Form ADV

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 Enforcement Case Highlights Importance of Conflict of Interest Disclosure

January 30, 2023 | Steve Parker

In this first quarter of the year, most investment advisers are working diligently to complete and file their annual updating amendment to Form ADV, including Part 2A, commonly called the “Brochure.” One of the most important requirements in drafting a Brochure is to make sure that all conflicts of interests, together with a description of how the conflict is mitigated or addressed, are fully and fairly disclosed. An administrative action brought by the SEC and settled last week illustrates, and should serve to underscore, the importance of identifying and disclosing such conflicts.

The SEC charged registered investment adviser Moors & Cabot (“M&C”) with breaching its fiduciary duty to investment advisory clients by failing to disclose conflicts of interest relating to revenue sharing payments and other financial incentives that the adviser received from two clearing brokers. The financial benefits included discounts, incentive credits and shared revenue that were contingent upon M&C meeting certain thresholds in total assets maintained in FDIC-insure bank deposit cash sweeps. M&C also received a share of margin interest the clearing firms charged to M&C’s clients who maintained margin loans. M&C also received a portion of postage and handling fees that one of the clearing brokers charged to its clients.

SBA and SEC Add Guidance on Paycheck Protection Program Loans

May 7, 2020 | Steve Parker

Due to recent guidance from the Small Business Association (SBA) and the Securities and Exchange Commission (SEC), registered investment advisers (RIAs) should carefully consider their eligibility for a loan under the Paycheck Protection Program, and whether they must disclose the circumstances that led to the loan, or the fact of receiving the loan itself, on form ADV.

The PPP Loan Certification
In order to qualify for a PPP loan, an applicant must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Our view of this language was that it was very broad, so as to apply to any business that reasonably anticipated a reduction in revenue that could result in curtailment of its current operations. If an RIA believed in good faith that its revenue will decrease or has decreased as a result of the pandemic, and also anticipated that it will have to terminate any employees without the loan, then it is eligible for the loan. Since the primary purpose of the loan program was to minimize unemployment, in our view such an RIA should have easily been able to make the certification in good faith. However, later SBA guidance effectively altered the standard, and any RIA who applied for a loan should reevaluate the certification under the new standard.

April 23, 2020 — SBA Guidance
There was political backlash in mid-April when it was revealed that certain large companies, including publicly-traded companies that had access to capital markets, were receiving PPP loans. This led the Small Business Administration to issue formal Q&A guidance last Thursday, April 23, 2020. As a result of the guidance, the SBA stated that, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. While it is tempting to read the SBA guidance as applicable only to large businesses with access to capital, the Q&A made it clear that the “significantly detrimental” standard applies to “all borrowers.”Furthermore, while the guidance could be interpreted to apply only to public companies, the SBA clarified that it applied to private companies by updated guidance issued on April 28, 2020.

SEC Issues Clarifying Guidance on New Form CRS

December 5, 2019 | Parker MacIntyre

The SEC’s Divisions of Investment Management and Trading & Markets have issued guidance in the form of a set of Frequently Asked Questions (or “FAQs”) addressing the upcoming implementation of the newly-created SEC Form CRS Relationship Summary (“Form CRS”).

As previously profiled on this blog, Form CRS is a new SEC disclosure document that will be applicable to both RIAs and broker/dealers offering services to retail investors. Indeed, for RIAs, the new Form CRS will function as a new Part 3 to the RIA’s existing Form ADV. The purpose of Form CRS is to summarize basic information about the firm’s services, fees, and costs, as well as its conflicts of interest and material disciplinary events. As noted, Form CRS obligations only arise for firms dealing with “retail investors,” which the SEC defines as “natural persons” or their legal representatives, who seek to receive or receive services “primarily for personal, family or household purposes.” Full implementation of Form CRS is slated for June 30, 2020.

Massachusetts Adopts New Rules Mandating Additional Written Fee Disclosure by RIAs

June 25, 2019 | Parker MacIntyre

The Massachusetts Securities Division (“MSD”) has announced the adoption of new rules requiring that investment advisers registered with the MSD provide, to clients and prospective clients, an additional one-page stand-alone disclosure document specifically detailing the adviser’s fee schedule. This new disclosure document or “Fee Table” will need to be “updated and delivered consistent with the existing requirements for Form ADV (including the Brochure).” The new rules, which were adopted pursuant to the MSD’s notice and comment process, take effect—and will be enforced—commencing on January 1, 2020.

While only applicable to advisers registered with the MSD, the new rules requiring the Fee Table could portend similar future action by additional states. Moreover, the new rules come on the heels of the SEC’s June 5^th high profile standard-of-conduct releases (which we have previously chronicled) that also include a new stand-alone disclosure document for SEC-registered advisers to be known as Form CRS. If the MSD’s actions here are in fact echoed by additional states, it could cause potential headaches for the RIA industry, as this would require RIAs operating in multiple states to conform to multiple differing disclosure document regimes. Additionally, with the new Form CRS (applicable to SEC-registered advisers only) beginning to circulate at about the same time, an assortment of new documents being presented to clients may cause marketplace confusion as well. Continue reading ›

SEC Adopts Long-Awaited Regulation Best Interest and Amendments to Form ADV

June 13, 2019 | Parker MacIntyre

The SEC, on June 5^th, adopted a comprehensive set of rules and interpretations that will have a profound effect on the brokerage and advisory industries going forward, first and foremost by revising the standard-of-conduct applicable to broker-dealers and their registered representatives in dealings with retail customers. Even casual observers will likely be familiar with the various proceedings just concluded at the SEC, which resolve debates that have raged in the investment industry for decades as to the need to align the higher fiduciary “standard-of-conduct” applicable to investment advisers with the lesser suitability standard applicable to broker-dealers. While the June 5^th releases do not equalize the two standards—as many commentators would have desired—they do significantly raise the standard applicable to broker-dealers from suitability to “best interests.” The SEC’s releases number four separate documents, each covering a distinct aspect of the standard-of-conduct controversy, and run over 1200 pages. Accordingly, this note will seek to identify the major headlines from the various releases. Look for future writings, wherein we will explore the nuances of the June 5^th releases in greater detail.

As noted, the SEC released a package of Final Rules and Interpretive Releases comprising four separate components: (1) Final Rules implementing Regulation Best Interest (“Reg BI”), the new enhanced standard for brokers; (2) Final Rules implementing a new Form CRS Relationship Summary (“Form CRS”), a new disclosure document applicable to both brokers and advisers (that, for advisers, will function as a new Part 3 to Form ADV); (3) an Interpretive Release clarifying the SEC’s views of the fiduciary duty that investment advisers owe to their clients; and (4) an Interpretive Release intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act. All four components of the regulatory package were approved by a 3-1 vote of the SEC’s Commissioners, with Commissioner Robert Jackson being the sole dissenter.

While the June 5^th releases are the culmination of a decades-long controversy, they are the proximate result of a formal rulemaking commenced on April 18, 2018, at which time the SEC published initial proposed versions of Reg BI, Form CRS and the advisory interpretations. The Final Rules for Reg BI and Form CRS will become effective 60 days after they are formally published in the Federal Register; however, firms will be given a transition period until June 30, 2020 to come into compliance. The two Interpretive Releases will become effective upon formal publication. Continue reading ›

FINRA Regulatory Notice Announces Commencement of 2019 Renewal Program

November 7, 2018 | Elizabeth Dalziel

On October 31, 2018 the Financial Industry Regulatory Authority published Regulatory Notice 18-37, which announces the commencement of the 2019 Renewal Program for registered investment advisers and broker-dealers. The 2019 Renewal Program is set to begin on November 12, 2018. On that day, FINRA will release Preliminary Statements to all registered firms via E-Bill. Firms are required to remit full payment of their Preliminary Statements by December 17, 2018.

The Preliminary Statements contain various fees for renewal of state registrations and notice filings. For individuals who are renewing their broker-dealer registrations, FINRA will assess a fee of $45. For investment adviser firms and their representatives who are renewing their registrations, any IARD system fees will be featured on their preliminary statements. For FINRA-registered firms that have one or more branch offices, FINRA will assess a renewal fee of $20 per branch. FINRA will, however, waive one branch renewal fee for each FINRA-registered firm.

Firms may pay their Preliminary Statement fees via E-Bill, a wire transfer, or a check. FINRA’s preferred method of payment is E-Bill. If a firm does not pay the Preliminary Statement fees by December 17, it will be charged a late renewal fee. The late fee will amount to either 10 percent of a firm’s final renewal assessment or $100, whichever is greater, but the late fee can be no more than $5,000. FINRA also warns firms that failure to pay the Preliminary Statement fees by the December 17 deadline could result in the firms becoming unable to do business in the areas where they are registered.

Form ADV Amendments Vexing Some Advisers

February 14, 2018 | Steve Parker

The amendments to Form ADV, Part 1 that became effective October 1, 2017 are presenting some registered investment advisers with unforeseen problems as we move into “annual amendment season” in 2018. As we previously highlighted among those changes to Form ADV is the requirement for advisers to disclose estimated percentages of assets held within separately managed accounts in twelve categories of assets.

Advisers with more than $10 billion in regulatory assets under management are required to report the same data as of mid-year and year-end. Smaller firms must report the same data as of year-end only.

This has not proved a simple exercise for some firms. Many have assumed that the custodians of their clients’ assets would readily be able to categorize their clients’ holdings and provide them reports summarizing the data. Continue reading ›

Date Drawing Near for Compliance with SEC Amendments to Form ADV and Recordkeeping Rules

August 8, 2017 | Elizabeth Dalziel

Beginning October 1, 2017, registered investment advisers are required to use revised form ADV, which requests certain information not sought on previous versions of the form. Advisers will also have to comply with amendments to Rule 204-2 under the Investment Advisers Act of 1940 (“Advisers Act”). With the compliance date less than three months away, advisers should examine whether to modify their internal policies and procedures pertaining to Form ADV reporting and recordkeeping, and also should begin the process of collecting the new information and assuring that the information remains available for future Form ADV filings.

The amendments to Form ADV changed the requirements of Item 5 of Part 1A of Form ADV and Section 5 of Schedule D. The amendments will obligate investment advisers to disclose the estimated percentage of regulatory assets under management (“RAUM”) held in separately managed accounts (“SMAs”) and to indicate those assets “that are invested in twelve broad asset categories.” Investment advisers with $10 billion or more in RAUM connected to SMAs will be obligated to report both mid-year and end-of-year percentages for each category. Investment advisers with fewer than $10 billion in RAUM connected to SMAs will only be obligated to report only end-of-year percentages. The amendments to Form ADV will also require investment advisers to disclose the identity of custodians that make up 10 percent or more of an investment adviser’s total SMA RAUM. Continue reading ›

SEC Settles Charges with Investment Adviser for Failure to Disclose Conflicts of Interest Stemming From Revenue Sharing Arrangement

March 27, 2017 | Elizabeth Dalziel

On March 8, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Voya Financial Advisors, Inc. (“Voya”), an SEC-registered investment adviser. The Order, to which Voya consented, obligates Voya to pay disgorgement of $2,621,324, prejudgment interest of $174,629.78, and a civil money penalty of $300,000.

The SEC’s Order claims that Voya did not inform its clients that it was receiving compensation from a third-party broker-dealer and that these receipts created a conflict of interest. Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) states that investment advisers are forbidden from participating in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” Section 207 provides that investment advisers are not allowed to “make any untrue statement of a material fact in any registration application or report filed with the Commission, or to omit to state in any such application or report any material fact which is required to be stated therein.” Finally, Rule 206(4)-7 under the Adviser’s Act compels investment advisers to “[a]dopt and implement written policies and procedures, reasonably designed to prevent violation” of the Adviser’s Act and the rules thereunder. Continue reading ›