Compliance News

Key Regulatory Developments Over the Past Year and Their Impact on Your Compliance Program

With the appointment of a new Chairman and leadership changes at its Division of Enforcement, 2017 has been a year of transition for the Securities and Exchange Commission (“SEC”). This article focuses on four key regulatory developments for investment advisers in 2017, including updates to Custody Rule requirements, Form ADV amendments, advertising developments, and the DOL fiduciary rule. Other key developments discussed are pay to play, private equity conflicts, robo-advice, fund share class selection, and cybersecurity.

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January 2018 Newsletter

In the January 2018 edition of our newsletter, we discuss compliance resolutions RIAs can make to improve their compliance programs and FINRA Rule 2210. Our guest article by Jeremy Solomon from Solomon Exam Prep, reviews the essentials of FINRA’s new Securities Industry Essentials exam.

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December 2017 Newsletter

In the December edition of our monthly newsletter,  we discuss how effective annual reviews can result in improvements to your compliance program in addition to benefits which transcend compliance. Our BD team shares a year-end compliance planning checklist as well as an entertaining short jingle about a CCO who didn’t plan well enough. Lastly, our guest article by Global Relay reviews how they combat Cybersecurity threats.

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November 2017 Newsletter

In this edition of our monthly Newsletter, Les Abromovitz explores how to handle clients who take their business elsewhere and the SEC’s latest initiative to fight cyber threats and protect retail investors. Our guest column this month is from Smarsh’s Corporate Counsel and Regulatory Advisor, Marianna Shafir, Esq., who discusses how failure to archive text messages can result in regulatory fines and suspension.

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October 2017 Newsletter

The October edition of our Newsletter covers a variety of topics. Beverly Fetcko reviews the areas broker-dealers should include in their Business Continuity Plan according to FINRA Rule 4370. Les Abromovitz discusses the SEC Office of Compliance Inspections and Examinations (OCIE) Risk Alert on the Advertising Rule. Our guest column this month is from Dan Klein, President and CEO of Sage Marketing, who discusses the importance of using social media to reach your clients.

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September 2017 Newsletter

Our September Newsletter focuses on cybersecurity after Equifax revealed a data breach that exposed 143 million American consumer’s sensitive personal information. Mark Alcaide discusses how the SEC expects firms to implement robust cybersecurity policies and procedures. Les Abromovitz reviews the SEC’s Office of Compliance Inspections and Examinations (OCIE) Risk Alert on cybersecurity.

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August 2017 Newsletter

In this addition of our monthly Newsletter, Les Abromovitz reveals the results from the 2017 Investment Management Compliance Testing Survey and discusses FINRA’s Regulatory Notice that strengthens controls on Registered Representatives and Broker-Dealers. Our guest columnist, Ric Lager, explains how he has combined old school methodology with social media technology to grow his RIA.

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Alternative Facts Aren’t Acceptable on Form ADV

Using words and deeds, the SEC has made it abundantly clear that Form ADV disclosures must be thorough, complete, and truthful. These disclosures must also be consistent with a firm’s advisory contracts and business practices.

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DOL Confirms Fiduciary Rule Applicability Date of June 9th

On May 22, DOL Secretary Alexander Acosta announced that the components of the Fiduciary Rule scheduled to go into effect on June 9th will go effective on that date without further delay.

Effective June 9, 2017, advisers providing advice to traditional and defined contribution plans, such as 401(k) plans, as well as to plan participants and to those who save through IRAs, will be treated as fiduciaries under the Fiduciary Rule and have an obligation to adhere to “Impartial Conduct Standards”.

The Impartial Conduct Standards consist of three components:

  • Advice must be in the best interest of the client at the time the advice is given;
  • Compensation must be reasonable as described in section 408(b)2 of ERISA; and
  • Statements about recommended investments, fees & compensation, material conflicts of interest, and any other relevant matters are not misleading at the time they are made.

NCS Regulatory Compliance has made available a Rollover Suitability Form to assist firms with complying with the Impartial Conduct Standards, which is found in the Library of NCS-Connect (under DOL Fiduciary Rule).  Compliance with the remaining conditions in the exemptions provided under the Rule (including the Best Interest Contract exemption), such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors, are not required until Jan. 1, 2018.

Although written policies and procedures are not required under the Rule for most RIAs, NCS Regulatory Compliance recommends that RIAs impacted by the Rule adopt policies and procedures as a best practice to help ensure compliance with the Rule.  NCS Regulatory Compliance will be providing updates to ERISA policies and procedures to clients impacted by the Rule.  In the meantime, if you have specific questions or concerns relating to the Fiduciary Rule, please contact your NCS Regulatory Compliance Consultant.

The DOL will continue their review of the Fiduciary Rule beyond the June 9th effective date and the possibility remains that modifications could be adopted prior to the Rule’s full implementation on January 1, 2018.  We will continue to monitor the status of the DOL’s Fiduciary Rule and keep you informed of any developments.

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Robo-Advisers and Traditional RIAs Can Benefit from SEC Guidance

In February, 2017, the SEC provided guidance regarding robo-advisers, a term that refers to an automated digital investment advisory program. The guidance is important to all Registered Investment Advisers (“RIAs”), even if they are not incorporating a digital platform in their business model.

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Compliance Trends Are Worth Watching

There is an investment adage that says “The trend is your friend.” Investment advisers sometimes look at trend activity as part of their analysis of which securities to trade. Compliance trends can also be your friend if a Registered Investment Adviser (“RIA”) is attempting to enhance its compliance program. RIAs should take note of compliance trends to ensure their firms are compliant. A recent Risk Alert from the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) highlighted five compliance topics that were most frequently cited by examiners in deficiency letters sent to RIAs after their examinations.

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OCIE Reveals the Top Five Compliance Topics Found by Examiners

On February 7, 2017, OCIE published a Risk Alert, which lists the five compliance topics that were identified most frequently in deficiency letters sent to RIAs. OCIE’s list was compiled from more than one thousand deficiency letters involving RIAs registered with the Commission. These deficiency letters related to examinations conducted during the previous two years. The problems most frequently encountered by examiners pertained to the compliance topics detailed in this alert.

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RIAs Need to Ensure that Branch Offices Are in Compliance

Oversight of Registered Investment Advisers (“RIAs”) and broker-dealers is a huge undertaking. When the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2017 priorities, the publication noted that OCIE oversees more than 4,000 broker-dealers, including roughly 162,000 branch offices and 640,000 registered representatives. OCIE also oversees more than 12,000 investment advisers with a growing number of branch offices.

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New Year Means FINRA Exam Priority Time

FINRA released last week their annual Examination Priorities Letter for 2017. We put together a brief synopsis for you to get a better understanding of the priorities and what they mean to your Firm and your business. Again this year, Sales Practices dominate their priorities. http://www.finra.org/sites/default/files/2017-regulatory-and-examination-priorities-letter.pdf  

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Latest Guidance on Succession Filings

In November, 2016, the SEC’s Division of Investment Management staff published guidance regarding Registered Investment Adviser (“RIA”) reliance on a predecessor’s registration. The guidance addressed situations where an RIA may be able to rely on the special registration provisions afforded to successors.

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SEC Examiners Will Look at Whistleblower Rules Compliance

The Dodd-Frank Act established a whistleblower program that authorizes the SEC to reward individuals who voluntarily provide the Commission with original information about a violation of federal securities laws. Before the Dodd-Frank Act was passed, the SEC’s authority to compensate whistleblowers was limited to insider trading cases. A whistleblower is defined as any individual who provides the SEC with original information related to a possible violation of federal securities law that has occurred, is about to occur, or is ongoing.

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Risky Business and Employees Can Put RIAs on SEC’s Radar

Delray Beach, Fl – November, 2016 – When the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its priorities for 2016, the Commission warned that higher-risk Registered Investment Advisers (“RIAs”) were more likely to be examined. Focusing on high-risk firms enables the SEC and state securities regulators to make the most effective use of their resources. Firms that pose the greatest threat to retail investors and individuals saving for retirement are likely to be on the SEC’s radar.

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RIAs Pay the Price for False Performance Claims

Delray Beach, Fl – October, 2016 – On August 25, 2016, the SEC announced penalties against thirteen Registered Investment Advisers (“RIAs”) that violated securities laws by disseminating false performance claims made by F-Squared Investments, an investment management firm. The SEC conducted an enforcement sweep of RIAs and found that these thirteen firms did not question F-Squared’s claims that its AlphaSector strategy had outperformed the S&P 500 index for a number of years. The firms passed along the performance claims made by F-Squared to investors without substantiating the results.

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“Over-exaggeration” and Other Advertising Compliance Problems

Delray Beach, Fl – September, 2016 – An Olympic swimmer recently admitted that he “over-exaggerated” his story about being robbed after a night of celebration in Rio. “Over-exaggeration,” or any exaggeration for that matter, is just one of many misstatements that can cause an investment adviser’s advertisements to be noncompliant.

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Form ADV Disclosure Deficiencies Mislead Investors and Regulators

Delray Beach, Fl – August, 2016 – The Form ADV Part 2 disclosure brochure is a narrative that must be written in plain English. The disclosure brochure describes a firm’s advisory services, compensation, experience, conflicts of interest, investment strategy, and a wealth of other important information. Recent enforcement actions demonstrate that the SEC will sanction Registered Investment Advisers (“RIAs”) that fail to make full and accurate disclosure in their firms’ Form ADV.

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Inaccurate Fee Calculations Will Be Costly for RIAs

Delray Beach, Fl – July, 2016 – The late New York Yankee legend, Yogi Berra, said that “baseball is 90 percent mental, and the other half is physical.” Registered Investment Advisers (“RIAs”) are required to be much more precise with their calculations, especially in regard to advisory fees. Miscalculating those fees is likely to cause problems with clients and examiners.

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SEC Sends Clear Message That Cybersecurity Is Still a High Priority

Delray Beach, Fl – June, 2016 – Recent speeches and public statements made by SEC officials indicate that the Commission is still focused on cybersecurity. Registered Investment Advisers (“RIAs”) and broker-dealers would be wise to take note of those pronouncements and should make certain they are using their best efforts to defend their firms against cyber-attacks.

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Solicit Compliance Advice Before Using Solicitors

Delray Beach, Fl – May 2016 – As Registered Investment Advisers (“RIAs”) attempt to grow their business, they often consider whether to use solicitors. RIAs should be aware of the compliance obligations they will face if they choose to use solicitors. These compliance requirements are dependent upon where the RIA and the solicitor are located, as well as the particular facts and circumstances surrounding their relationship.

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A Cautionary Look at Regulation Crowdfunding

Delray Beach, Fl – May, 2016 – Issuers are often bewildered by the myriad “Dos” and Don’ts” of raising equity capital for their young firms. Their attention span does not last far into an explanation of the rules and how and why they came about. Often the first mention of the ’33 Act loses their interest. Title III of the JOBS Act required the SEC to come up with a solution to allow issuers and investors to come together under less onerous and modern terms. The SEC’s answer is Regulation CF.

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DOL’s Fiduciary Rule is Finalized

Delray Beach, Fl – Apr. 2016 – The final version of the Department of Labor’s fiduciary rule was released on April 6, 2016. According to Labor Secretary Thomas Perez, the final version of the 1,028 – page rule was streamlined. Though the final version of the fiduciary rule was revised in response to industry concerns, it is still likely to have a dramatic impact on Registered Investment Advisers (“RIAs”), broker – dealers, insurance agents, and financial institutions.

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Share Class Choices Can Breach Duty of Best Execution

Delray Beach, Fl – Mar. 2016 – On January 14, 2016, the SEC announced that it had settled an enforcement action against an Ohio-based Registered Investment Adviser (“RIA”) and two of its officers who were licensed registered representatives of a broker-dealer. The SEC alleged that the RIA violated sections 204, 206(2), 206(4) and 207 of the Investment Advisers Act, as well as Rules 204(a), 204-3(b)(1) and (2), and 206(4)-7 thereunder. The RIA’s president and majority owner, as well as its Chief Operating Officer and minority owner, were accused of violating or causing these violations of the Investment Advisers Act and its rules.

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SEC’s 2016 Examination Priorities

Delray Beach, Fl – Feb. 2016 – The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) revealed its 2016 examination priorities on January 11, 2016. These examination priorities affect a number of financial institutions, including Registered Investment Advisers (“RIAs”), broker-dealers, transfer agents, and clearing agencies.

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Compliance Resolutions for the New Year

Delray Beach, Fl – Jan. 2016 – The new year is a perfect time for resolutions and not just the standard pledge to lose weight or exercise more. Chief Compliance Officers (“CCOs”) should consider making resolutions that will help their firms to stay compliant.

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Knowledgeable, Ethical, and Conscientious CCOs Can Protect Themselves and Their Firms

Delray Beach, Fl – Dec. 2015 – The SEC and other securities regulators know they cannot catch every noncompliant activity that might harm investors. Enforcement actions help securities regulators send a message to Registered Investment Advisers (“RIAs”), Chief Compliance Officers (“CCOs”), and Broker-Dealers (“BDs”) that noncompliance and recidivist violations will not be tolerated.

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National Compliance Services and Regulatory Compliance join forces to form full-service compliance consulting powerhouse

New York – Oct. 27, 2015 – National Compliance Services Inc. (NCS) and Regulatory Compliance LLC, two of the nation’s longest-serving regulatory compliance consulting leaders, announced today they have signed a definitive agreement to merge.  This strategic combination creates a single source of compliance consulting services and solutions for registered investment advisers (RIAs), broker-dealers (BDs), hedge funds and other financial services clients.

Each with 20+ years of experience in the registration and compliance consulting space, the two privately held companies have enjoyed strong growth in recent years, fueled by an increasingly demanding regulatory environment and the trend toward investment advisory independence.

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