds and securities. According to current SEC Rule 206(4)-2, Custody or Possession of Funds of Securities of Clients, custody is defined as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. Custody includes –

(i) Possession of client funds or securities, (but not of checks drawn by clients and made payable to third parties,) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them;

(ii) Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and

(iii) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.

The SEC’s proposed changes to Rule 206(4)-2 do not change the definition of custody or change what is considered custody, but impose additional requirements such as hiring a public accounting firm to perform an annual surprise examination for purpose of verifying client assets. Not surprisingly the proposed rule changes prompted significant discussion and resistance. Most of the investment advisory industry’s resistance has been aimed at the applicability of the audit requirements for the most common form of custody, automatic fee deductions from client accounts. It is estimated by the SEC that a large majority of SEC registered investment advisors automatically deduct their advisory fees from client accounts. The SEC considers this practice to be a type of custody covered under item (ii) above.

Many within the investment advisory industry believe automatic fee deductions pose lower risk than other forms of custody. While this may be true, there are significant risks and potential conflicts associated with automatically deducting advisory fees from client accounts. The fact of the matter is that the SEC and state securities regulators have brought several enforcement actions alleging fraudulent conduct involving the misappropriation and/or misuse of client funds directly related to automatic fee deductions. Fee deduction activities continue to be a focal point during regulatory examinations. Investment advisor firms need to have strong checks and balances to ensure their fee deduction policies and procedures are sufficient. Testing mechanisms need to be reasonably designed and then implemented to prevent, detect and correct errors from occurring during the fee calculation and deduction process. More importantly, supervisory procedures need to protect against fraudulent activity. All registered investment advisor firms need to make sure their compliance procedures go beyond the minimum regulatory requirements of having written client authorization to deduct fees from accounts and ensuring fee calculations appear on client account statements. Procedures need to include ongoing monitoring and auditing of the process.

Some of the more common deficiencies we often note when conducting mock regulatory reviews and annual assessments for our clients include (1) investment advisory fees being deducting from the wrong account; (2) miscalculation of quarterly or monthly investment advisory fees; (3) the agreed upon investment advisory fee between the client and advisor incorrectly entered into the investment advisor’s client database system; (4) the misconception that the client’s qualified custodian is auditing the accuracy of the investment advisor’s investment advisory fee calculations; (5) the investment advisor intentionally or unintentionally overcharging client accounts; and (6) the investment advisor failing to develop procedures to supervise and monitor the investment advisory fee calculation and deduction process.

Does your registered investment advisor firm adequately monitor its fee deduction process? Do you have questions about this important compliance function? If so, join us on Thursday, October 8 at 12:00 p.m. CST for a live webcast titled “Auditing Investment Advisory Fee Calculations, Deductions & Refunds”. During this informative one-hour online event, we will discuss the implications of proposed changes to SEC Rule 206(4)-2, recent regulatory enforcement actions, and best practices with respect to fee calculations, deductions and refunds. The fee to sign up for the webcast is $59.95. You can register now by clicking the link below.

SEC Chair Predicts Detailed Disclosures by Hedge Funds to Regulators

noreply@blogger.com (bhill) — Sun, 20 Sep 2009 02:16:00 +0000

The Wall Street Journal ("WSJ") recently reported that "Securities and Exchange Commission Chairman Mary Schapiro predicted that any new regulation of hedge funds will likely require detailed disclosure to regulators, but not necessarily as much disclosure to the public."

According to the WSJ, "[i]f proposed legislation under consideration by Congress to require hedge-fund advisers to register with the SEC is enacted, Ms. Schapiro predicted that the final regulation will result in "fairly detailed reporting to regulators and some level of public reporting to investors."

However, the WSJ noted that Schapiro "...acknowledged that in some instances, such as dealing with hedge funds, it can be hard to strike a balance between informing investors without disclosing too much about firms' trading strategies. She said there are still "issues to be resolved" in this area."

NASAA President Calls for Raising AUM to $100 Million for SEC Registration of Investment Advisers

noreply@blogger.com (bhill) — Sat, 19 Sep 2009 21:38:00 +0000

In a recent speech at the North American Securities Administrators Association ("NASAA") annual conference, Texas Securities Commissioner, Denise Voigt Crawford who is the incoming NASAA President, revealed that the SEC might raise the asset under management ("AUM") threshold for SEC registration of investment advisers from $25 million to $100 million, and NASAA supports such a change.

The NASAA President explained that "...the current dividing line between federal and state regulation of investment advisory firms is $25 million of assets under management. The SEC might increase this to $100 million of assets under management. Given the difficulty the SEC has in examining such a large number of investment advisory firms, I think this is a good idea. NASAA has endorsed such a change and will work closely with the SEC to make this happen."

For those smaller SEC registered investment advisers that have voiced concerned about the burden of the proposed SEC rule requiring an annual surprise audit by a public accounting firm, such a change is likely to be well received by many investment advisers, especially since NASAA has indicated that it doesn't believe the surprise audit requirement is necessary for investment advisers deemed to have custody solely due to automatic fee deduction.

NASAA Proposes Model Rule Regarding Solicitors for Registered Investment Advisors

noreply@blogger.com (bhill) — Tue, 08 Sep 2009 00:48:00 +0000

The Investment Adviser Regulatory Policy and Review Project Group of the North American Securities Administrators Association (known as "NASAA" and essentially consisting of state securities regulators) recently solicited comments from the public on a proposed model rule regarding solicitors for registered investment advisors. The comment period ended in August and NASAA has not yet released a final version of the model rule. According to NASAA’s website, the model rule “is necessary and appropriate to facilitate the regulation of solicitor activity for the benefit of investors, to promote uniformity among the states and between states and federal rules, and to provide guidance to the industry.”

The proposed model rule for solicitor arrangements reaffirms the solicitor/investment advisor written agreement and client disclosure requirements that are already on the books in many states. But the proposed model rule goes further to make very clear that the solicitor must be licensed as an investment advisor representative. While most states require solicitors to license as investment advisor representatives, there is a high level of confusion within the industry regarding solicitor registration and qualifications. Currently, only about 10 states do not require solicitors to license as investment advisors so the model rule includes a provision exempting solicitors from the investment advisor representative licensing requirements for states that choose to do so. The model rule is designed to mirror Rule 206(4)-3 of the U.S. Securities and Exchange Commission ("SEC") provisions for statutory disqualifications, written agreements and disclosures to clients.

NASAA’s proposed rules are being provided under the Uniform Securities Act of 1956 and under the Uniform Securities Act of 2002. Therefore it is important to note that just because NASAA adopts a new model rule, it does not mean every state will automatically adopt the rule. While many states strictly follow the Uniform Securities Act’s provisions for investment advisors, some do not. Also, the adoption of any new rule must be made by the individual state. For example, in some states the securities division is given more latitude to implement new rules while other states securities division may require specific authorization from the state legislature. You can read more about the proposed rule on the NASAA website.

To learn information about the regulatory requirements for investment advisor solicitor arrangements, you can purchase our webinar, “Establishing & Supervising Solicitor Arrangements," recorded on August 19, 2009 and view on-demand for a purchase price of $59.95. During this webinar, our consultants review in detail the requirements of SEC Rule 206(4)-3, the registration requirements of certain states and best supervisory practices for an investment adviser utilizing solicitors.

Purchase this on-demand webinar, “Establishing & Supervising Solicitor Arrangements," for $59.95 by clicking below.

Registered Investment Advisors Need to Monitor Outside Business Activities of Investment Advisor Representatives

noreply@blogger.com (bhill) — Mon, 07 Sep 2009 23:17:00 +0000

The establishment of policies and procedures designed to monitor the outside business activities ("OBAs") of supervised persons (i.e. officers, directors, partners, investment advisor representatives, and employees) should be part of every registered investment advisor firm's written compliance programs. RIA Compliance Consultants, Inc. suggests that some type of "outside business activities form" be created and all supervised persons be required to complete the form on an annual basis and whenever changes are needed. A supervised person should disclose and seek approval of an outside business activity prior to engaging in the activity.

There are two important regulatory reasons for monitoring outside business activities: (a) Form ADV disclosure purposes, and (b) Form U4 disclosure purposes. A registered investment advisor is required to disclose to clients all potential and real conflicts of interests including outside activities of the firm and its related persons. Item 8 of Form ADV Part II outlines specific business activities or affiliations of the firm's related persons that must be disclosed. These include affiliations with institutions such as banks, real estate brokers, and broker/dealers. Individuals listed under Item 6 of Form ADV Part II need to provide detailed business background for the preceding five years. Finally, Item 7.C. of the Form ADV Part II may require the registered investment advisor firm to provide a description of the supervised person's outside activity and the amount of time spent on that activity.

In addition to disclosing outside activities on the Form ADV, investment advisor representatives ("IARs") must disclose their employment history for the previous 10 years and their current outside business activity on the Form U4. It is the investment advisor representative's ultimate responsibility to keep the Form U4 current and complete, particularly his/her employment and other business background.

Registered investment advisors need to be cognizant of the 30 day deadline for making material updates to the Form ADV and Form U4. Whenever an individual or firm's outside business activities change, those activities need to be updated on the Form ADV and/or Form U4 within 30 days of the change.

Jarrod James, Vice President of RIA Compliance Consultants, will be the featured speaker during our webinar, "Addressing Outside Business Activities and Conflicts of Interest," on Tuesday, September 15, 2009 from 12:00 p.m. to 1:00 p.m. CST.

Purchase your webinar seat for $59.95:
www.RIA-Compliance-Consultants.com/webinars.

RIAs Required to Disclose Conflicts of Interest & Outside Business Activities

noreply@blogger.com (bhill) — Mon, 07 Sep 2009 20:30:00 +0000

A registered investment advisor has a fiduciary duty to disclose all real and potential conflicts of interests to clients as well as all material arrangements. Often times this broad requirement encompasses outside business activities the registered investment advisor considers non-advisory and would otherwise not disclose to clients. For example, a registered investment advisor that spends only 10% of its time on investment advisory activities and 90% of its time on non-advisory activities is required to disclose this fact. It must be made clear to all clients that the registered investment advisor will not devote all of its time to investment advisory functions unlike other registered investment advisor firms whose only activity is acting as an investment advisor.

An outside business activity may create an incentive to the registered investment advisor that is not in the best interests of the client. For example, an investment advisor representative that is also an insurance agent may decide to recommend a particular insurance product based on an incentive to sell the product (e.g. higher commission, soft-dollars, trips, marketing allowance) rather than recommending the product solely based on the needs of the client. This is a classic conflict of interest that must be disclosed to investment advisory clients. A registered investment advisor’s failure to disclose outside business activities and the outside business activities of its supervised persons is an all-too-often deficiency during examinations by the U.S. Securities and Exchange Commission ("SEC") and state securities regulators.

A related type of deficiency is the failure to adequately monitor and approve outside business activities considered investment related. Certain financial related activities are considered higher risk for conflicts of interest between an investment advisor representative ("IAR") and his/her clients and even his/her firm. These activities include wholesaling investment products, affiliation with a broker/dealer, acting as a mortgage broker, working for a second registered investment advisor, and serving as a limited partner or managing member of a private investment. Before a registered investment advisor allows its supervised persons (which includes all officers, directors, partners, investment advisor representatives and employees) to engage in these types of activities, it is imperative that the supervised person fully disclose the activity and provide detailed documentation of how the activity will impact their affiliation with the registered investment advisor. If the activity does not comply with the registered investment advisor’s compliance policies and procedures, the registered investment advisor should not approve the activity.

For more information and guidance regarding outside business activities common to many registered investment advisors and to learn some best practices with respect to disclosure and mitigation of conflicts of interest, please consider attending our webinar, “Addressing Outside Business Activities and Conflicts of Interest,” on Tuesday, September 15, 2009 from 12:00 p.m. to 1:00 p.m. CST.

Purchase your webinar seat for $59.95 at www.RIA-Compliance-Consultants.com/webinars.

Upcoming Webinar Addressing Succession Planning for RIAs

noreply@blogger.com (bhill) — Mon, 31 Aug 2009 02:40:00 +0000

Many individuals who operate their own registered investment adviser firms have a tendency to delay succession planning and deal almost exclusively with shorter-term business issues. However, succession planning is a critical issue, in particular, for a small registered investment adviser firm due to the risks that one key investment adviser representative could become unavailable, on either a temporary or permanent basis, to serve clients and operate the registered investment adviser firm. In the interest of both the investment advisory practice and its clients, it is critical to plan for continuity and succession of the registered investment adviser firm.

Ideally, a registered investment adviser's business succession plan should be in place well in advance of any investment adviser representative's planned or unplanned departure from the investment advisory practice. There are several components that comprise a successful succession plan, such as: (a) creating an ideal scenario for departure of the investment adviser representative; (b) identifying and evaluating potential buyers or other successors; (c) deciding how the registered investment adviser firm's responsibilities will be distributed to the successors; (d) if necessary, determining who will mentor the successors; (e) determining the value of your registered investment adviser firm; and (f) addressing tax implications of the succession and implementing strategies to reduce taxes.

Particularly, with respect to creating an ideal scenario for planned or unplanned departure of any investment adviser representative and in determining the value of your registered investment adviser firm, it is critical to be aware of financial industry regulations and requirements affecting a registered investment adviser. These include FINRA's Continuing Commissions policy and corresponding SEC guidance regarding continuing commissions for registered representatives of a broker-dealer; the privacy policies of relinquishing and receiving firms and custodians if the succession plan will involve a change of the actual investment adviser firm entity or the custodian for client accounts; licensing and registration requirements for the investment adviser firm and any affiliated investment advisory representatives; assignment provisions of the Investment Advisers Act, restrictive covenants, such as non-solicitation or non-compete agreements, affecting the investment adviser representative and/or intended successors; and continuity of existing business contracts.

For more information and guidance about the regulatory considerations when planning for succession within your registered investment adviser, purchase a webinar seat for "Planning for Succession" sponsored by RIA Compliance Consultants and presented by our affiliated law firm, Bryan Hill Attorney at Law, on Tuesday, September 8, 2009 from 12:00 -1:00 p.m. Central Standard Time. The charge for this webinar is $59.95.

Purchase for $59.95 your webinar seat now: www.RIA-Compliance-Consultants.com/webinars

Federal Credit Union Must Utilize CUSO to Register as Investment Adviser

noreply@blogger.com (bhill) — Mon, 17 Aug 2009 21:29:00 +0000

Recently the National Credit Union Administration (“NCUA”) has issued guidance regarding the offer of investment advisory services by federal credit unions. Specifically, the NCUA has stated that the employee of a federal credit union may not provide investment advisory services that would subject that employee or the federal credit union to federal or state securities laws, and has noted that the regulation and oversight of investment advisory services is conducted by the SEC, and by the states, pursuant to the Investment Advisers Act of 1940.

The NCUA has stated that there is no authority under the Federal Credit Union Act for federal credit unions to act as registered investment advisers to provide investment advice. The NCUA has indicated that federal credit union employees may conduct activities that it considers financial counseling but are not permitted to offer investment advisory services. The NCUA provided some specific guidance explaining its distinction between “financial counseling” and investment advice. In its May 2003 Letter (OGC Op 03-0308 (May 1, 2003)), the NCUA references the preamble to NCUA’s incidental powers rule, which had the following explanation with respect to the permissible activity of financial counseling:

…[federal credit unions] may counsel members about financial matters, such as setting budgets, establishing financial goals, and managing tax liabilities. Other examples within this category may include counseling members on money management, paying down debt, saving for the future, types of investments, and diversification principles. This category applies only to financial counseling provided by a [federal credit union] to its members and does not encompass activities that require SEC registration as a broker, dealer or investment adviser.

In its June 2009 Legal Opinion Letter 09-0511 Investment Advice Services, the NCUA stated that a credit union may offer investment advisory services to its members in three ways: 1) through a shared employee with a registered investment adviser; 2) by acting as a finder under the NCUA incidental powers rule; or 3) by wholly or partly owning a Credit Union Service Organization (“CUSO”) that provides investment advisory services. Acting as a finder is otherwise known as acting as a solicitor to a Registered Investment Adviser. If acting as a solicitor, a credit union will need to be compliant with the applicable regulatory requirements for solicitors, including SEC Rule 206(4)-3, and any applicable state registration requirements. Most states define the solicitation or referral of investment advisory clients as an investment advisory activity which requires the registration of the solicitor as a registered investment adviser or investment adviser representative. A CUSO that provides investment advisory services would need to be properly registered as a registered investment adviser.

If you are affiliated with a federal credit union and have questions related to registration or regulation of registered investment advisers, RIA Compliance Consultants, Inc. can help. We can provide you with guidance about the activities of providing of investment advice through an arrangement with an existing registered investment adviser, acting as a solicitor to a registered investment adviser, or offering investment advisory services through a CUSO.

Licensing of Solicitors as Investment Advisor Representatives Required by Most State Securities Regulators

noreply@blogger.com (bhill) — Mon, 10 Aug 2009 16:25:00 +0000

Did you know that most state securities regulators require paid solicitors of registered investment advisor firms to license as investment advisor representatives? This means that the solicitor must either establish his/her own registered investment advisor or license under an existing registered investment advisor. From the solicitor's perspective it is far easier to simply license under an existing registered investment advisor rather than forming a new registered investment advisor. However, what does that mean for the existing registered investment advisor holding the solicitor's investment advisor representative license?

When a solicitor is licensed as an investment advisor representative under a registered investment advisor, the registered investment advisor becomes much more responsible for the investment advisory activities of the solicitor. The relationship moves away from a due diligence requirement to a supervision requirement. A registered investment advisor must treat all licensed investment advisor representatives, even those that are just solicitors, as supervised persons for purposes of the firm's compliance policies and procedures and code of ethics. Therefore, in addition to ensuring compliance with the SEC's solicitor rule, the solicitor must follow the firm's written compliance policies and procedures including the firm's code of ethics. The registered investment advisor must establish reasonable policies and procedures designed to properly supervise its licensed solicitors. These procedures could include training events, advertising limitations, and monitoring the actual services provided by the solicitor.

If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our August 19 webinar titled "Establishing & Supervising Solicitor Arrangements". This timely webinar is being presented by Jarrod James, Vice President and Senior Compliance Consultant at RIA Compliance Consultants, Inc. The cost of the webinar is $59.95 and will detail the requirements of Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions. We will be examining the differences between affiliated and unaffiliated solicitors and the ramifications of holding licenses of solicitor-only investment advisor representatives.

Purchase your webinar seat now: https://www2.gotomeeting.com/register/673425275

*The webinar has been accepted by the CFP Board for 1 hour of General CFP® continuing education credit.

NASAA Urges SEC to Exclude from Surprise Audit RIAs with Custody Solely Due to Automatic Deduction of Fees

noreply@blogger.com (bhill) — Sun, 09 Aug 2009 19:46:00 +0000

In response to the proposal by the U.S. Securities and Exchange Commission ("SEC") to require federally registered investment advisers with custody of client funds or securities to undergo an annual surprise audit by an independent public accountant, the North American Securities Administrators Association ("NASAA") surprisingly weighed in favor of the investment advisory industry.

NASAA urged the SEC to exclude from its proposed surprise audit requirement those investment advisers that have custody of client assets solely due to the authority to withdraw investment advisory fee. NASAA explained that "we believe these accounts are less likely to be subject to abuse and could reasonably be excluded from a program of annual surprise examinations by an independent CPA."

Considering that NASAA is typically less receptive to the investment advisory industry's concerns as compared to the SEC, this position by NASAA definitely adds legitimacy to the argument of many registered investment advisers that the SEC's proposed independent CPA surprise audit requirement is too expensive and overly broad.

Renewed SEC Scrutiny of Registered Investment Advisors Using Solicitors

noreply@blogger.com (bhill) — Wed, 05 Aug 2009 21:52:00 +0000

We frequently hear stories and receive questions from our registered investment advisor clients about the benefits of receiving client referrals from outside professional sources. Such outside professionals can include CPAs, attorneys, and insurance agents. While the U.S. Securities and Exchange Commission ("SEC") does not generally have an issue when an SEC registered investment advisor uses employees or outside sources to generate client referrals, the SEC has taken the position that a line is crossed when payment is provided for such referrals. When fees (including non-cash payments) are paid by an SEC registered investment advisor for client referrals, SEC Rule 206(4)-3 sets forth specific requirements that must be followed. The requirements are different depending on whether the solicitor is affiliated or unaffiliated with the registered investment advisor. For example, when an unaffiliated solicitor refers a client to an SEC registered investment advisor, the unaffiliated solicitor is required to provide written disclosures to the prospective client outlining the unaffiliated solicitor’s arrangement with the firm and the compensation that may be received. The disclosure must be provided at the time of solicitation.

In addition to requirements under SEC Rule 206(4)-3, SEC registered investment advisor firms must have a thorough understanding of applicable state rules. The majority of state securities regulators include the terms solicitor or referral in the definition of investment advisor representative and therefore require the referring party to be licensed as such. This means passing the Series 65 exam, filing a Form U4, paying the licensing fee, and receiving approval by the state securities regulator; all prior to soliciting the first client for a fee. Some state securities regulators even require companies that receive solicitor fees to be registered as an investment advisor even though they may provide no other advisory services. In these cases, the referring firm would need to file a Form ADV and other required documents in order to register directly with the state securities regulator.

From our experience, non-compliance with SEC Rule 206(4)-3 will all-too-often result in deficiencies during SEC examinations. Some of the specific deficiencies include failing to have an adequate agreement with the solicitor; failure to require that the solicitor provide written disclosures; and failure to maintain all required books and records related to the solicitor arrangement. Inadequate disclosure in the firm’s Form ADV Part II, Schedule F or similar disclosure document is another common deficiency. In more egregious situations, registered investment advisors have been cited for altogether failing to disclose to clients the fees paid to solicitors.

More recently, we have seen the SEC initiate administrative and enforcement proceedings citing SEC Rule 206(4)-3. One such case was in June of this year when the SEC charged Cohmad Securities Corporation and some of its personnel alleging that they collectively raised billions of dollars from investors for Bernard Madoff’s Ponzi scheme. Given the fact that paid solicitor programs present an inherent conflict of interest between registered investment advisors and their clients and given the fact that solicitors (i.e. feeder funds) played such a significant role in the Madoff scandal, we fully expect the SEC to increase scrutiny on paid solicitor arrangements.

If your firm has an active solicitor program, is considering such a program or if you just want to learn more about SEC Rule 206(4)-3, please join us for our August 19 webinar titled “Establishing & Supervising Solicitor Arrangements”. This timely webinar is being presented by Jarrod James, Vice President and Senior Compliance Consultant at RIA Compliance Consultants, Inc. The cost of the webinar is $59.95 and will detail the requirements of SEC Rule 206(4)-3, discuss best tips for complying with the rule and provide opportunity for attendees to pose specific questions.

*The webinar has been accepted by the CFP Board for 1 hour of General CFP® continuing education credit.

Join Us for a Webinar: Establishing & Supervising Solicitor Arrangements

noreply@blogger.com (bhill) — Thu, 30 Jul 2009 00:49:00 +0000

Does your investment adviser act as a solicitor for another investment adviser or utilize a third-party as a solicitor of your investment advisory services?

If so, your registered investment adviser firm could possibly face regulatory and civil liability risks due to the negligence, misconduct or fraud of this third-party. Learn how your registered investment adviser firm can protect or mitigate its risks by attending our webinar, "Establishing & Supervising Solicitor Arrangements," on Wednesday, August 19, 2009 from 12:00 p.m. to 1:00 p.m. CST.

During this webinar, our consultants will review in detail the requirements of SEC's solicitor rule for registered investment advisers, the registration requirements of certain states for third- party solicitors, and examples of best supervisory practices for a registered investment adviser utilizing solicitors and due diligence activities by a solicitor referring clients to a registered investment adviser.

For only $59.95, you can purchase a seat to RIA Compliance Consultants' webinar, "Establishing & Supervising Solicitor Arrangements," scheduled for 12:00 - 1:00 p.m. CST on Wednesday, August 19, 2009. You can start the registration process by following the payment instructions and clicking on the registration link below.

For online payment by credit card, after completing the webinar registration page, you will be re-directed to a PayPal shopping cart for processing. If you prefer to pay over the telephone, after completing the webinar registration page, please contact Crystal Walz at cwalz@ria-compliance-consultants.com or 877-345-4034 x 100.

Purchase now your webinar seat for $59.95: https://www2.gotomeeting.com/register/673425275

SEC Proposes Ban of Political Contributions by Registered Investment Advisers Seeking to Manage Public Pensions

noreply@blogger.com (bhill) — Fri, 24 Jul 2009 18:50:00 +0000

Earlier this week, the U.S. Securities and Exchange Commission ("SEC") proposed a new rule prohibiting "pay to play" practices by SEC registered investment advisers seeking to manage money for state and local governments. The SEC explained that "[t]he measures are designed to prevent an [investment] adviser from making political contributions or hidden payments to influence their selection by government officials." The proposed SEC rule prohibit three primary activities by a federally registered investment adviser seeking to manage public funds: (1) political contributions (2) solicitation of political contributions and (3) use of a third-party to solicit the government.

First, under the proposed rule, an SEC registered investment adviser, including certain executives and employees of the investment adviser, who makes a political contribution to a candidate or an elected official in a position to influence the selection of the investment adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund. However, the proposed rule provide a de minimis permitting an executive or employee of the registered investment adviser to make a contribution of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

Second, the proposed SEC rule would prohibit a federally registered investment adviser, including certain executives and employees of the investment adviser, from coordinating or asking another person or political action committee ("PAC") to (a) make contribution to a candidate or elected official who can influence the selection of the investment adviser to manage the government's funds, or (b) make a payment to a state or local political party where the registered investment adviser is seeking to provide investment advisory services to the government.

Third, the SEC proposed rule would prohibit a federally registered investment adviser, including certain executives and employees, from paying a third-party to solicit a government client on behalf of the registered investment adviser.

Finally, the proposed rule prevents a SEC registered investment adviser from circumventing these political contribution prohibitions by also banning the investment adviser from making indirect contributions through the use of third-parties such as spouses, lawyers or affiliated companies.

The proposed SEC rule will be subject to a 60 day comment period. RIA Compliance Consultants will keep its readers informed of any developments related to this proposed ruled by the SEC.

Broker-Dealer Trade Group Supports Holding Registered Reps to Fiduciary Standard

noreply@blogger.com (bhill) — Fri, 17 Jul 2009 14:27:00 +0000

The Securities Industry and Financial Markets Association ("SIFMA") announced today that it supports the holding of broker-dealers and registered investment advisers to a new federal federal fiduciary standard when providing personalized investment advice. However, SIFMA noted that current standards and rules (apparently in lieu of a fiduciary standard) should apply to broker-dealers in those business areas where registered investment advisers do not offer services, such as raising capital for business or mergers and acquisitions.

SIFMA is one of the largest trade group for broker-dealers in the securities industry, and its support increases the likelihood that Congress will adopt the Obama Administration's proposal to hold broker-dealers and their registered representatives to a fiduciary standard. Interestingly, the SIFMA announcement did not address issues such as the sale of proprietary product by registered representatives of broker-dealers and whether the Financial Industry Regulatory Authority ("FINRA") should serve as the self-regulatory organizaiton ("SRO") for SEC registered investment advisers. These are the type of details that will be subject a battle in Congress during the next few months.

Join Our Webinar - Maintaining Required Books & Records for a Registered Investment Adviser

noreply@blogger.com (bhill) — Fri, 26 Jun 2009 03:26:00 +0000

If an examiner of the Securities and Exchange Commission ("SEC") or a state securities regulator showed up in your registered investment adviser's office tomorrow, could you provide all of the investment advisory books and records required by the examiner? Do you even know exactly what books and records a registered investment adviser is required to maintain? Your registered investment adviser needs to be ready for an examination by a securities regulator at anytime. If your registered investment adviser is examined, you are required to provide examiners with requested investment advisory records in a timely manner (typically expected within 24 hours).

Your registered investment adviser is required to make and keep true accurate and current certain books and records relating to its investment advisory business. For SEC registered investment advisers, these required books and records are outlined in SEC Rule 204-2 of the Investment Advisers Act of 1940 ("Advisers Act"). Every investment adviser registered with the SEC should familiarize themselves with the requirements of this rule in relation to the documents and reports that need to be maintained, where and for how long the documents must be maintained, and how the documents may be maintained. Most state securities regulators impose books and records requirements similar to the SEC for state registered investment advisers, however, your registered investment adviser will need to make sure that it understands the specific requirements of its state securities regulator.

Maintenance of books and records is something that should be covered in a registered investment adviser's compliance program. It is not enough just to know what books and records your registered investment adviser needs to maintain, your registered investment adviser should perform periodic testing to make sure that it is maintaining and can provide the appropriate books and records to the securities regulator. A best practice is to have a mock examination performed of your registered investment adviser. Take the list of required books and records and test to determine if your registered investment adviser is prepared to present all required documents and if it can do so in a timely manner. This mock examination of your registered investment adviser's books and records is something that can be performed internally or you can hire RIA Compliance Consultants to perform this service for your registered investment adviser.

It is surprising how many books and records deficiencies are discovered during our mock examinations of registered investment advisers. The following are some examples of common books and records deficiencies found by our compliance consultants:

Not maintaining an order memorandum or not maintaining complete information in the order memorandum as outlined in Rule 204-2(a)(3) the Advisers Act;

Not maintaining current financial or complete financial records;

Not maintaining proper documentation to support performance advertising figures;

Not maintaining a list of all access persons for the past five years;

Not maintaining access person holdings reports;

Not maintaining records to support the firm's duty of best execution;

Not maintaining or unable to locate contracts the firm has executed with service providers, sub-advisors, or solicitors;

Not able to easily or timely produce copies of requested email records; and

Not having complete or adequate written compliance programs or having written compliance programs that are not consistent with what the firm is actually doing.

For more information and guidance on maintaining the appropriate books and records for you registered investment adviser, register for the Maintaining Required Books and Records webinar that will be presented by RIA Compliance Consultants on Thursday, July 23, 2009 from 12:00 -1:00 p.m. Central Standard Time. During the webinar you will have the ability to direct questions to our staff. The fee for the webinar is $59.95 and space is limited so sign up today!

Purchase now your webinar seat for $59.95: https://www2.gotomeeting.com/register/497126507

SEC Files Enforcement Action Against an RIA for Allegedly Failing to Disclose Compensation Received from Private Investment Funds

noreply@blogger.com (bhill) — Mon, 22 Jun 2009 03:20:00 +0000

On May 20, 2009, the U.S. Securities and Exchange Commission ("SEC") announced that it had filed an emergency civil action charging Wealth Management LLC (registered investment adviser), James Putman (founder, majority owner and Chief Executive Officer of Wealth Management), and Simone Fevola (former President and Chief Investment Officer of Wealth Management) with engaging in a kickback scheme and other fraudulent conduct involving unregistered investment pools for which Wealth Management served as a General Partner or Managing Member and as the registered investment adviser responsible for managing the pooled assets.

In the complaint, the SEC alleges breach of fiduciary duty and fraud for misrepresenting the safety and stability of the two largest private funds managed by Wealth Management while placing their clients into these investments even though they were unsuitable for some of their clients. The SEC's complaint also alleged, among other things, that Mr. Putman and Mr. Fevola each accepted at least $1.24 million in undisclosed payments derived from certain investments made within the private funds that were managed by Wealth Management, while continuing to cause clients to invest in these private funds.

The offering documents for the private investment funds disclose that Wealth Management would be compensated for managing the funds through a management fee based on a percentage of assets under management. Additionally, on four of the six funds that were managed by Wealth Management an annual "Incentive Allocation" of up to 10% (depending on the fund) of the annual profits could be paid to Wealth Management. No other forms of compensation were disclosed, and Wealth Management's Form ADV indicated that the adviser and its associated persons did not receive any economic benefits from non-clients in connection with giving investment advice to clients. No references were made regarding the payments received from the investments made within the funds.

This case should serve as a reminder to a registered investment adviser that it has a fiduciary duty to its clients. As a fiduciary, a registered investment adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts, especially when the registered investment adviser's interest may conflict with the client's interest. Not providing proper disclosure to advisory clients can result in violations to the anti-fraud provisions of the Investment Advisers Act of 1940. The receipt of any form of additional compensation received from any source other than the client when the adviser is recommending a security to a client is just one example of a conflict of interest that must be fully disclosed to the client.