Compliance

Investment Advisers and Social Media

January 2, 2015 | Chadd Reynolds

As the use of social media becomes more prevalent and popular, businesses and financial institutions have begun to utilize the new methods of communication that social media can provide. Many businesses already maintain blogs or interactive accounts like Twitter, Facebook, and Instagram as a method of marketing and interacting with clients or prospective customers. However, social media is a relatively new and constantly changing technology that can create unique and unforeseen risks to a businesses image and regulatory compliance policies. These risks are particularly acute for registered investment advisers.

In the broker-dealer world, FINRA has already adopted rules and issued regulatory notices designed to protect investors from false or misleading claims and representations and guide member firms on how to appropriately monitor their social media participation. Although not strictly applicable to pure RIAs, these rules should be viewed as best practices:

FINRA Rule 2210 and NASD Rule 3010 govern the supervision of a firm’s social media communications;

FINRA Rule 2111 requires that social media communications, if recommending a security, must be considered suitable for the targeted investors; and

Record keeping of all social media communications is required under FINRA Rule 4510.

Texas Charges RIA with Using Misleading Brochure and Advertisements

December 8, 2014 | Chadd Reynolds

On November 17th, the Texas State Securities Board’s Office of Inspections and Compliance charged Mowery Capital Management, LLC (“Mowery Capital”) and one of its investment adviser representatives (collectively “Respondents”) with fraud for failing to disclose certain conflicts of interests, charging excessive fees, plagiarizing advertising material, and other material misrepresentations. The complaint requests that the state Securities Commissioner revoke Respondents’ registration with the state, levy an administrative fine, and issue a cease and desist order prohibiting any further fraudulent behavior.

When registering as a registered investment adviser, a Form ADV must be completed and filed with the appropriate securities authority. Part 2 of the Form ADV, or the “Brochure,” acts as the primary disclosure document for clients and requires the applicant to write in plain English general information about the business (i.e. types of services offered, fee schedule, business and educational background of employees), including any possible conflicts of interest the applicant may have.
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SEC Concerns Regarding Wrap Fee Programs

November 19, 2014 | Chadd Reynolds

Earlier this year, the SEC Office of Compliance Inspections and Examinations (“OCIE”) sent a letter to registered investment advisers requesting information about their wrap fee programs and how their suitability for clients was determined. Most of the requested information centered around the possible misuse of wrap fee programs by advisers. OCIE examiners will want to see that adequate compliance procedures are in place, and that advisors conduct periodic reviews of their wrap fee programs to ensure that advisers are putting their clients’ interests first.

During an examination, advisers will need to disclose, among other things, the procedures and compliance policies governing their wrap fee programs, each wrap fee program used and its adviser, any brochures or marketing materials used to promote their wrap free programs, and what types of fees are covered in such programs. Advisers will also be asked to provide the SEC with its compliance policies for wrap fee programs. This may include how advisers monitor wrap accounts with high cash balances or accounts with low levels of trading, the oversight procedures of branch offices and representatives outside of those offices, best execution policies, and the initial and ongoing suitability reviews for wrap fee programs.
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SEC Enforcement Action Against Former Wells Fargo Advisor for Altering Requested Documents

November 17, 2014 | Chadd Reynolds

In a case that underscores the importance of maintaining thorough and contemporaneous records of compliance reviews of trading records of firm personnel for both broker-dealers and registered investment advisers, on October 15th, 2014, the Securities and Exchange Commission’s Enforcement Division instituted an administrative proceeding against a former compliance officer at Wells Fargo Advisors for allegedly altering documents requested by the SEC during an insider trading investigation.

The Wells Fargo Advisors’ compliance officer was responsible for identifying suspicious trades by Wells Fargo personnel and determining, after a thorough analysis, or what was called a “look back review,” whether such trading was based on material non-public information. On September 2nd, 2010, the compliance officer began review on a set of trades in Burger King securities made by a registered representative of Wells Fargo Advisors, prior to an announcement that the private equity firm, 3G Capital Partners Ltd. (“3G Capital”), was to acquire Burger King at take it private. The findings contained within the compliance officer’s review confirmed that the registered representative and his customers bought Burger King securities ten days prior to the announcement. However, the compliance officer failed to make any additional inquiries into the trades and closed the review with “no findings.” The registered representative was later criminally charged in September of 2012, and subsequently was convicted of trading in Burger King securities on the basis of material non-public information.
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Is your firm prepared? October is National Cybersecurity Awareness Month

October 17, 2014 | Bryan Gort

Earlier this year, the SEC announced one of its focus areas for examinations in 2014 would be cybersecurity. The SEC Office of Compliance Inspections and Examinations published a Cybersecurity Initiative Risk Alert in April that provides a sample request for information and documents, which are designed to determine the preparedness of a firm for a cybersecurity threats. Examples of questions asked include:

– Please provide a copy of the Firm’s written business continuity of operations plan that addresses mitigation of the effects of a cybersecurity incident and/or recovery from such an incident if one exists;

– Does the Firm have a Chief Information Security Officer or equivalent position? If so, please identify the person and title. If not, where does principal responsibility for overseeing cybersecurity reside within the firm?;

– Please provide a copy of the Firm’s procedures for verifying the authenticity of email requests seeking to transfer customer funds. If no written procedures exist, please describe the process.

New Indiana Crowdfunding Act Exemptions

September 9, 2014 | Bryan Gort

The Indiana Securities Division recently issued an emergency rule to explain new distinctions in Indiana’s crowdfunding exemptions, which became effective July 1, 2014. Indiana’s new rule is similar to Georgia’s “Invest Georgia” rule, which we have previously profiled.

The Invest Indiana Crowdfunding Exemption, Sec. 23-19-2-2(27), permits Indiana-organized entities to offer or sell securities for intrastate offerings to Indiana residents only. The exemption requires the Indiana-organized entity to file with the Indiana Securities Division SEC Form D, which clearly states “Indiana Only” on the first page, and to include a cover letter identifying that the filing is for the 23-19-2-2 (27) exemption, and to include a $100 filing fee. The Exemption details the requirements for both issuers and investors in regards to an Invest Indiana offering.
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SEC fines RIA for failure to disclosure conflicts of interest on Form ADV

July 14, 2014 | Bryan Gort

In a consented-to Administrative Order dated July 2, 2014, the Securities and Exchange Commission fined a Missouri-based Registered Investment Adviser, SignalPoint Asset Management (“SignalPoint” or “SAM”), $215,000 for breaching its’ fiduciary duty to clients.

Prior to the formation of SignalPoint, the Principals of SignalPoint were registered as registered representatives and investment adviser representatives for a dually-registered broker-dealer and investment adviser. In 2008, the principals asked the dually-registered broker-dealer and investment adviser to allow them to have ownership and control of SignalPoint but were told that they could not have an ownership in an outside RIA.
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SEC Approves FINRA Self-Trading Rule

May 28, 2014 | Steve Parker

Earlier this month, the Securities and Exchange Commission (SEC) approved a change to Financial Industry Regulatory Authority (FINRA) Rule 5210. The rule now requires member broker-dealers to implement and enforce policies and procedures “reasonably designed” to monitor and prevent “self-trading” activity. See SEC Release No. 34-72067.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is distinct from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.

The rule change will place new restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.
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FINRA Addressing Self-Trading in New Rule

May 28, 2014 | Parker MacIntyre

Earlier this month, the SEC approved FINRA’s rule change addressing the limitation and monitoring of self-trading in SEC Release No. 34-72067. FINRA Rule 5210 will put restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is apart from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.
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Target Date Mutual Funds: Proposed Rules and Recommendations

April 16, 2014 | Parker MacIntyre

On April 3, 2014, the SEC asked for comments on proposed Rule 33-9570, titled “Investment Company Advertising: Target Date Retirement Fund Names and Marketing.” The SEC had originally proposed and accepted comments on this rule in 2010, but it never took action on the proposal. “Target date funds” are a hybrid of stocks, bonds and cash, designed for a specified time-frame which is dependent on the particular investor. For example, someone planning for retirement in 2030 might have a target date fund set for that date.

The Dodd-Frank act, passed by Congress in 2012, created an Investor Advisory Committee within the SEC to offer recommendations to the SEC on various issues such as regulation of securities products, regulatory priorities, fee structures, and other initiatives to protect investor interests. The committee is authorized to submit their findings to the SEC for review and consideration. On April 11, 2013 the Committee issued recommendations regarding target date funds.

The recommendations suggested by the Committee include:

i) alterations to the fund’s “glide path illustration;”
ii) adoption of a standard methodology for designing these illustrations;
iii) increased prospectus disclosures;
iv) marketing materials requirements; and
v) expanded fee disclosures.
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