Compliance "Best Practices"
News, Commentary and Resources Regarding Compliance for Registered Investment Advisers

Archive for February, 2012

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SEC Proposes Rules To Help Prevent And Detect Identity Theft

Wednesday, February 29th, 2012

From the SEC’s alert:

Washington, D.C., Feb. 28, 2012 – The Securities and Exchange Commission today announced a rule proposal to help protect investors from identity theft by ensuring that broker-dealers, mutual funds, and other SEC-regulated entities create programs to detect and respond appropriately to red flags.

The SEC issued the proposal jointly with the Commodity Futures Trading Commission (CFTC). Section 1088 of the Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission (FTC) to the SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted in 2007 by the FTC and other federal financial regulatory agencies that were previously required to adopt such rules.

The rule proposal would require SEC-regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to:

  • Identify relevant red flags.
  • Detect the occurrence of red flags.
  • Respond appropriately to the detected red flags.
  • Periodically update the program.

The proposed rule would include guidelines and examples of red flags to help firms administer their programs.

The proposal will be published in the Federal Register with a 60-day public comment period.

 

Posted in Privacy & Data Security | No Comments »

SEC Releases Risk Alert on Unauthorized Trading

Tuesday, February 28th, 2012

From the SEC’s Risk Alert:

Washington, D.C., Feb. 27, 2012 – The Securities and Exchange Commission today released an alert to help firms prevent and detect unauthorized trading in brokerage and advisory accounts.

The Risk Alert issued by the agency’s Office of Compliance Inspections and Examinations (OCIE) notes that although broker-dealers and investment advisers are subject to different regulatory requirements, both face similar risks of financial and reputational losses arising from unauthorized trading.

Unauthorized trading can include rogue trades in customer, client, or proprietary accounts or trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be done by traders, assistants on trading desks, portfolio managers, brokers, risk managers, or other personnel, including those in administrative positions in a firm’s back office.

“Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” said Carlo di Florio, Director of OCIE. “We hope that the observations shared in the Risk Alert will be helpful for firms as they review their compliance and supervisory controls to detect and deter unauthorized trading.”

The alert notes that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny. The alert suggests compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading, such as stress testing and independent trading reviews. The alert also discusses policies that require traders to take vacations without remote access to trading accounts. These policies could be enhanced, for instance, by using the trader’s vacation to conduct a special review of the trader’s portfolio for signs of unusual activity.

The alert is the second this year and the fourth in a continuing series of Risk Alerts that the SEC’s examination staff expects to issue.

The following staff contributed substantially to preparing this Risk Alert: Marita Bartolini, Andrew Bowman, Julius Leiman-Carbia, Olin Filyaw, Dan Gregus, George Kramer, Lesley Ward, and Margaret Willenbucher.

# # #

For more information contact:

Carlo di Florio
Director, Office of Compliance Inspections and Examinations
202-551-6200

Julius Leiman-Carbia
Associate Director, Office of Compliance Inspections and Examinations
212-336-0970

George Kramer
Senior Counsel to the Director, Office of Compliance Inspections and Examinations
202-551-8959

 

Posted in Code of Ethics | No Comments »

Protecting Clients from Cybercrime

Wednesday, February 22nd, 2012

Important tips for advisers on protecting their clients from cybercrime.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20120205/REG/302059988

Posted in Compliance | No Comments »

Registration Transition – SEC Backs Off Automatic De-registration

Friday, February 17th, 2012

The SEC Final Rule Release that sets forth the increase in assets under management (AUM) threshold for SEC registration clearly states that the SEC is going to automatically deregister on June 28, 2012, any adviser that does not have the requisite AUM when filing their annual amendment. The SEC has backed off of this which will allow an SEC-registered adviser that reports less than the required $90 million in AUM on their annual amendment to stay SEC registered if, sometime before the June 28th deadline, they pop up over the $90 million mark. All the adviser would then need to do to stay SEC registered is file an other than annual amendment that reports the increased AUM.

Posted in Registration & Licensing | No Comments »

Compliance Alert! Performance Fees

Friday, February 17th, 2012

Dear Compliance Professional,

Recently the SEC tightened its rule on investment advisory performance fees by raising the net worth requirement for investors who pay performance fees and by excluding the value of the investor’s home from the net worth calculation.

This follows on the heels of the SEC excluding the value of an investor’s home from the net worth calculation when determining accredited investor status. Without making this change, there could have been instances when an investor would meet the (ostensibly) higher qualified client standard, but not the (ostensibly) less stringent accredited investor standard.

…………………………….

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the SEC will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.

The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then.

Click here to view the Final Rule Release in its entirety:

Final Rule Release No. IA-3372

Posted in Private Investment Funds | No Comments »

SEC Tightens Rules on Advisory Performance Fee Charges

Thursday, February 16th, 2012

The Securities and Exchange Commission today announced it is tightening its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011. The Commission-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.

The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then.

http://www.sec.gov/rules/final/2012/ia-3372.pdf

 

Posted in Compliance | No Comments »

Customize Those Manuals

Tuesday, February 7th, 2012

At the SEC seminar last week, Rosalind Tyson, director of the SEC’s Los Angeles office, said that firms should design compliance programs tailored to their core business activities and then follow through on them.

“For heaven’s sake, don’t adopt policies that you’re not going to implement,” she said. “Make sure you know who should do what and that they’re doing it.”

Posted in Compliance | No Comments »

9 Regulatory Issues That Could Affect Your Practice

Tuesday, February 7th, 2012

Regulatory issues impacting advisers:

http://www.investmentnews.com/article/20120201/FREE/120129929

Posted in Compliance | No Comments »

New Massachusetts Regulations

Monday, February 6th, 2012

The Massachusetts Securities Division recently adopted new regulations related to investment advisers.  The new regulations became effective February 3, 2012.  The rules will generally not be enforced until August 3, 2012.  The changes to the regulations did the following:

Discretion (950 CMR 12.205)(5): Changed the minimum financial requirements relating to an adviser with discretion over client assets.

Custody (950 CMR 12.205)(5): Removed the minimum financial requirements relating to an adviser with custody.  Instead, an adviser with custody of client assets must comply with the safekeeping requirements outlined in Adviser’s Act Rule 206(4)-2.

Change in registration requirements (950 CMR 12.205(1)&(2)): The regulations change the definition of “institutional buyer” found in the regulations.  This definition was traditionally used by advisers to pooled investment vehicles.  As a result of changes, more investment advisers to pooled vehicles may be required to register or claim another applicable exemption or exclusion.  The Division has also introduced a new conditional private fund exemption to exempt from registration certain advisers to one or more “private funds.”

 

Posted in Registration & Licensing | No Comments »

Registration Transition Issue

Saturday, February 4th, 2012

Many states require applicant for state registration to complete an affidavit of “no prior activity.” The choices are typically, no, you have not conducted advisory activities in this state or yes, you have conducted advisory activities in this state. If the answer is yes, they require you to list all clients and fees charges, provide copies of client agreements, etc. What these affidavits are trying to determine is whether the applicant has been providing investment advisory services absent registration. The problem is, that for transitioning advisers who have been providing services in the state under a notice filing, there is no right way to answer the question on the affidavit. You cannot answer “no” because you would be attesting to something that was not true, but if you answer “yes” you may need to provide years of information about clients and fees. Very onerous and no easy resolution in sight.

Posted in Registration & Licensing | No Comments »

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