RIA Compliance Blog

More Wirehouse Brokers Expected to Leave Firms in 2012

January 25, 2012 | Steve Parker

It is expected that more brokers will leave their wirehouse firms in the coming year. Numerous independent firms, Schwab Advisor Services, TD Ameritrade Institutional, Pershing Advisor Solutions LLC, Fidelity Institutional Wealth Services and Diamond Consultants LLC, saw an increase in “breakaway brokers” joining them in 2011. As a result of these breakaway brokers, Cerulli Associates Inc. has predicted in a recent report that the wirehouses’ market share of assets will drop from an estimated 43% last year to 35% in 2013.

The report also states that the big firms no longer seem to care as much about the market share they possess but rather seem intent on retaining their top advisers.
This trend in increasing breakaways seems to be a result of brokers who have been waiting for production requirements in earlier recruitment and retention deals to be fulfilled this year. Brokers may also be growing frustrated with increasing compliance demands, as well as with the bureaucracy and managements of their firms. The president of Diamond Consultants LLC, Mindy Diamond, agrees that there will be more breakaways in 2012 and states, “and at the same time, firms in the independent space have come up with a lot of solutions for advisers.”
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BCG Report Claims FINRA Cost Will Exceed SEC Cost as RIA SRO

January 17, 2012 | Steve Parker

Boston Consulting Group (BCG) released a report last month comparing the cost of the various possible options of different agencies examining investment advisers. This report was conducted as a follow-up to a study released by the Securities and Exchange Commission (SEC) in January 2011, which created these scenarios based on Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The three possible options would be:

Authorizing the SEC to conduct the examinations and fund them by collecting user fees;
Authorize a new self-regulatory organization (SRO) to examine the advisers; or
Authorize the Financial Industry Regulatory Authority (FINRA) to examine the advisers

The economic analysis of the options was based on public research along with more than 40 in-depth interviews with various investment advisory firms. The SEC and FINRA were not interviewed or consulted in this analysis. The report concluded that the creation of enhanced SEC capabilities would cost $240-$270 million, while setting FINRA up as the investment adviser SRO would cost $550-$610 million, and creating a new SRO would cost $610-$670 million. These estimates were developed by projecting setup costs, ongoing mandate costs, and the cost associated with SEC oversight of an SRO.
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SEC Issues Investment Adviser Risk Alert on Social Media

January 16, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) recently issued a National Examination Risk Alert to investment advisers discussing the use of social media. Social media is becoming more widely used as a means to communicate with investors, and advisers need to ensure they are meeting their compliance requirements. The purpose of the alert is to inform advisers of ways they can improve and maintain sufficient compliance practices in using social media websites.

The SEC listed a number of issues for firms to consider as they evaluate the effectiveness of their compliance programs. Among all of the guidelines, some areas firms are encouraged to consider include:

Whether they want to create usage guidelines to address which social media networks are appropriate for use and restrictions which may be appropriate for each network;
Whether to create content standards to prohibit specific content or impose other restrictions in relation to their social media networks;
How their compliance or supervisory personnel can adequately monitor the sites, and how frequently they should be monitored;
Whether content must be pre-approved before posting to a site;
Whether there are adequate resources dedicated to monitor the activity adequately on the social media sites;
Developing criteria for allowing participation by third parties ;
Implementing training related to social media-related compliance practices;
Whether certification should be required to ensure that those individuals using the social media sites understand and are complying with the firm’s internal policies;
Whether to adopt policies distinguishing between personal and professional sites, possibly specifying the types of communication about the firm which are acceptable on a site not maintained by the firm; and
How to maintain information security.

New “Invest Georgia Exemption” Helps Small Businesses Raise Capital

January 10, 2012 | Steve Parker

The Georgia Commissioner of Securities recently adopted the “Invest Georgia Exemption,” which will make it easier and less expensive for almost any small business located in Georgia to raise capital from fellow Georgians. Unlike most other securities registration exemptions, the Invest Georgia Exemption allows businesses to engage in public solicitations of investors, provided certain conditions are met.

Any business wanting to raise capital using this new exemption must be a corporation or limited liability company (LLC) organized in Georgia and registered with the Secretary of State. In addition,

The offering of securities must meet the federal exemption for intrastate offerings requirements, Rule 147, meaning all investors must be Georgia residents;
The total amount raised cannot exceed $1,000,000, not including investments from control persons of the business;
Unaccredited investors (as defined by the SEC) may not invest more than $10,000 each. However, there is no investment limitation for accredited investors;
All investments received must be deposited in an institution authorized to do business in the state of Georgia;
The issuer must file a form of notice with the Commissioner briefly explaining the offering. The notice may be filed after sales have been made, unless there is any general solicitation, in which case the notice must be filed prior to the solicitation; and
The issuer must inform the purchaser that the securities have not been registered and that there are resale restrictions.

Social Media Scam Artist Shut Down by SEC

January 9, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) recently filed a cease-and-desist order against an Illinois man, Anthony Fields, for scamming investors with a fictitious securities offering. Fields attempted to sell more than $500 billion in securities using various social media websites, including LinkedIn.

Fields claimed to be a representative of a “leading institutional broker-dealer” through his firms: Anthony Fields & Associates and Platinum Securities Brokers. He was not registered as a broker/dealer with the SEC nor was he licensed as an associate with a registered broker/dealer.

The SEC has claimed that Fields violated numerous securities regulations. Allegedly, he promoted fictitious bank guarantees by setting up an unfunded investment adviser and an unfunded broker-dealer. He registered both of these with the SEC; however, he did so by filing false applications in March 2010. He also failed to maintain adequate books and records or carry out proper compliance procedures. Finally, he overstated his assets under management by claiming he had $400 million when, in actuality, he had none.
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Financial Advisors Should Note More Restrictive Accredited Investor Definition

January 6, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) has adopted a new rule that redefines the standard for “accredited” investors. Required by the Dodd-Frank legislation enacted in 2010, the accredited investor standard is intended to protect less sophisticated investors in less regulated investments. The rule change, which eliminates an investor’s principal residence from consideration in determining accredited status, may dramatically affect whether some potential investors remain eligible for Regulation D offerings.

Most of the accredited investor qualification criteria remain the same, but the net worth criteria has changed. In order to qualify as an accredited investor, the qualifying net worth amount remains $1,000,000; however, the value of the investor’s principal residence must now be excluded from the calculation of the investor’s assets. In addition, subject to some exceptions, the amount of the mortgage debt on the principal residence is also excluded from the investor’s liability calculation. The overall purpose of the changes is to insure that accredited investor status is determined without regard to the value of any equity in the principal residence.
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FINRA And SEC To Firms: Improve Branch Office Supervision

January 6, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently jointly issued a Risk Alert and a Regulatory Notice on broker-dealer branch office inspections designed to help securities industry firms better supervise their branch offices, as well as to underscore the importance of that supervision.

“An effective risk based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interest,” stated Stephen Luparello, Vice Chairman of FINRA.

The risk alert specifically makes the following recommendations to firms, including:

Increasing the frequency of branch inspections, especially unannounced visits;
Customizing examinations to branch activity based on risk assessments;
Involving more senior personnel in exams;
Insuring that examiners have no conflicts of interest; and
Increasing supervision of certain offices based upon surveillance data and requiring corrective actions to address deficiencies noted.

Mid-Sized Advisers Should Have Already Commenced Transition

December 11, 2011 | Steve Parker

As we first reported on this blog site in September, the North American Securities Administrators Association (NASAA) held a forum, through its Investment Adviser subcommittee, to discuss transition issues for Mid-Sized Advisers under the Dodd-Frank Wall Street Reform Act. As we approach the annual December moratorium on new registrations and renewals, it seems appropriate to review and comment on some of NASAA’s suggestions.

The first step that any Mid-Sized Adviser should take should be to contact his or her state regulatory agency to determine whether it has adopted special rules, forms, or timetables for use. However, the NASAA committee generally provided the following procedure that its state members intended to follow:
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SEC Hits Mid-Sized RIA’s for Compliance Violations, Signaling Continued Interest

December 6, 2011 | Steve Parker

The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.

OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
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SEC Snares Hedge Funds Using Risk Analytics

December 5, 2011 | Steve Parker

The Securities and Exchange Commission (SEC) has implemented a new program — called the Aberrational Performance Inquiry (API) — that has resulted in enforcement proceedings against three hedge funds for overstating material aspects of their business. API looks to find statements made by funds relating to its investment strategy, performance or size, and compares those claims to market data using proprietary analytical processes. In a statement, the SEC stated that API is being used to find the same type of misleading information from registered investment advisers, not just hedge funds.

“We’re using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement — earlier detection and prevention,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, according to an SEC enforcement release. Robert Kaplan and Bruce Karpati, Co-Chiefs of the SEC Enforcement Division’s Asset Management Unit, added, “The extraordinary returns reported by these advisers and portfolio managers were, in most cases, too good to be true. In other cases, outlier returns were a telltale sign that something else was amiss.”
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