Compliance

New Indiana Crowdfunding Act Exemptions

September 9, 2014 | Bryan Gort

The Indiana Securities Division recently issued an emergency rule to explain new distinctions in Indiana’s crowdfunding exemptions, which became effective July 1, 2014. Indiana’s new rule is similar to Georgia’s “Invest Georgia” rule, which we have previously profiled.

The Invest Indiana Crowdfunding Exemption, Sec. 23-19-2-2(27), permits Indiana-organized entities to offer or sell securities for intrastate offerings to Indiana residents only. The exemption requires the Indiana-organized entity to file with the Indiana Securities Division SEC Form D, which clearly states “Indiana Only” on the first page, and to include a cover letter identifying that the filing is for the 23-19-2-2 (27) exemption, and to include a $100 filing fee. The Exemption details the requirements for both issuers and investors in regards to an Invest Indiana offering.
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SEC fines RIA for failure to disclosure conflicts of interest on Form ADV

July 14, 2014 | Bryan Gort

In a consented-to Administrative Order dated July 2, 2014, the Securities and Exchange Commission fined a Missouri-based Registered Investment Adviser, SignalPoint Asset Management (“SignalPoint” or “SAM”), $215,000 for breaching its’ fiduciary duty to clients.

Prior to the formation of SignalPoint, the Principals of SignalPoint were registered as registered representatives and investment adviser representatives for a dually-registered broker-dealer and investment adviser. In 2008, the principals asked the dually-registered broker-dealer and investment adviser to allow them to have ownership and control of SignalPoint but were told that they could not have an ownership in an outside RIA.
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SEC Approves FINRA Self-Trading Rule

May 28, 2014 | Steve Parker

Earlier this month, the Securities and Exchange Commission (SEC) approved a change to Financial Industry Regulatory Authority (FINRA) Rule 5210. The rule now requires member broker-dealers to implement and enforce policies and procedures “reasonably designed” to monitor and prevent “self-trading” activity. See SEC Release No. 34-72067.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is distinct from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.

The rule change will place new restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.
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FINRA Addressing Self-Trading in New Rule

May 28, 2014 | Parker MacIntyre

Earlier this month, the SEC approved FINRA’s rule change addressing the limitation and monitoring of self-trading in SEC Release No. 34-72067. FINRA Rule 5210 will put restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is apart from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.
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Target Date Mutual Funds: Proposed Rules and Recommendations

April 16, 2014 | Parker MacIntyre

On April 3, 2014, the SEC asked for comments on proposed Rule 33-9570, titled “Investment Company Advertising: Target Date Retirement Fund Names and Marketing.” The SEC had originally proposed and accepted comments on this rule in 2010, but it never took action on the proposal. “Target date funds” are a hybrid of stocks, bonds and cash, designed for a specified time-frame which is dependent on the particular investor. For example, someone planning for retirement in 2030 might have a target date fund set for that date.

The Dodd-Frank act, passed by Congress in 2012, created an Investor Advisory Committee within the SEC to offer recommendations to the SEC on various issues such as regulation of securities products, regulatory priorities, fee structures, and other initiatives to protect investor interests. The committee is authorized to submit their findings to the SEC for review and consideration. On April 11, 2013 the Committee issued recommendations regarding target date funds.

The recommendations suggested by the Committee include:

i) alterations to the fund’s “glide path illustration;”
ii) adoption of a standard methodology for designing these illustrations;
iii) increased prospectus disclosures;
iv) marketing materials requirements; and
v) expanded fee disclosures.
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SEC Investment Advisor 2014 Compliance Outreach Program

March 25, 2014 | Parker MacIntyre

On January 30, 2014, the Securities and Exchange Commission hosted a compliance outreach program for investment companies and investment advisors. The national seminar, which was jointly sponsored by the Office of Compliance Inspections and Examinations and the Asset Management Unit of the Division of Enforcement, was held at the SEC headquarters in Washington, D.C.

The seminar outlined the priorities of SEC Divisions or Programs as well as general regulatory priorities of the SEC in the coming years. These priorities included the Wrap-Fee Programs, General Solicitation under the JOBS Act, Cybersecurity, and IABD Harmonization. One program of note that will be taking on more importance over the next two years is the Examination Initiative. The National Examination Program intends to review a substantial percentage of registrants that have not had an examination in the last three years. These examinations will take the shape of either a Risk Assessment Exam or a Presence Exam.
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SEC Announces Plans to Examine Never-Before Examined RIAs

March 13, 2014 | Steve Parker

On February 20, 2014, the Securities and Exchange Commission announced that it is launching an initiative, through its Office of Compliance Inspections and Examinations (“OCIE”), to conduct examinations of investment advisers that have been registered with the SEC for 3 or more years but who have never been examined. That same day, OCIE sent letters to all RIAs that have never been examined in order to provide them with information about the new initiative, which is being conducted under the National Exam Program (“NEP”).

The notice letter describes the two distinct approaches of the initiative as “risk assessment” and “focused reviews.” The former approach is designed to allow OCIE to obtain a better understanding of a particular RIA, and may include an overall review of the adviser’s activities with focus on the firm’s compliance program and disclosure documents and underlying facts. The latter, or “focus review” approach, includes a comprehensive risk-based examination of those advisers identified as having a higher risk area of business or operations. The focus-review examinations will focus on one or more of the firm’s compliance program, filings and other disclosure documents, marketing, portfolio management, and/or safety of client assets.

OCIE disclosed that not all RIAs receiving the letter would, in fact, be examined. Firms that receive the letter, however, would be well advised to prepare for an examination in any event, which usually means nothing more than maintaining and sharpening, where necessary, their policies and procedures so that they are adequate to assure compliance with SEC regulations, and contain clear and well-defined processes and responsibilities.
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California Court Decision May Allow Brokers to Expunge Their Records More Easily

September 7, 2012 | Steve Parker

In a decision last month, the California Court of Appeals may have opened the door for brokers to bypass the Financial Industry Regulatory Authority’s (FINRA) rigid expungement rules in order to remove matters from their CRD records. Currently, brokers must abide by Rule 2080 in order to expunge their records. The FINRA rule allows for expungement only upon meeting one of three tests: (1) the claim is factually impossible, (2) the broker was not involved in the conduct or (3) the information is false. The rule states that a broker who seeks expungement “must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.”

In its recent decision, the California Court of Appeals held that a court may expunge a broker’s CRD record in the interest of fairness and equity, regardless of FINRA’s rule. Edwin Lickiss filed a petition in the court in April 2011 seeking expungement of 17 customer complaints and a regulatory action from his CRD record claiming that they were old and irrelevant and negatively affected his profession. The customer complaints against Mr. Lickiss had resulted in total payments of $831,000, and Mr. Lickiss was required to personally pay a $5,000 settlement. FINRA objected to Mr. Lickiss’s expungement request, stating that he was trying to “sanitize his record and prevent regulators, brokerage firms and investors from learning of this history for what amounts to ‘time served.'” The trial court dismissed the complaint, citing the requirements of Rule 2080. The court of appeals reversed the trial court’s decision, holding that it should have looked to equitable principles instead of FINRA rules.
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States Report RIA Enforcement Cases Doubled in 2011

August 27, 2012 | Steve Parker

The North American Securities Administrators Association (NASAA) released preliminary numbers this month showing that the number of enforcement cases brought by state regulators doubled during 2011. During that year, states brought about 400 cases compared to 208 cases brought during 2010. This increase is due in large part to an expansion of state examinations as a result of the Dodd-Frank financial reform law. Dodd-Frank gave the states examination authority for some approximately 2,400 “mid-sized” advisers (firms with less than $100 million in assets under management) which are required to switch from SEC to state registration.

As a result of the switch, some former SEC firms that haven’t been examined in many years, if ever, by the SEC now find themselves subject to a state examination and can also look forward to being examined by the state more frequently.
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FINRA Issues Regulatory Notice Clarifying New Suitability Rule

June 20, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice in May clarifying its new suitability rule, Rule 2111. The rule, which was approved by the Securities and Exchange Commission (SEC) in November 2010, will be implemented on July 9, 2012. The Notice is intended to answer industry questions and provide guidance on the new rule.

According to FINRA, the new rule imposes the same obligations as the predecessor rule and related case law. It is intended to clarify and codify three main suitability obligations.

The first obligation is reasonable-basis suitability, which has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.

The second obligation is customer-specific suitability, in which the broker must have a reasonable basis to believe that a recommendation of a security or investment strategy is suitable for the particular customer based on the customer’s investment profile.
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