Articles Posted in Compliance

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The Financial Crimes Enforcement Network (“FinCEN”) adopted final rules to bring the majority of the investment advisory industry under the reporting requirements for illicit finance activity. The update brings “investment advisers,” as defined under the new rule, within the definition of “financial institution” for regulation under the Bank Secrecy Act (“BSA”).

The BSA has long attempted to safeguard the US financial system by monitoring and reporting certain activities and transactions. Under the new FinCEN Rule, certain investment advisers have the same regulatory requirements historically reserved for banks, broker-dealers, money transmitters, and casinos.

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The Corporate Transparency Act (“Act”) became effective January 1, 2024. The goal of the Act is to provide a framework for the collection of beneficial ownership information from non-exempt entities in order to protect national security interests and bring the United States up to international standards.

The Act requires that all non-exempt corporations, limited liability companies, and similar entities report beneficial ownership information to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Under the Act, SEC-registered investment advisers are exempt entities. However, state-registered investment advisers are non-exempt under the current framework. State-registered investment advisers created before January 1, 2024, must file the report by January 1, 2025. State-registered investment advisers created on or after January 1, 2024, but before January 1, 2025, have 90 days after receiving notice of their creation to file the initial report. State-registered investment advisers created after January 1, 2025, will have 30 days after receiving notice of their creation to file the original report. Once submitted, there is no regular reporting requirement. However, you must report changes to beneficial ownership on an ongoing basis, in a timely manner, within 30 days of the change. Continue reading ›

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In September 2023, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against Lufkin Advisors, LLC, a now de-registered Registered Investment Adviser, and its President, Chauncey Forbush Lufkin, III (collectively, “Defendants”) in the U.S. District Court for the Southern District of Florida.

The SEC first alleged an ongoing fraudulent course of conduct for multiple years. To support this claim, they alleged that the Defendants

  • Failed to manage assets entrusted to them,
  • Lost control–due to a lost or forgotten password–of cryptocurrency assets valuing an estimated $10 million for at least a year without notification to the client(s),
  • Made investments with Mr. Lufkin’s spouse’s company without the appropriate conflict of interest disclosures,
  • Failed to account for withdrawals from private funds, and
  • Failed to monitor the value of investments in private funds.

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In November 2022, the U.S. Securities and Exchange Commission (“SEC”) adopted new rule 14Ad-1, which requires that institutional investment managers that are subject to the reporting requirements of section 13(f) of the Exchange Act annually report each say-on-pay vote over which the manager had voting power on the Form N-PX. Institutional investment managers include any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person (“Institutional Managers”). Any Institutional Managers that are required to file Form 13F must disclose any say-on-pay votes over which it exercised voting power on Form N-PX. The types of say-on-pay votes that must be reported include votes on approval of executive compensation, on the frequency of that compensation, and on approval of “golden parachute” compensation connected to a merger or acquisition.

The SEC adopted a two-part test to determine whether an Institutional Manager “exercised voting power” over a security and thus must report a say-on-pay vote on Form N-PX. Accordingly, an Institutional Manager must report a say-on-pay vote for a security if the manager: (1) has the power to vote, or direct the voting of, a security; and (2) exercises this power to influence a voting decision for the security. Even if an Institutional Manager did not exercise voting power over any say-on-pay votes, it must still file a notice on the Form N-PX indicating that it does not have any proxy votes to report. Continue reading ›

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On April 12, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced they had settled charges against 5 registered investment advisers for violations of the SEC’s Marketing Rule. The announcement follows prior enforcement actions for similar violations, which we have previously addressed: SEC Fines 9 RIAs for Marketing Rule Violations, SEC Fines Adviser Under New Marketing Rule, and SEC Announces Examinations Under New Marketing Rule.

Collectively, the 5 investment advisers, GeaSphere LLC; Bradesco Global Advisors Inc.; Credicorp Capital Advisors LLC; InSight Securities Inc., and Monex Asset Management Inc., were censured, ordered to cease and desist from further violations of the Investment Advisers Act of 1940, and pay civil penalties ranging from $20,000 to $100,000.

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Last month, the Financial Crimes Enforcement Network (FinCEN) released notice of a proposed rule that would impose new requirements on certain investment advisers under the Bank Secrecy Act (BSA). Specifically, the new rule would include some advisers within the rule’s definition of “financial institution,” thereby bringing those new advisers within the scope of the rule, which sets out requirements for complying with the US Treasury Department’s counter-terrorism financing and anti-money laundering (collectively, “AML”) program.  FinCen proposed a similar rule in 2015, but that rule never became effective.

This proposed rule is another step in a larger effort by FinCen to collect more relevant information that would allow for better AML enforcement and follows on the heels of the Corporate Transparency Act (“CTA”), which became effective on January 1, 2024. The CTA requires most US companies to submit reports relating to the beneficial ownership of the company. The impetus for the new rule proposal, according to a statement issued by FinCEN’s director, is the concern that foreign adversaries may be taking advantage of vulnerabilities within the US financial system, and a recognition that, collectively, US advisers manage many trillions of dollars. Continue reading ›

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In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.

Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.

Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years. Continue reading ›

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This past October the U.S. Department of Labor (DOL) released a proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). Investment advice fiduciaries must generally avoid engaging in certain prohibited transactions absent an exemption. In connection with this proposed amendment, the DOL also released proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.

Whether an individual is providing fiduciary investment advice under ERISA and the Code is currently determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, a person will be deemed to be rendering fiduciary investment advice if: 1) the person renders advice to a  plan or IRA (including plan participants or beneficiaries) as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the particular needs of the plan or IRA.[1] Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code further provide that this investment advice must be “for a fee or other compensation, direct or indirect.” Continue reading ›

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With the end of the federal government’s fiscal year, the Securities and Exchange Commission (SEC) once again recently released results from the enforcement program, covering November 2022 through October 2023. The release included cumulative totals and highlighted individual cases and enforcement areas of concentration. The annual release serves as a roadmap for where the SEC is spending its resources, and what conduct will likely lead to enforcement actions.

During fiscal year 2023, the SEC’s Enforcement Division filed 3% more total enforcement actions than during 2022. This included an 8% increase in “stand-alone,” or original actions, along with increases in the number of “follow-on” administrative proceedings. These “follow-on” actions are typically filed after an associated criminal, civil, or other regulatory action, and look to impact an individual’s ability to conduct business in the securities industry.

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The Securities and Exchange Commission (SEC) recently released the 2024 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers, investment companies, and broker-dealers during the coming year.

As more advisers have returned to the office, the SEC has ramped up its in-person examinations while also leveraging technologies and virtual options to increase the efficiency of the examination program. Going forward, many advisers may experience a blend of in-person and virtual portions of an examination.

For FY24 examinations, the SEC will place a significant focus on how advisers abide by their duty of care and duty of loyalty under their fiduciary standard. Under this focus, the SEC will place an emphasis on (1) the advice provided to clients for complex or illiquid products, (2) the adviser’s process for ensuring that advice is provided in the client’s best interest, (3) how the adviser addresses conflicts of interests, including economic incentives, and (4) how disclosures are made to clients and prospective clients regarding all materials facts necessary for the clients to make informed decisions. Continue reading ›

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