Investment Adviser

New Investment Adviser Marketing Rule Relaxes Restrictions on Use of Testimonials

April 29, 2021 | Steve Parker

Rule 206(4)-1 under the Investment Advisers Act, known as the “Marketing Rule,” becomes effective on May 4, 2021. Full details of the new rule and the related amendments to the Books and Records Rule and for ADV can be reviewed in the SEC’s adopting release. The new rule changes many aspects of the current guidance applicable to advertising by SEC-registered investment advisers, some of which is drawn from no-action letters and other informal releases. Advisers must come into compliance with the new rule within eighteen months of the effective date or by November 4, 2022. Firms may choose to come into compliance at any time between the effective date and the compliance date, but the SEC has warned that RIAs may not choose to implement parts of the new rules at different times. Rather, a firm must implement and be prepared to comply with the entirety of the new rule on a single date within the eighteen-month compliance period. The rule does not, on its face, apply to state-registered RIAs, who should continue to follow the rules applicable to the states in which they conduct business. Some state rules mirror or adopt the SEC advertising rules in some respects.

One of the most important changes relates to using what has historically been referred to as “testimonials,” or statements by clients regarding their experience with an adviser. The current rule 206(4)-1, titled “Advertisements by Investment Advisers,” states that any advertisement by an adviser that uses a “testimonial of any kind” is deemed fraudulent, deceptive or manipulative. Although “testimonial” is not defined in the current rule, the SEC consistently interpreted the term as a statement of a client’s experience with, or endorsement of, an investment adviser. Under the new rule, however, testimonials as traditionally understood are permitted as long as firms comply with a number of requirements. Continue reading ›

Future of New DOL Fiduciary Rule Uncertain

January 29, 2021 | Steve Parker

Last month, the U.S. Department of Labor announced that it has finalized the new “fiduciary rule” proposed during the Trump administration, creating a new exemption to the fiduciary standards that investment advisers must comply with when servicing ERISA accounts and IRAs Specifically, the new rule – Prohibited Transaction Exemption 2002-02 – creates an exception to ERISA’s prohibited transaction rules and similar rules under the Internal Revenue Code. The DOL issued a Fact Sheet summarizing the rule and its impact.

The new exemption grants investment advisers more latitude and in dealing with such accounts. The exemption applies to both SEC and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that serve as investment advice fiduciaries. The exemption is slated to become effective February 16, 2021. Some have speculated, however, that the new Biden administration may withdraw the rule and pursue a more restrictive one similar to the 2016 exemption adopted during the Obama administration.

After the US Court of Appeals for the Fifth Circuit struck down the Obama-era fiduciary rule in 2018, the DOL issued a Field Assistance Bulletin (FAB 2018-02), that was a temporary policy that provided relief under the prohibited transaction rules to investment advice fiduciaries, provided they worked in good faith the follow the “impartial conduct standards” that had been codified in the vacated rule. The impartial conduct standards require that an adviser act in the client’s best interest, receive only reasonable compensation and refrain from misleading clients. The new final rules, designed to supersede FAB 2018-02, were proposed in June 2020. FAB 2018-02 will remain in effect for 365 days following the publication of the new rule in the Federal Register, while the exemption will become effective 60 days after publication. Continue reading ›

Possible Cognitive Decline of Investment Advisers Underscores Need for Succession Plan, Training

November 18, 2020 | Steve Parker

Earlier this year, the North American Securities Administrators Association (NASAA), through a working group within the Senior Issues/Diminished Capacity Committee, issued a report of findings and recommendations relating to issues of cognitive impairment or diminished capacity that may affect investment advisers and other financial professionals. The report summarized information received by the working group from registered investment advisers, broker-dealers, and compliance consultants in the industry. The findings focused on communication, education, and succession planning as key elements of an effective plan to address impairment issues.

Of course, an adviser suffering from diminished capacity could face serious difficulties relating to his or her work, including not being able to provide effective service to the client or to comply with responsibilities under the securities laws, including meeting the standards of conduct and maintaining adequate books and records. Those interviewed in connection with the study indicated that the industry welcomes continued regulatory engagement and continued input on this subject. Many of them also identified existing guidance from NASAA, the Securities Industry and Financial Markets Association, and the Financial Services Institute as being resources they currently consult when issues arise.

Among the key areas considered are how firms can recognize signs of diminished capacity and how they should consider dealing with issues that arise. The report encouraged firms to consider implementing an appropriate training program to enable staff to detect “red flags” of impairment by an adviser and a mechanism to communicate concerns freely within an organization. While dementia associated with aging is still the most common reason for impairment, other underlying causes include accidents and traumatic injury, side effects from medications, a non-dementia medical diagnosis, and drug or alcohol addiction. When a situation is detected, how a firm should confront the adviser is a key issue, and one that may be fraught with both practical and legal considerations. The report summarized a few instances where firms had successfully dealt with such issues and stressed that sensitivity and respect should be paramount in every such encounter.

SEC Adds RIAs to Definition of “Accredited Investor,” Adopts Other Changes

September 3, 2020 | Steve Parker

In a closely-watched move, the SEC voted 3-2 this past Wednesday to expand the definition of an “accredited investor” to include both state-registered and SEC-registered investment advisers with $5 million or more in assets. Accredited investors are those who are permitted to purchase unregistered securities such as those typically sold in a private placement. The current definition includes individuals or married couples with $1 million or more in investments and individuals with $200,000 in annual income or total income with a spouse of $300,000.

Also added to the definition are individuals who hold Series 7, 65, and 82 licenses. Those correspond to examinations for the general securities agent or representative, the investment adviser representative, and the private placement agent, respectively. “Knowledgeable employees” of a private fund are now also accredited investors. In addition to the new categories included, the Commission established a framework whereby additional categories of sophisticated investors can be added to the definition over time.

The Commission also voted not to adjust upward for inflation, the traditional wealth-based definition of “accredited investor.” The issue exposes a fundamental debate about the adequacies of protections that currently exist in the private securities market, as well as issues of class-based access to markets.

SEC Signals Ransomware Risk to Investment Advisers is High

July 31, 2020 | Bryan Gort

The Securities and Exchange Commission (“SEC”) recently published its sixth risk alert on cybersecurity since 2014. In this alert, the SEC focused on how its regulated firms protect themselves against ransomware risk. I previously wrote about the SEC’s last risk alert on ransomware here.

Ransomware is malware that stops a user from accessing either part or all of the data within their network or other systems until a ransom is paid. For ransomware to be effective, it must gain access to network data in some form or fashion, usually through user error, such as a user clicking a link, downloading a file, or doing something else which affirmatively provides the ransomware access to data. From there, the hacker typically encrypts data and demands payment to unencrypt it.

There are varying studies, but up to 90% of financial services firms, including investment advisers, broker-dealers and investment companies, report that they have been targeted by ransomware. The SEC also reports that these targeted attacks have gotten more sophisticated in nature over the last few years, which necessitates greater allocation of resources from firms to protect themselves.

Investment Advisers to Private Funds Urged to Review SEC Risk Alert

June 25, 2020 | Steve Parker

Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert in which it discussed ongoing deficiencies identified during compliance examinations of investment advisers that advise private funds. This risk alert follows on the heels of other SEC activity relating to private fund advisers, including enforcement referrals, deficiency letters, and informal guidance.

The deficiencies discussed in the risk alert fall into three broad categories: disclosures relating to fees; disclosures relating to conflicts of interests; and sufficiency of a firm’s policies relating to nonpublic material information and its internal enforcement of such policies. The purpose of this risk alert was to provide guidance to private fund advisers regarding steps they should take to improve their compliance policies and program, while simultaneously advising investors in private funds of the types of issues to be aware of when dealing with private fund advisers. Many investors in private funds are pensions or other qualified retirement plans, charities and endowments, and families who have family offices.

This blog post focuses on the portion of the risk alert relating to fees and expenses. Continue reading ›

SBA Extends Safe Harbor for Return of PPP Loans and Signals Further Guidance

May 8, 2020 | Steve Parker

Through updates to the Frequently Asked Questions maintained on its website, the Small Business Administration announced that it has extended the safe harbor date previously announced in Question 31 from May 7, 2020 to May 14, 2020, and that it intends to issue updated guidance relating to the safe harbor before May 14.

By way of background, on April 23, 2020 the SBA issued guidance relating to the certification that must be made by any applicant for a loan under the Paycheck Protection Program (PPP). Specifically, the SBA advised all applicants to consider the truthfulness of the certification in the application regarding the need for the loan to support business operations. The answer to question 31 clarified that all borrowers must carefully consider whether, in light of their current business and access to capital, the loan is necessary, provided the capital is available in a way that would not substantially impair the business. The SBA granted a “safe harbor” by which anyone who had received funds through a PPP loan will be deemed to have made the loan certification in good faith if they return the funds on or before May 7, 2020. A few days later the SBA made it clear that the answer to Question 31 applied to private as well as public companies, through the addition of Question and Answer 37.

The entire process has been sloppy and uncertain. Even the original certification required is vague. What exactly does it mean that a loan is necessary “to support the ongoing operations of the Applicant.” This question could have been avoided through the development of more thorough, objectively measurable eligibility standards, rather than through such a scatter gun approach.

Investor Losses from Oil Pricing War Could Trigger FINRA and SEC Exam Scrutiny

March 11, 2020 | Steve Parker

As the saying goes, “a rising tide lifts all boats.” This expression is commonly used in the investment world to mean that in bull markets, all portfolios tend to rise, no matter how poorly constructed. However, when the market changes directions sharply, as it has over the last thirteen trading days, poorly constructed portfolios sink more precipitously than the overall market.

The stock market has never before plunged by 18% off of its all-time high over such a short time frame. The main driver of the decline had been, prior to this week, concern over the impact that the spreading Coronavirus will have on the US economy. On Monday, March 9, however, news of an oil trade war caused a further, more precipitous decline. But the 18% decline in the market in the last few trading days represents the broad equity markets. Investors whose portfolios are overconcentrated in individual stocks or market sectors are experiencing even worse declines. To continue the boat metaphor, some portfolios will be sunk or will crash against the rocks. Continue reading ›

Text and Chat Messages Key in Hiding Forex Traders Bid-Rigging Scheme

January 13, 2020 | Steve Parker

A federal court in the Southern District of New York is currently considering a motion filed last month that would overturn a jury verdict convicting a former Forex Trader at JP Morgan, Akshay Aiyer, of conspiring to rig bids in Forex transactions. The motion argues that the testimony of alleged co-conspirators Christopher Cummins of Citigroup and Jason Katz of Barclays was unreliable and false, and should not serve as a valid basis for the conviction.

Another aspect of the case that should be of interest to compliance officers of financial services firms was the role that text messages and group chats played in the trial of Mr. Aiver. During the trial in November 2019, Mr. Cummins testified that he and defendant Aiyer communicated via text message and private chat rooms in order to avoid being caught by the banks’ compliance personnel. Cummins pled guilty in 2017 but testified as a cooperating witness for the U.S. Justice Department in the case against Aiyer.

The cases against the US traders are only a part of a larger scheme involving other banks as well. In May 2017, the European Union levied fines totaling €1.7 Billion on Barclays, Citigroup, JPMorgan, Royal Bank of Scotland and Mitsubishi UFJ. The only firm not fined by the EU was UBS, who first detected and reported the fraudulent scheme. The importance of being able to monitor and detect these types of communications cannot be ignored.

SEC Issues Clarifying Guidance on New Form CRS

December 5, 2019 | Parker MacIntyre

The SEC’s Divisions of Investment Management and Trading & Markets have issued guidance in the form of a set of Frequently Asked Questions (or “FAQs”) addressing the upcoming implementation of the newly-created SEC Form CRS Relationship Summary (“Form CRS”).

As previously profiled on this blog, Form CRS is a new SEC disclosure document that will be applicable to both RIAs and broker/dealers offering services to retail investors. Indeed, for RIAs, the new Form CRS will function as a new Part 3 to the RIA’s existing Form ADV. The purpose of Form CRS is to summarize basic information about the firm’s services, fees, and costs, as well as its conflicts of interest and material disciplinary events. As noted, Form CRS obligations only arise for firms dealing with “retail investors,” which the SEC defines as “natural persons” or their legal representatives, who seek to receive or receive services “primarily for personal, family or household purposes.” Full implementation of Form CRS is slated for June 30, 2020.