With the new requirements that corporations, limited liability companies and other entities report the identities of their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), the chief compliance officer (“CCO”) of an investment adviser firm and sponsors of pooled investment vehicles should be aware that certain investment adviser firms and pooled investment vehicles are eligible for an exemption from FinCEN’s beneficial ownership reporting requirements.
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]]>The beneficial ownership reporting requirements stem from the Corporate Transparency Act (“CTA”) which was passed into federal law in 2021 on a bi-partisan basis and aims to curb illicit financial activities by mandating the disclosure of beneficial owners of various entities to the U.S. government.
Corporations, limited liability companies, and other entities are required to file a beneficial ownership report with FinCEN. The report will disclose each “beneficial owner” of the reporting company, which is defined as any individual who, directly or indirectly, exercises substantial control over an entity or owns or controls at least 25% of the ownership interests of an entity.
If the reporting company was created or registered to do business before January 1, 2024, then it will have until January 1, 2025, to file its initial beneficial ownership information report with FinCEN. If the reporting company was created or registered on or after January 1, 2024, and before January 1, 2025, it will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial beneficial ownership report with FinCEN.
The information collected from an entity’s beneficial ownership report will be accessible to law enforcement agencies and, in certain cases, financial institutions (with customer consent), facilitating the identification and prevention of financial crimes.
Significantly, the CTA and the subsequent guidance from FinCEN, the Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements, provides exemptions for 23 categories of entities, including Exemption #10 for entities which meet the definition of an “investment adviser” under Section 202(a)(11) of the Investment Advisers Act of 1940 as amended (“IAA ’40”) and is also registered as an investment adviser with U.S. Securities and Exchange Commission (“SEC”) under the IAA’40. For purposes of Exemption #10, this exemption does not appear to include an investment adviser firm registered with a state securities regulator or not required to register as exempt reporting adviser (“ERA”). Consequently, the state-registered investment adviser firm will need to look for other exemptions.
Under Exemption #13, an entity qualifies for an exemption from the BOI reporting requirements if the entity is an “insurance producer ” authorized by the state and subject to supervision by the state insurance regulator and has an operating presence at a physical office in the United States.
In addition, FinCEN provides Exemption #18 for a pooled investment vehicle if it meets a two prong test.
The pooled investment vehicle must meet both prongs to be exempt from FinCEN’s reporting requirements.
Please refer to the Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements for other available exemptions such as an investment company, venture capital fund adviser, broker-dealer, insurance company, bank, or credit union. To the extent that an investment adviser firm is owned by another legal entity which doesn’t qualify for a FinCEN exemption, it appears that the parent company will need to file a beneficial ownership report for itself.
According to FinCEN’s FAQs on Beneficial Ownership Reporting Requirements, these exempt entities are not required to report their beneficial ownership information to FinCEN under the current regulations. This exemption is predicated on the rationale that such entities are already subject to comprehensive regulatory oversight and reporting requirements, which include obligations to disclose beneficial ownership information.
In late 2023, the White House has announced that U.S. Department of the Treasury plans to propose in 2024 a new anti-money laundering rule for investment advisers. The U.S. Department of Treasury provided further details in the following excerpt from a press release:
Investment advisers are not subject to consistent or comprehensive AML/CFT obligations in the United States, creating the risk that corrupt officials and other illicit actors may invest ill-gotten gains in the U.S. financial system through hedge funds, private equity firms, and other investment services. In line with the U.S. Strategy on Countering Corruption, Treasury is re-examining the 2015 NPRM regarding this sector, and aims to issue in the first quarter of 2024 an updated NPRM that would propose applying AML/CFT requirements pursuant to the Bank Secrecy Act, including suspicious activity reporting obligations, to certain investment advisers.
For investment adviser firms especially those managing or advising private funds, this development signals the need for proactive engagement with regulatory trends and potential adjustments to compliance strategies. Staying informed about proposed changes and participating in the rule-making process through public comments can help shape outcomes that are both effective in combating financial crimes and practical for the industry.
In summary, while the immediate reporting obligations under the CTA may not apply to SEC registered investment adviser firms as defined in FinCEN Exemption #10 or pooled investment vehicles as defined in FinCEN Exemption #18, it appears at this time that state-registered investment advisers will need to report beneficial ownership information to FinCEN (unless qualifying under another FinCEN exemption).
The information contained in this blog post is general in nature, intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material requirements and exceptions from the applicable rule or regulatory guidance. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult U.S. Department of Treasury’s rules and published guidance for more details about the topics referenced above. Since this is a new regulation, there’s a significant possibility that the U.S. Department of Treasury will issue further regulatory guidance which will not necessarily be reflected in this blog post. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This is not a legal opinion as to whether a particular entity is required to file a beneficial ownership information report with the U.S. Department of Treasury. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>According to the Daily Montanan, a class-action lawsuit has been filed against the State of Montana. This lawsuit challenges the constitutionality of a licensing fee structure imposed on non-resident investment adviser representatives and securities salespersons, alleging it violates the privileges and immunities clause of the United States Constitution.
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]]>According to the Daily Montanan, a class-action lawsuit has been filed against the State of Montana. This lawsuit challenges the constitutionality of a licensing fee structure imposed on non-resident investment adviser representatives and securities salespersons, alleging it violates the privileges and immunities clause of the United States Constitution.
The lawsuit, as reported by the Daily Montanan, centers around state legislation in 2019 which increased the licensing fees of investment adviser representatives and securities salespersons but permitted Montana residents to apply for a refund, while out-of-state investment adviser representatives and securities salespersons were ineligible.
This differential rate is noted on the website of the Montana Commissioner of Securities and Insurance, which states that “[i]f you are a Montana [investment adviser representative], you will first fund the account and then request a refund of $50….” See https://csimt.gov/investment-advisers-investment-adviser-representatives/ .
The Daily Montanan notes that this legislative measure was controversial from the outset of its proposal with lawmakers and witnesses raising concerns about its constitutionality under the privileges and immunities clause of the U.S. Constitution which prohibits states from discriminating against residents of other states in favor of their own residents. The plaintiffs in the class-action lawsuit assert that the Montana Supreme Court has previously upheld this clause, emphasizing the right of nonresidents to work in the state without facing discrimination based on state residency. The lawsuit argues that Montana’s fee structure for nonresident investment adviser representatives and securities salespersons does not align with any substantial state interest, thus violating this constitutional provision.
The lawsuit seeks a declaratory judgment that the statutory provision (Mont. Code Ann. Section 30-10-209(2)(i)) is unconstitutional, an injunction prohibiting the State of Montana from charging a different fee for non-resident investment adviser representatives and securities salespersons, damages incurred by the lead plaintiff and class and reasonable attorney fees.
Frequently Asked Questions: An Investment Adviser Firm’s IARD Renewals
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Frequently Asked Questions: Form U4
The information contained in this blog post is general in nature, intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary of the new article and underlying lawsuit. Please read the article in the Daily Montanan in its entirety and the linked Class-Action Complaint at https://dailymontanan.com/2024/01/12/class-action-lawsuit-claims-montana-discriminates-against-out-of-state-financial-advisers/ . RIA Compliance Consultants, Inc. has not verified the accuracy of the article or the allegations within the underlying lawsuit. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This blog post should not be considered legal advice. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>The Office of the Investor Advocate of the U.S. Securities and Exchange Commission (“SEC”) recently released a report about the SEC staff’s study of mandatory arbitration clauses in investment advisory client agreements used by investment adviser firms registered with the SEC.
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]]>The SEC’s Office of the Investor Advocate expressed concerns that certain restrictions associated with some mandatory arbitration clauses could mislead retail advisory clients, place an investment adviser’s interest before a client’s interest and consequently result in the in the investment adviser breaching its fiduciary duty. The primary findings and recommendations include the following:
Limitation on Damages and Types of Claims: The SEC’s Office of Investor Advocate believes that the language in an investment advisory agreement preemptively limiting the damages available to clients, or types of claims that clients may assert against the investment adviser in an arbitration, might mislead retail clients into not exercising their legal rights and would constitute a breach of the investment adviser’s fiduciary duty.
Placing Adviser’s Interest Before Client’s Interest: Absent evidence that a client has provided informed consent, the SEC’s Office of Investor Advocate concludes that an investment adviser is placing its interests before a client’s interest and thus breaching its fiduciary duty when utilizing an arbitration clause with any of the following restrictions or requirements:
Disclosure of Arbitration: The Investor Advocate’s Office recommends that the Commission require investment advisers registered with the SEC to disclose arbitration information to clients and such disclosures should be similar between and SEC and state registered investment advisers.
Prohibition of Restrictive Terms: The Office of the Investor Advocate encourages the Commission to prohibit investment advisers registered with the SEC from using certain restrictive terms in mandatory arbitration clauses that negatively affect clients.
Temporary Suspension: The SEC’s Investor Advocate Office urges the SEC to suspend the use of mandatory arbitration clauses until further analysis of their impact on clients.
Given these developments, investment advisers registered with the SEC should engage legal counsel to review current investment advisory agreements, focusing upon the following:
The Investor Advocate’s report provides a guide to how investment advisers registered with the SEC should approach mandatory arbitration clauses in client agreements. It is imperative for SEC-registered investment advisers to take the initiative in reviewing and, if necessary, amending their agreements or updating their informed consent processes in light of these recommendations. As always, consultation with legal counsel is crucial in navigating these changes.
Investment Advisers Should Review Client Agreements for Liability Hedge Clauses (10/5/2023)
SEC Enforcement Action: In the Matter of Titan Global Capital Management USA LLC (8/21/2023)
Key Takeaways from NASAA’s 2023 Investment Adviser Coordinated Exam (8/15/2023)
SEC Issues Investment Adviser Exam Priorities for 2023 (2/16/2023)
Recorded Webinar: Reviewing and Updating Investment Adviser Client Agreements (4/27/2022)
SEC Enforcement Action: In the Matter of Comprehensive Capital Management, Inc. (1/11/2022)
SEC Release No. IA-5248: Commission Interpretation Regarding Standard of Conduct for Investment Advisers (6/5/2019) at pages 10 – 11
Understanding the Provisions Required for Registered Investment Adviser Client Contracts (5/16/2013)
The information contained in this blog post is general in nature, intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the report or underlying study. RIA Compliance Consultants, Inc. has not verified the accuracy of the securities regulator’s report and is not offering any definitive opinion on its research, analysis and findings. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This blog post should not be considered legal advice. RIA Compliance Consultants, Inc. recommends that an investment adviser discuss the use of pre-dispute, mandatory arbitration clauses in client agreements with its legal counsel. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>For investment adviser firms which are state registered with Nebraska, it’s crucial to be aware that there are certain additional documents which must be submitted directly (via a ShareFile link) to the Nebraska Securities Bureau in addition to and separate from the paying the regulatory fees associated with annual renewals and filing the Form ADV Annual Amendment via the IARD (“Investment Adviser Registration Depository”) system.
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]]>The Securities Bureau of Nebraska Department of Banking and Finance has issued its 2024 renewal notice for state-registered investment adviser firms and investment adviser representatives. An investment adviser firm can find the complete renewal notice and checklist on Nebraska’s website. Let’s delve into the key points you need to know related to the additional documents.
While the majority of an investment adviser firm’s annual renewal process is done through the IARD system, Nebraska has certain additional documents that state registered investment advisers must submit directly to the Securities Bureau outside of the IARD system. These include the following:
Financial Statements and Reporting Requirements:
Net Capital Requirements:
Investment Adviser Contracts:
The additional documents identified above must be submitted to the Nebraska Securities Bureau by December 11, 2023, via a secure ShareFile link email to the firm contact identified on the Form ADV. If an investment adviser firm did not receive such, email with the ShareFile link, please contact the Nebraska Securities Bureau.
Failure to meet the above deadline for submission of these additional documents will result in the automatic termination of the registrations of the firm and its representatives on January 1, 2024, and consequently, the firm and its representatives will be unable to conduct any investment advisory business in Nebraska.
It’s important to remember that many other state securities regulators also require state registered investment adviser firms to submit annual financial statements and/or other documents (e.g., proof of continued coverage of a surety bond, investment advisory client agreement) directly to the state securities regulator (outside of the IARD/CRD system). The required documents and deadline can vary among state securities regulators. A state registered investment adviser firm should consult its home state securities regulator to confirm whether there are any annual submissions (outside of the IARD/CRD system) and the applicable deadline.
RIA Compliance Consultants, Inc. can assist you with the IARD Renewal and Form ADV Annual Amendment process. If you are an existing client of RIA Compliance Consultants, please contact your consultant to discuss how we can assist you. If you have not previously worked with RIA Compliance Consultants, please click here to learn more about our 2024 IARD Renewal and Form ADV Annual Amendment Services, or contact our business development team at Contact Us.
Navigating the Preliminary Renewal Statement for Investment Advisers (11/11/2023)
2024 Preliminary Renewal Statements Are Available for Investment Advisers (11/7/2023)
Nebraska State-Registered Investment Adviser Renewal Requirements for 2022 (11/1/2021)
Regulatory Reminder – Submission of Annual Financial Statements in Certain States (2/25/2021)
Nebraska State-Registered Investment Adviser Renewal Requirements for 2020 (11/8/2020)
2024 IARD Renewal & Form ADV Annual Amendment Services
An Investment Adviser Firm’s IARD Renewals
IARD – Annual IARD Renewal Tips Checklist
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>As we approach the end of the year, it is crucial for investment adviser firms to review their 2024 Preliminary Renewal Statements, which are now accessible through their IARD accounts. This statement is an overview of the firm’s current registration status and the associated renewal fees. Let us delve into the specifics of this renewal statement and its implications for your investment adviser firm.
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]]>As we approach the end of the year, it is crucial for investment adviser firms to review their 2024 Preliminary Renewal Statements, which are now accessible through their IARD accounts. This statement is an overview of the firm’s current registration status and the associated renewal fees. Let us delve into the specifics of this renewal statement and its implications for your investment adviser firm.
The Preliminary Renewal Statement includes several key elements:
The Preliminary Renewal Statement reflects all current registrations and notice filings for which no Post-Dated Termination filings have been submitted by the investment adviser firm as of the Preliminary Renewal Statement’s issuance date.
When reviewing the Preliminary Renewal Statement, the investment adviser firm should consider where the firm and its investment adviser representatives are required to register or notice file. The investment adviser firm will need to compile a list of the firm’s current investment advisory clients (sorted by the client’s state of residence), a list where the firm maintains a place of business or holds itself out as maintaining a place of business, and a list for each representative’s places of business. The investment adviser firm will then analyze the requirements of the applicable jurisdictions against this set of data. Based upon this analysis, the investment adviser firm will make any necessary filings to add or remove registrations or notice filings with applicable states.
For the latest information and deadlines, investment adviser firms should refer to the IARD Renewal Program Calendar. This resource offers crucial dates and guidelines for the renewal process and can be easily accessed online.
Filing Withdrawal Requests: To be eligible for a refund in the Final Renewal Statement, investment adviser firms must file a Post-Dated Termination Notice via the IARD system. The deadline for this filing is the last day of the calendar year for IARD filings. For instance, for calendar year 2024, the deadline is 6:00 p.m. Eastern U.S. on Tuesday, December 26, 2023.
No Pro-Rata Refunds: It is important to note that partial or pro-rata refunds are not issued for withdrawing a registration or removing a notice filing on or after the first business day of the new calendar year (January 2, 2024, for calendar year 2024)
Form U5, Form ADV-W or Form ADV Amendment Filings: Even if a firm files a Form U5 or Form ADV-W to withdraw a state registration or amends the Form ADV to remove a notice filing in a state, the full amount of the Preliminary Renewal Statement must still be paid by the due date (Monday, December 11, 2023, for calendar year 2024). Credits for any refunds will only be reflected in the Final Renewal Statement.
RIA Compliance Consultants can assist you with the renewal process. If you are an existing client of RIA Compliance Consultants, please contact your consultant to discuss how we can assist you. If you have not previously worked with RIA Compliance Consultants, please click here to learn more about our 2024 IARD Renewal and Form ADV Annual Amendment Services, or contact our business development team at bizdevteam@ria-compliance-consultants.com.
The Preliminary Renewal Statement is a pivotal document for an investment adviser firm’s compliance, encapsulating the registrations being renewed for the upcoming year. Firms should thoroughly review this statement to ensure proper registration and to make informed decisions about potential terminations for fee refunds. Remember, attention to the details and timely action are the keys to effectively managing your investment adviser firm’s renewal process.
2024 Preliminary Renewal Statements Are Available for Investment Advisers (11/7/2023)
2024 IARD Renewal & Form ADV Annual Amendment Services
An Investment Adviser Firm’s IARD Renewals
IARD – Annual IARD Renewal Tips Checklist
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>Investment adviser firms can now access to their Preliminary Renewal Statement for 2024 through their IARD (Investment Adviser Registration Depository) accounts.
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]]>It’s crucial for the chief compliance officer (“CCO”) of an investment adviser firm to take note of the following dates and actions required for a smooth licensing renewal process:
It’s important for a CCO to be aware that most state securities regulators participate in the IARD Automatic Failure to Renew Program. Under this program, if your firm or its representatives are registered or notice filed in a jurisdiction that participates, the state securities regulator has granted FINRA the authority to automatically terminate the registrations of your investment adviser firm and its investment adviser representatives on December 31, 2023, if the firm’s IARD Renewal Account is not funded by the renewal deadline.
Every year, there are unfortunately instances where investment adviser firms fail to submit their renewal fees through their IARD accounts in a timely manner. In such cases, almost all state securities regulators will automatically terminate these registered firms and their representatives for non-payment. Dealing with the aftermath of such a situation can be time-consuming and costly.
For an investment adviser firm which does not properly renew, a state securities regulator may seek a fine and/or require a new registration application. Additionally, the state securities regulator might prohibit the investment adviser firm and its investment adviser representatives from charging of investment advisory fees while unregistered.
To help avoid problems with your investment adviser’s annual licensing renewals, learn more our about services by visiting 2024 IARD Renewal & Form ADV Annual Amendment Services.
2024 IARD Renewal & Form ADV Annual Amendment Services
An Investment Adviser Firm’s IARD Renewals
IARD – Annual IARD Renewal Tips Checklist
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>Just as a skilled surfer anticipates the perfect wave, an investment adviser firm’s seasoned executives and compliance professionals must prepare for the impending regulatory swell.
The post Invewtment Advisers Riding the SEC Regulatory Wave into 2024 appeared first on RIA Compliance Consultants.
]]>In 2024, investment adviser firms registered with the U.S. Securities and Exchange Commission (“SEC”) may find themselves facing a potentially significant wave of new rules and regulatory changes.
Take the opportunity to nail this regulatory wave and avoid washing out by downloading our complimentary slides from our course: “Riding the Regulatory Wave: Navigating the Potential 2024 Surge for SEC Registered Investment Advisers” presented on October 26, 2023.
During this course, Bryan Hill and Jarrod James of RIA Compliance Consultants, Inc. discussed the SEC’s rule making process along with five new rules approved by the SEC during the few months and six proposed rules which are applicable to investment advisers and currently under consideration by the SEC.
For your convenience, you can download a complimentary copy of the online seminar slides: Riding SEC Regulatory Wave.10.26.2023.
The full recording of this webinar is available to Annual Compliance Program (Bronze, Silver, Gold, Platinum and Titanium) clients of RIA Compliance Consultants, Inc. at https://www.ria-compliance-consultants.com/knowledge-base/riding-the-regulatory-wave/ .
Disclosure: This post and the slides are for general educational purposes only and should not be considered advice to the reader. A client relationship is not created by merely reading this post and/or slides. For additional information or specific guidance, the reader should consult with his or her compliance professional for advice tailored to the reader’s specific circumstances. The contents of this post and slides may become dated, and RIA Compliance Consultants, Inc. will not necessarily provide an update to the slides.
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]]>The post Failure to Properly Renew Registration May Result in Adverse Consequences for Investment Advisers appeared first on RIA Compliance Consultants.
]]>2024 IARD Renewal & Form ADV Annual Amendment Services
An Investment Adviser Firm’s IARD Renewals
IARD – Annual IARD Renewal Tips Checklist
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>The Division of Examinations of the U.S. Securities and Exchange Commission (“SEC”) recently issued the Fiscal Year 2024 Examination Priorities signaling areas of particular interest for the upcoming audits of investment advisers. Notably, this year’s exam priorities introduces what appears to be a new focus on whether investment adviser firms are obtaining “informed consent” from clients when making material changes to advisory agreements:
The post SEC Taking a Closer Look at Whether Investment Advisers Are Obtaining “Informed Consent” When Amending Advisory Agreements appeared first on RIA Compliance Consultants.
]]>The Division of Examinations of the U.S. Securities and Exchange Commission (“SEC”) recently issued the Fiscal Year 2024 Examination Priorities signaling areas of particular interest for the upcoming audits of investment advisers. Notably, this year’s exam priorities introduces what appears to be a new focus on whether investment adviser firms are obtaining “informed consent” from clients when making material changes to advisory agreements:
“The [SEC’s] Division [of Examinations] is also focused on [investment] advisers’ policies and procedures for …obtaining informed consent from clients when advisers implement material changes to their advisory agreements.”
See https://www.sec.gov/files/2024-exam-priorities.pdf at page 10 (emphasis added).
Although the SEC doesn’t specify in the FY 2024 Examination Priorities what constitutes “informed consent” by a client for purposes of amending an advisory agreement, the following are examples possible questions that an SEC examiner might consider:
Disclosure: Did the investment adviser provide the client with full and fair disclosure of all material facts concerning the amendment to the investment advisory agreement? A lack of adequate written disclosure can make it difficult for the investment advisory client to give truly informed consent.
Timeliness: Was the disclosure given well in advance of the amendment taking effect, giving the investment advisory client ample time to consider the changes and to decide whether to continue the advisory relationship under the amended terms?
Multiple Notices or Confirmation of Receipt: To the extent that the investment advisory agreement expressly allows the investment adviser to obtain client consent through a no-response notification letter, did the investment adviser provide multiple notices of the proposed amendment or verify client’s receipt of the proposed amendment?
Comprehensibility: Was the disclosure about the proposed amendment made in “plain English,” meaning it was easily understood by the investment advisory client? If the disclosure about the proposed amendment is written in complex legal jargon, a SEC examiner might argue that a retail client would struggle to understand the amendment and cannot provided informed consent.
Access to Information: Did the investment advisory client have the opportunity to ask questions about the proposed amendment and receive full and clear answers from the investment adviser? This includes access to additional documentation or clarification as necessary.
Termination Rights: Was the client made aware that they have the right to terminate the investment advisory relationship without penalty if they do not agree with the investment adviser’s proposed changes?
Proving “informed consent” could be challenging for an investment adviser firm and will likely require careful documentation and active participation by the assigned investment adviser representative.
In light of the evolving regulatory landscape, it is crucial for an investment adviser firm to keep an eye on SEC risk alerts and enforcement actions for further guidance and specifically consult with its compliance professional and legal counsel to ensure that its methods of obtaining “informed consent” when amending advisory agreements are in line with current regulatory expectations.
SEC Exam – Best Practice Checklist
SEC Exam – Mock Exam Document Request List
SEC Exam – Log of Requested Docs & Info
SEC Exam – Privilege Log
SEC Exam – Investment Adviser’s Confirmation of New Deadline for Response
SEC Exam – Response to Deficiency or Findings Letter from Securities Regulator
SEC Exam – Sample Letters Requesting Confidential Treatment under FOIA
Annual Review – Spreadsheet for Risk Assessment, Supervision Chart and Assessment Log
CCO – Third-Party – Confirming Annual Review Completion
Branch Office Review – IA Checklist
RIA Express – Compliance Review Tool
Recorded Webinar: Reviewing and Updating Investment Adviser Client Agreements (4/27/2022)
Investment Advisers Should Review Client Agreements for Liability Hedge Clauses (10/5/2023)
SEC Provides Investment Advisers with Insights on Examination Process (9/7/2023)
Key Takeaways from NASAA’s 2023 Investment Adviser Coordinated Exam (8/15/2023)
Common Deficiencies of Newly Registered Investment Advisers (4/14/2023)
SEC Issues Investment Adviser Exam Priorities for 2023 (2/16/2023)
SEC Announces 2021 Examination Priorities for RIAs (3/15/2021)
SEC Announces 2020 Exam Priorities (1/16/2020)
NASAA Releases 2019 Investment Adviser Coordinate Examinations Report (10/25/2019)
2019 SEC Examination Priorities (12/27/2018)
NASAA Investment Adviser Coordinated Examinations Report (1/24/2018)
NASAA Report on Common Investment Adviser Deficiencies (10/2/2015)
SEC’s 2015 Examination Priorities for Investment Advisers (1/13/2015)
NASAA Report on State Investment Advisor Exams (11/12/2005)
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This blog post should not be considered legal advice. RIA Compliance Consultants, Inc. recommends that an investment adviser discuss how to obtain “informed consent” from clients when amending advisory agreements with its legal counsel. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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]]>The U.S. Attorney’s Office (District of Connecticut) announced that it entered into a plea agreement with an owner/investment adviser representative of an investment adviser firm based in Connecticut. This CT investment adviser representative waived his right to be indicted and pled guilty to defrauding clients of $2.7 million through a cherry-picking scheme. Last month, the U.S. Securities and Exchange Commission (“SEC”) also issued a cease-and-desist order against this investment adviser representative and firm. This blog post will review the cherry-picking allegations and offer several best practices for a chief compliance officer (“CCO”) to detect such activity within his or her own investment adviser firm.
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]]>The following is a summary of key facts based upon the allegations of the U.S. Attorney’s Office and SEC. RIA Compliance Consultants, Inc. has not independently verified the accuracy of such allegations.
This Connecticut-based investment adviser firm’s Code of Ethics allegedly required CT investment adviser representative to determine and document the specific allocation of each block trade prior to the execution and to allocate block trades to individual accounts at an average price.
Additionally, the investment adviser firm’s Form ADV Part 2A disclosure brochure allegedly stated that the firm would execute trades based upon a client’s risk tolerance, make investment decisions in accordance with its fiduciary duty, allocate investment opportunities fairly and equitably and never allow its investment adviser representative to engage in personal trading that disadvantages a client when similar securities are being bought or sold.
However, the CT investment adviser representative allegedly entered block trades on behalf of multiple client accounts without also assigning (at the time of entering each order) a corresponding allocation to the applicable accounts. After observing whether the position from the executed block trade increased or decreased in value during the first day, the CT investment adviser representative allegedly allocated the more profitable trades to personal, family and favored client accounts and the unprofitable trades to other client accounts. The SEC found that the probability of this happening by chance was statistically nearly zero.
In the federal criminal case, the CT investment adviser representative is awaiting sentencing for the guilty plea to one count of securities fraud, which carries a maximum term of imprisonment of 25 years and a fine of up to approximately $5.4 million.
In announcing the settlement of the administrative proceeding, the Co-Chief of the SEC Enforcement Division’s Asset Management Unit made a veiled reference to its market surveillance capabilities: “The SEC has the means to identify investment advisers that abuse their position through cherry-picking….” Although not specifically referenced in its press release, the SEC has previously identified the advance data analytics work of its Market Abuse Unit’s Analysis and Detection Center with respect to insider trading and cherry picking cases.
The following are examples of best practices for an investment adviser firm and its chief compliance officer to consider for purposes of detecting cherry-picking (i.e., allocating profitable block trades after execution to favored accounts) by its investment adviser representatives.
(Please understand that this is not a comprehensive listing of the techniques for detecting cherry picking.)
Cherry-picking is a serious offense that undermines the integrity of the investment adviser and client relationship. An investment adviser firm’s CCO has a critical role in detecting and preventing such fraudulent activities. By implementing these and other best practices, a CCO can better safeguard both the firm and its investment advisory clients.
Trading – Checklist for Detecting Cherry Picking
Personal Securities Transactions – Checklist for Reviewing PSTs & Holdings
Cherry Picking – SEC Cease-and-Desist Proceeding (3/28/2018)
SEC Fines Investment Adviser Firm $300,000 for Failure to Prevent Cherry Picking (1/18/2017)
SEC Enforcement Action Alleges Cherry-Picking, Double-Dipping, and Fund Mismanagement (10/25/2016)
SEC Revokes Investment Adviser’s Registration Due to Improper Trade Allocations (6/25/2008)
Written Policies for Block Trades (7/25/2005)
The information contained in this blog post is general in nature intended for educational purposes only and is not a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the proceeding or order. RIA Compliance Consultants, Inc. has not verified the accuracy of the prosecutor’s press releae and securities regulator’s order and is not offering any opinion whether the allegations made by the prosecutor or the securities regulator are accurate. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
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