Articles Posted in Industry News

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 ›

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 ›

Last week the Securities and Exchange Commission issued Proposed Amendments to the “internet adviser” basis for SEC registration found in Rule 203 A-2 (e). Currently, the rule provides that an adviser who provides investment advice nearly exclusively via an interactive website is eligible to register with the SEC, as long as the adviser maintains records demonstrating that it provides investment advice to its clients exclusively through an interactive website and does not control, is not controlled by, and is not under common control with another investment adviser registered with the SEC solely in reliance on the internet adviser registration basis. An adviser can still qualify to register on this basis if it provides investment advice outside the interactive website (e.g., by telephone, in person, or via email) to not more than 15 clients in a 12-month period.

In proposing the amendments, the SEC noted that the investment management industry has experienced considerable growth and change in the 20-plus years since the rule was adopted. The proposal purports to address some of the more significant changes in the industry, particularly as it relates to the use of technology.

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The DOL recently dismissed its appeal of an earlier ruling from the U.S. District Court for the Middle District of Florida (the Court) invalidating part of the DOL’s guidance regarding application of its fiduciary duty to rollover recommendations. The guidance was in the form of an FAQ issued in connection with PTE 2020-02 that explained how a recommendation to roll over retirement assets from a plan to an IRA at the beginning of an ongoing relationship could still be subject to ERISA and/or Code fiduciary duties.

Whether an individual is providing fiduciary investment advice under ERISA or the Code is determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, an individual will be deemed to be rendering fiduciary investment advice if: 1) the individual renders advice to a plan or IRA 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 needs of the plan or IRA.[1]
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PTE 2020-02 is a prohibited transaction exemption under ERISA. It requires Financial Institutions, including RIAs, to meet several enumerated requirements, including adhering to the “Impartial Conduct Standards,” in order to rely upon the exemption with respect to certain transactions, including rollover recommendations. It also requires Financial Institutions to adopt policies and procedures to assure compliance with all of the substantive provisions of PTE 2020-02.

RIAs relying on PTE 2020-02 are required to conduct an annual retrospective review of their policies and procedures for compliance with PTE 2020-02. The retrospective review must be documented in a written report that is certified by a senior executive officer of the firm. The review must be reasonably designed to assist the RIA in detecting and preventing violations of the Impartial Conduct Standards and its policies and procedures governing compliance with PTE 2020-02.
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The SEC’s Division of Examinations recently released their Observations from Examinations of Newly-Registered Advisers. Issued as a Risk Alert, the release provides guidance for what investment advisers new to SEC registration should expect, but also warns were previously examined advisers failed to meet the SEC’s expectations.

The SEC typically initiates an examination of new-to-SEC registration investment advisers within the first year of registration. In our experience, this can occur as soon as six months after the registration is approved. The purpose of these examinations is as much informative as it is about enforcing the securities regulations. In the SEC’s own words, “[s]uch examinations allow the staff to: provide advisers with information about the Division’s examination program, conduct preliminary risk assessments, facilitate discussions regarding the advisers’ operations and risk characteristics, and promote compliance with applicable statutes and regulations.”[1]

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The Securities and Exchange Commission (SEC) recently released the 2023 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 during the coming year.

Over the last few years, the SEC has adopted several new rules that include compliance obligations. As the implementation dates for these new rules have passed, the SEC will prioritize examining how investment advisers have incorporate the rules into their compliance programs. While impacting a limited number of investment advisers, the amended rules include changes to the Derivates Rule and Fair Valuation Rule.[1] Continue reading ›

On August 26, 2022, the U.S. Securities and Exchange Commission (“SEC”) issued an order settling charges against Kovak Advisors, Inc. (“Kovak”), for compliance failures related to its wrap fee program. The case highlights how important it is for an investment adviser to adopt and follow policies and procedures relating to any wrap fee program, to ensure that the adviser’s services are in the client’s best interest.

From 2015 through August 2018, Kovak offered advisory services to clients through a wrap fee program. Clients that participated in the wrap fee program paid a fee that included asset management, trade execution, and other costs. The SEC made three findings during the time Kovak offered the wrap fee program.
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The Securities and Exchange Commission announced a settled enforcement action against a registered investment adviser for violating the Custody Rule and for compliance violations associated with custody. The enforcement action, coupled with the SEC’s announcement, shows the significance that the SEC places on the safeguarding of client assets.

An investment adviser has custody when it holds client funds or securities or has the ability to obtain possession of such assets, directly or indirectly. In general, the custody rules and regulations are intended to protect client assets from misappropriation or misuse by their investment adviser. As a result, it is considered a prohibited act for an investment adviser to have custody of client funds or securities without implementing policies and procedures specifically designed to comply with the rules and regulations and prevent misuse of the assets. These policies and procedures include notice to client in certain situations, identification of the qualified custodian, and obtaining an audit or verification by an independent CPA of the client assets subject to custody. Custody can be further imparted to an investment adviser through a related party of the investment adviser.

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The Securities and Exchange Commission (SEC) recently announced a series of enforcement actions centered on several of the largest broker-dealers in the financial sector. The enforcement actions addressed longstanding failures of the firms and their employees to preserve certain electronic communications. The 15 broker-dealers, and one affiliated investment adviser, admitted to the facts as stated, acknowledged their actions violated the securities laws, and agreed to pay a combined $1.1 billion in penalties.

Under the various securities rules, including recordkeeping provisions, broker-dealers and investment advisers are required to maintain and preserve electronic communications of business-related matters. Regulators expect that the written policies and procedures address this requirement and set forth a framework for the firm and firm employee’s compliance with the policies and procedures. To meet the regulatory expectations, firms traditionally have set out parameters for both internal and external communications and prohibited communications outside of those parameters. The goal of this method is to limit the forms of communications to those that the firm can monitor and preserve.

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