Industry News

DOL Drops Appeal of Court Ruling Partially Vacating its PTE 2020-02 Guidance

June 22, 2023 | Patricia Klusmeyer

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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DOL PTE 2020-02 Annual Retrospective Review Deadline Approaching

May 25, 2023 | Patricia Klusmeyer

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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SEC Announces What to Expect for Newly Registered Investment Advisers

April 6, 2023 | Charlie Jarrett

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]

What to Expect: SEC Announces Examination Priorities for 2023

March 7, 2023 | Charlie Jarrett

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 ›

SEC Settles Charges Against RIA for Failure to Review Wrap Fee Programs

February 16, 2023 | Katherine Oberlies

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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SEC Announces Enforcement Action Against Investment Adviser for Custody Violations

February 8, 2023 | Charlie Jarrett

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.

SEC Announces Enforcement Actions Concerning Electronic Records

October 27, 2022 | Charlie Jarrett

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.

SEC Announces Examinations Under New Marketing Rule

September 22, 2022 | Charlie Jarrett

While it comes with little surprise, on Monday the SEC’s Division of Examinations officially announced the areas of focus regarding compliance with the New Marketing Rule. The recently released Risk Alert was expected as the compliance date for the New Marketing Rule is quickly approaching.

Initially introduced in December 22, 2020 the modernized Marketing Rule allowed for an 18-month transition period ending with a compliance date of November 4, 2022. Since adoption, we have previously written about the passage of the New Marketing Rule and some of the significant areas impacted by the new rule. The newest announcement shows that the SEC is going to initially focus on some of the top-level issues under the New Marketing Rule: policies and procedures, substantiation, and performance advertising.

When reviewing policies and procedures, the SEC will look that the investment adviser has adopted and implemented a compliance program that is reasonably designed to prevent violations of the New Marketing Rule by the firm and its supervised persons. The Risk Alert mirrors sections of the Adopting Release and states that the SEC expects a thorough New Marketing Rule compliance program should include objective and testable means to prevent violations. Testing includes some documentable review process for advertisements for compliance with the policies and procedures.

Colorado Releases Guidance for Financial Planners

August 18, 2022 | Charlie Jarrett

For the past several years, regulators at both the federal and state levels have placed a greater emphasis on the advisory fees charged to retail clients and how those fees are calculated and disclosed. We have previously written about these efforts publicized through Risk Alerts, Exam Priorities and Observations, and Staff Bulletins. Recently, the Colorado Division of Securities published an Ongoing Financial Planning Guide that articulated its concerns regarding investment adviser firms that provide continuous financial planning services.

The Colorado Division of Securities stated that it has encountered a growing trend in which investment advisers provide on-going financial planning rather than the traditional hourly or one-time fixed fee models. Under the on-going financial planning arrangement, investment advisers theoretically take a greater role in implementing financial plans, assisting clients with day-to-day financial decisions, updating financial plans, and making themselves available to the client as needed.

Compliance concerns regarding financial planning have traditionally focused on the disclosure of services and fees, including how and when the fees are charged, whether collecting fees in advance triggers custody concerns, and whether collecting fees in advance create a refund obligation. Colorado’s Guidance continues highlighting these areas of focus and expands what it considers to be best practices.
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SEC Fines Investment Advisers for Misleading Robo-Adviser Clients About Hidden Fees

July 26, 2022 | Katherine Oberlies

On June 13, 2022, the Securities and Exchange Commission (“SEC”) issued an order instituting administrative and cease-and-desist proceedings against Charles Schwab & Co., Inc. (“CS & Co.”), Charles Schwab Investment Advisory, Inc. (“CSIA”), and Schwab Wealth Investment Advisory, Inc. (“SWIA”), (collectively, “Schwab subsidiaries”) who submitted an offer of settlement without admitting or denying the findings of the order, except as to jurisdiction and subject matter. The order alleges that these investment adviser subsidiaries of The Charles Schwab Corporation (“Schwab”) listed before made false and misleading disclosures on Forms ADV Part 2A and published false and misleading advertising regarding Schwab Intelligent Portfolios (“SIP”), a robo-adviser service.

The Schwab subsidiaries did not charge an advisory fee for the SIP service and instead made money by allocating a fixed percentage of a client’s portfolio to cash and depositing that cash with Schwab Bank. Schwab Bank then loaned the cash out at a higher interest rate than the interest rate paid to clients in order to make a profit.