Articles Posted in Compliance

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In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.

Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.

Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years. Continue reading ›

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This past October the U.S. Department of Labor (DOL) released a proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). Investment advice fiduciaries must generally avoid engaging in certain prohibited transactions absent an exemption. In connection with this proposed amendment, the DOL also released proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.

Whether an individual is providing fiduciary investment advice under ERISA and the Code is currently determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, a person will be deemed to be rendering fiduciary investment advice if: 1) the person renders advice to a  plan or IRA (including plan participants or beneficiaries) as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the particular needs of the plan or IRA.[1] Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code further provide that this investment advice must be “for a fee or other compensation, direct or indirect.” Continue reading ›

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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.

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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 ›

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On August 21, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order imposing civil monetary penalties against Titan Global Capital Management USA LLC (“Titan”) for violations of the new investment adviser Marketing Rule, Rule 206(4)-1. The new rule had a mandatory compliance date of November 4, 2022, but advisers could voluntarily adopt the rule sooner. 

Titan elected to comply with the new rule in June 2021; however, the firm did not adopt new policies and procedures or adapt its practices as required by the new rule. Between August 2021 and October 2022, Titan violated the new Marketing Rule by advertising hypothetical performance without adopting policies and procedures reasonably designed to ensure the hypothetical performance was relevant to client’s or prospective client’s financial situation and investment objectives and also by failing to provide information underlying the hypothetical performance as required by the new rule.  Continue reading ›

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On June 20, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order against Insight Venture Management LLC (“Insight”). The SEC and Insight settled the matter to resolve allegations that the adviser charged excessive management fees caused by the adviser’s inaccurate application of its “permanent impairment” policy and that the adviser failed to disclose a conflict of interest related to these fee calculations.

Insight is an adviser that advises private equity funds. Limited partnership agreements (“agreements”) associated with some of these private equity funds stated that Insight charged management fees during the funds’ post-commitment period—the period during which a fund manager manages and looks to exit funds’ investments—based on the investor’s pro rata share of the funds’ invested capital. The agreements further stated that if Insight determined an investment suffered a “permanent impairment” in value, the adviser would remove an amount equal to the difference between the acquisition cost and the impaired value of the investment. This amount would be paid from the funds’ invested capital, which would in turn reduce the basis used to calculate fees paid by the fund to Insight. The agreements allotted Insight discretion to reverse the “permanent impairment” determination if the investment increased in value thereafter.
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The DOL recently dismissed its appeal of an earlier ruling from the U.S. District Court for the Middle District of Florida (the Court) invalidating part of the DOL’s guidance regarding application of its fiduciary duty to rollover recommendations. The guidance was in the form of an FAQ issued in connection with PTE 2020-02 that explained how a recommendation to roll over retirement assets from a plan to an IRA at the beginning of an ongoing relationship could still be subject to ERISA and/or Code fiduciary duties.

Whether an individual is providing fiduciary investment advice under ERISA or the Code is determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, an individual will be deemed to be rendering fiduciary investment advice if: 1) the individual renders advice to a plan or IRA as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the needs of the plan or IRA.[1]
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PTE 2020-02 is a prohibited transaction exemption under ERISA. It requires Financial Institutions, including RIAs, to meet several enumerated requirements, including adhering to the “Impartial Conduct Standards,” in order to rely upon the exemption with respect to certain transactions, including rollover recommendations. It also requires Financial Institutions to adopt policies and procedures to assure compliance with all of the substantive provisions of PTE 2020-02.

RIAs relying on PTE 2020-02 are required to conduct an annual retrospective review of their policies and procedures for compliance with PTE 2020-02. The retrospective review must be documented in a written report that is certified by a senior executive officer of the firm. The review must be reasonably designed to assist the RIA in detecting and preventing violations of the Impartial Conduct Standards and its policies and procedures governing compliance with PTE 2020-02.
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The SEC’s Division of Examinations recently released their Observations from Examinations of Newly-Registered Advisers. Issued as a Risk Alert, the release provides guidance for what investment advisers new to SEC registration should expect, but also warns were previously examined advisers failed to meet the SEC’s expectations.

The SEC typically initiates an examination of new-to-SEC registration investment advisers within the first year of registration. In our experience, this can occur as soon as six months after the registration is approved. The purpose of these examinations is as much informative as it is about enforcing the securities regulations. In the SEC’s own words, “[s]uch examinations allow the staff to: provide advisers with information about the Division’s examination program, conduct preliminary risk assessments, facilitate discussions regarding the advisers’ operations and risk characteristics, and promote compliance with applicable statutes and regulations.”[1]

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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 ›

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