Articles Tagged with Policies and Procedures

Investment advisers’ use of clients’ usernames and passwords to access their clients’ accounts to observe the accounts’ performance has come under scrutiny in recent years.  In February 2017, the SEC Office of Compliance Inspections and Examinations (“OCIE”) disclosed in a Risk Alert that investment advisers’ use of client usernames and passwords can create compliance issues with the Custody Rule.  According to OCIE, an investment adviser’s “online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts.”  Accessing a client’s account using a client’s username and password often results in an investment adviser being able to withdraw funds and securities.

The North American Securities Administrators Association (“NASAA”) has also observed in recent years that if an investment adviser logs into a client’s account using the client’s personal information, “the investment adviser is in effect impersonating this client and has the same access to the account as the client.”  As a result, a number of issues arise when investment advisers use their clients’ personal information to gain access to online accounts, including custody, recordkeeping obligations, and potential violations of user agreements. Continue reading

On April 3, 2018, the Financial Crimes Enforcement Network (“FinCEN”) published Frequently Asked Questions (“FAQs”) to help “covered financial institutions,” including broker-dealers and dually registered SEC investment advisers, better understand its new Customer Due Diligence Requirements (“CDD Rule”), which will become effective on May 11, 2018.  Other “covered financial institutions” include insured banks, commercial banks, federally insured credit unions, savings associations, trust banks or trust companies that are federally registered, and mutual funds.

The CDD Rule will require covered financial institutions to adopt written policies and procedures that are sufficiently tailored to “identify and verify beneficial owners of legal entity customers and to include such procedures in their anti-money laundering compliance program.”  A beneficial owner is defined as an individual who directly or indirectly owns 25 percent or more of a legal entity customer’s equity and a person who exercises significant control over a legal entity customer.  However, according to the FAQs, should covered financial institutions desire to gather information on individuals owning less than 25 percent of a legal entity customer, they are welcome to do so.  The FAQs also provide that covered financial institutions are required to verify beneficial owners’ identities using risk-based procedures that feature the same factors financial institutions are required to use to verify customer identities under the Customer Identification Program rules. Continue reading

On March 15, 2018, the United States Court of Appeals for the Fifth Circuit elected, in a 2-1 decision, to vacate the Department of Labor’s (DOL’s) Fiduciary Rule (Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al.).  In doing so, the Fifth Circuit overturned the Fiduciary Rule in its entirety, including its new definition of fiduciary advice under the Employee Retirement Income Security Act of 1975 (ERISA) and the Internal Revenue Code (Code), as well as the various new exemptions and revisions to existing exemptions that it features.  It is uncertain whether the DOL will request that the Fifth Circuit rehear the case, appeal the case to the United States Supreme Court, or do nothing.  The Fifth Circuit’s decision, however, has not deterred the Securities and Exchange Commission (SEC) from continuing to discuss implementing its own fiduciary rule.

According to the Fifth Circuit’s majority opinion, the DOL exceeded its authority in adopting the new fiduciary investment advice definition in the Fiduciary Rule, finding the definition inconsistent with the plain text of ERISA and the Code. The Fifth Circuit also concluded that the DOL acted “arbitrarily and capriciously” in, among other things, requiring people providing services to IRAs to sign a contract under the Best Interest Contract exemption in which they admit that they are fiduciaries and can be sued. Therefore, the Fifth Circuit concluded that “the Rule fails to pass the tests of reasonableness of the [Administrative Procedures Act].” Continue reading

On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”).  The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.”  The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET.  While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives.  SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices.  CCOs and other senior staff in private advisory firms typically participate in the panels as well.  Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading

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

On April 10, 2017, the Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (“NAC”) updated FINRA’s Sanction Guidelines.  The purpose of these updates is to “ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.”

FINRA’s Sanction Guidelines are designed to acquaint FINRA-member firms with common securities-industry rule violations that take place and the variety of disciplinary sanctions that may be imposed because of those rule violations.  The Sanction Guidelines also serve as a tool to help FINRA’s adjudicators find suitable sanctions in disciplinary proceedings.  From time to time, FINRA conducts reviews of the Sanction Guidelines to account for “changes in FINRA’s rules” and to reflect accurately “the levels of sanctions imposed in FINRA disciplinary proceedings.” Continue reading

On January 12, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) published its examination priorities for 2017.  OCIE selects its priorities based on practices and products that it believes to constitute significant risks to investors and the investment markets.  It also receives insight from a variety of sources, such as staff from the SEC’s regional offices and other regulators.  The priorities for 2017 are primarily based around protection of retail investors, protection of elderly and retiring investors, and addressing market-wide risks like cybersecurity and anti-money laundering.

The first priority that OCIE plans to emphasize is the protection of retail investors.  Over the years, new technology has provided investors with new, innovative ways to invest their finances.  As a result, the SEC and other regulators must regulate new potential risks that are bound to occur.  To address the possible challenges that retail investors face, OCIE plans to implement a number of examination initiatives.  For example, it plans to evaluate registered investment advisers and broker-dealers who provide electronic investment advice, such as “robo-advisers.”  It also intends to pay particular attention to wrap fee programs and exchange-traded funds (“ETFs”), as well as enlarge its Never-Before-Examined Adviser Initiative program.  Finally, OCIE intends to address the challenges related to investment advisers who operate on a multi-branch business model Continue reading

Most deficiencies identified in the course of investment adviser examinations can be remedied by the adviser simply taking corrective measures. This can be true even with regard to deficiencies that are somewhat serious violations, but only if corrective action is taken and sustained.

In 2016, the Securities and Exchange Commission (“SEC”) starkly demonstrated the importance of following through with promises advisers make to the SEC Examinations Staff. Because they did not make promised corrections, Moloney Securities Co., Inc. and Joseph R. Medley, Jr. were forced to consent to the entry of an Order Instituting Proceedings that required them, among other things, to pay civil penalties and to hire an independent compliance consultant to monitor and report certain aspects of the firm’s compliance program. Continue reading

On November 17, 2016, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a Letter of Acceptance, Waiver and Consent (“AWC”), in which Oppenheimer & Co., Inc. (“Oppenheimer”) agreed to settle numerous charges.  Pursuant to the AWC, Oppenheimer will be fined $1.575 million.  It will also be required to make remediation payments of $703,122 to seven arbitration claimants and $1,142,619 to customers who qualified for but did not receive applicable sales charge waivers pertaining to mutual funds.

Many of the violations related to FINRA Rule 4530. Rule 4530(f) requires FINRA members promptly to provide FINRA with copies of certain civil complaints and arbitration claims.  Rule 4530(b) provides that if a FINRA member realizes that it or an associated person has violated any securities or investment-related laws that have widespread or potential widespread impact to the firm, the member must notify FINRA.  The notification should take place within either 30 calendar days after the determination is made or 30 calendar days after it reasonably should have been made.

According to FINRA’s findings, Oppenheimer failed to file in excess of 350 of these required filings.  Moreover, FINRA found that when Oppenheimer did make the required filings, the disclosures were, on average, more than four years late.

Earlier this year, the North American Securities Administrators Association (“NASAA”) adopted a proposed model legislation or regulation (“Model Act”) aimed at protecting vulnerable adults from financial exploitation.  A 2010 survey by the Investor Protection Trust Elder Fund Society found that one out of every five United States citizens age sixty-five and over has been a victim of financial fraud.  As a result, the protection of vulnerable adults, such as senior investors, from financial exploitation has been one of NASAA’s priorities.

The Model Act is entitled “NASAA Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation.”  It is designed to protect “eligible adults.”  An “eligible adult” is defined as a person age sixty-five years or older, or a person subject to a state’s Adult Protective Services statute, such as disabled or impaired persons. Continue reading