Custody presents a compliance danger for investment advisers, including advisers to private funds. Three recent enforcement cases illustrate the importance of diligent compliance for fund advisers with custody of client assets.
According to the Advisers Act, an investment adviser has custody of client assets if it holds, directly or indirectly, client funds or securities, or if it has the authority to obtain possession of those assets. See Advisers Act Rule 206(4)-2(d)(2). Continue reading ›
The SEC recently announced its annual Examination Priorities for the 2025 year. This annual release provides insight into the areas that the SEC plans to highlight when inspecting investment advisers, investment companies, broker-dealers, and other entities subject to examination by the SEC’s Division of Examinations. For investment advisers, the 2025 priorities largely are unchanged from the announced 2024 priorities, which we have previously discussed.
For FY25, the SEC again intends to focus on investment advisers who have never been examined, newly registered investment advisers, and investment advisers who have not been examined recently.
Last week, the SEC announced a series of enforcement actions tied to its ongoing sweep of investment adviser compliance with the new Marketing Rule. In total, nine firms settled claims that they violated Advisers Act Rule 206(4)-1, the “new Marketing Rule,” resulting in $1,240,000 in civil penalties.
We have previously written about the implementation of the new Marketing Rule, the announcement of the corresponding examination sweep program, and the subsequent enforcement actions that have resulted. While the previous enforcement actions have largely centered around investment advisers who have failed to adopt policies and procedures designed to prevent violations of the new Marketing Rule, the recent enforcement actions give greater insight into the real-world application of the new Marketing Rule. Namely, the actions detail marketing violations due to the use of third-party ratings by the investment advisers.
With the end of the federal government’s fiscal year, the Securities and Exchange Commission (SEC) once again recently released results from the enforcement program, covering November 2022 through October 2023. The release included cumulative totals and highlighted individual cases and enforcement areas of concentration. The annual release serves as a roadmap for where the SEC is spending its resources, and what conduct will likely lead to enforcement actions.
During fiscal year 2023, the SEC’s Enforcement Division filed 3% more total enforcement actions than during 2022. This included an 8% increase in “stand-alone,” or original actions, along with increases in the number of “follow-on” administrative proceedings. These “follow-on” actions are typically filed after an associated criminal, civil, or other regulatory action, and look to impact an individual’s ability to conduct business in the securities industry.
The Securities and Exchange Commission (SEC) recently released the 2024 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, investment companies, and broker-dealers during the coming year.
As more advisers have returned to the office, the SEC has ramped up its in-person examinations while also leveraging technologies and virtual options to increase the efficiency of the examination program. Going forward, many advisers may experience a blend of in-person and virtual portions of an examination.
For FY24 examinations, the SEC will place a significant focus on how advisers abide by their duty of care and duty of loyalty under their fiduciary standard. Under this focus, the SEC will place an emphasis on (1) the advice provided to clients for complex or illiquid products, (2) the adviser’s process for ensuring that advice is provided in the client’s best interest, (3) how the adviser addresses conflicts of interests, including economic incentives, and (4) how disclosures are made to clients and prospective clients regarding all materials facts necessary for the clients to make informed decisions. Continue reading ›
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 ›
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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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.
For the majority of investment advisers registered with either the SEC or state regulators, annual updating amendment season is once again upon us. Advisers whose fiscal year ends on December 31 are required to file their Form ADV annual amendment within 90 days or by March 31, 2023.
While investment advisers are under a continuing obligation to update their disclosure documents when certain or material information becomes inaccurate, the annual update is a universal requirement designed to ensure that the filing information for investment advisers is up to date. This serves an important function in that it allows clients and potential clients to review the publicly filed ADVs for investment advisers on FINRA’s BrokerCheck and the SEC’s IADP. Additionally, regulators review the filings and the underlying analytics to track industry trends, plan examination targets, and conduct regulatory sweeps.
The Securities and Exchange Commission recently announced the filing of an administrative proceeding against a registered investment adviser and the investment advisers owner/CCO for failing to adopt compliance policies and procedures, a Code of Ethics, and for failing to conduct annual reviews of the same. The advisory firm is Two Point Investment Management, Inc., based in Pittsford, New York. The SEC found that the violations occurred over a 10-year period starting when the adviser first registered with the SEC in 2012.
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