RIA Compliance Blog

Is your firm prepared? October is National Cybersecurity Awareness Month

October 17, 2014 | Bryan Gort

Earlier this year, the SEC announced one of its focus areas for examinations in 2014 would be cybersecurity. The SEC Office of Compliance Inspections and Examinations published a Cybersecurity Initiative Risk Alert in April that provides a sample request for information and documents, which are designed to determine the preparedness of a firm for a cybersecurity threats. Examples of questions asked include:

– Please provide a copy of the Firm’s written business continuity of operations plan that addresses mitigation of the effects of a cybersecurity incident and/or recovery from such an incident if one exists;

– Does the Firm have a Chief Information Security Officer or equivalent position? If so, please identify the person and title. If not, where does principal responsibility for overseeing cybersecurity reside within the firm?;

– Please provide a copy of the Firm’s procedures for verifying the authenticity of email requests seeking to transfer customer funds. If no written procedures exist, please describe the process.

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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Alabama Joins the Crowd: State Crowdfunding Exemption

June 16, 2014 | Parker MacIntyre

The Alabama Legislature passed a crowdfunding exemption bill this April, but the bill is still awaiting the Governor’s signature to become effective. Alabama is the eleventh state to enact legislation or develop regulations on this topic. Other states that have adopted crowdfunding exemption bills include, Washington, Idaho, Wisconsin, Michigan, Kansas, Georgia, Tennessee, Indiana, Maryland, and Maine.

Similar to the approach taken by other states, Alabama’s new legislation is intended to unlock capital and increase access to it for local small businesses and entrepreneurs. While it is still uncertain how successful state measures such as these will be in achieving the goal of increased capital access, the ability of small business owners to raise capital should be enhanced through the relaxation of some of the previous constraints. It is important to note, however, that regulatory agencies will require strict adherence to the new standards in return for less-regulated access to capital. Businesses using the Alabama crowdfunding exemption, and other, similar state exemptions, bear the burden of ensuring its sale of unregistered securities does not run afoul of restrictions governing them.
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State Private Fund Adviser Exemption Update

June 12, 2014 | Steve Parker

In the past six months two states, Iowa and Texas, have adopted private fund adviser exemptions to their investment adviser registration requirements under their respective state securities acts. Another state, Washington, has proposed a private fund adviser exemption. These state actions reflect a continuing trend to exempt private fund advisers from registration under certain carefully circumscribed conditions.

The Iowa exemption, which became effective at the end of 2013, exempted advisers providing advice to one or more qualifying private funds so long as neither the advisers nor their affiliates are subject to the “bad boy” disqualification provisions of Rule 262, Regulation A and the adviser files the required exempt reporting adviser’s reports mandated by Rule 204-4 of the Investment Adviser’s Act of 1940 via the IARD filing system. The exemption further provides that representatives of exemption-eligible investment advisers are also exempt from the investment adviser representative registration requirements if they do not otherwise act as representatives, that is, if they only act as representatives in connection with the activities of the exempt private adviser. The Iowa rule also provides that private fund advisers that are registered with the SEC are ineligible for the state exemption and therefore must comply instead with the notice filing requirements under the Iowa Securities Act for federal covered advisers.
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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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