RIA Compliance Blog

Nebraska Proposes Amendments to its Investment Adviser, Broker Dealer and Securities Registration Rules

November 25, 2016 | Steve Parker

Nebraska has proposed multiple changes to its securities laws, including changes to investment adviser registration requirements, changes related to broker dealers and agents, and changes relating to securities registration procedures.

As the proposed changes relate to investment advisers, Nebraska proposes to eliminate the Form IAR and to substitute registration through the CRD/IARD system. An original application for registration would be required to contain Form ADV, Part 2 for the firm and a brochure supplement for each investment adviser representative. An original application would also be required to contain copies of all other promotional or disclosure literature expected to be provided to clients and perspective clients in Nebraska. The proposed rule would eliminate from the registration renewal requirements, the current requirements of submission of Form IAR and the promotional and disclosure literature. The rules would align Nebraska with the annual updating amendment requirements of other states, by requiring submission of annual updating amendments to Form ADV within 90 days of the end of the fiscal year. Additionally, the rule would require firms to submit other-than-annual amendments to Form ADV as required by the Form ADV instructions.

The proposed rule would also require brochure delivery to clients in a manner consistent with the requirements of most other states. For example, delivery of Part 2 and a brochure supplement for each individual that provides investment advice and has direct contact with the client, or exercises discretion over the client’s assets in Nebraska either at the time of entering into an advisory contract or within 48 hours before entering into the contract. If the delivery is made at the time the contract is entered into, the client must be given the right to terminate the contract without penalty within 5 days of entering into the contract. Either an annual update or summary of material changes must be delivered to each client within 120 days after the end of the firm’s fiscal year.

FINRA Proposes Rule Designed to Combat Financial Exploitation of Seniors and Other “Specified Adults”

November 23, 2016 | Elizabeth Dalziel

In October 2015, the Financial Services Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a proposal (“Proposal”) to amend its Customer Account Information Rule (“Rule 4512”) and to adopt a new Financial Exploitation of Specified Adults Rule (“Proposed Rule 2165”). Based on a study published in 2011 and a survey published in 2013, FINRA determined that financial exploitation of seniors and other vulnerable adults is a serious and growing problem that must be addressed. As of now, a small number of states have already enacted legislation that is designed to help detect and prevent financial exploitation of seniors. As discussed previously, the North American Securities Administrators Association (“NASAA”) recently adopted a model act that is intended to provide states with guidance for drafting legislation or regulations to protect seniors and other vulnerable adults from financial exploitation.

FINRA, however, believes there needs to be a uniform, national standard regarding a financial institution’s obligations in helping to prevent financial exploitation of seniors and other vulnerable adults. Thus, FINRA first published its Proposal in October 2015 and requested comments on it. After receiving 40 comment letters from both individuals and institutions, FINRA filed the Proposal with the Securities and Exchange Commission in October 2016. The SEC began a comment period on November 7, 2016, and it will end on November 28, 2016.

The proposed amendments to Rule 4512 and Proposed Rule 2165 pertain to the accounts of “Specified Adults.” A “Specified Adult” is defined as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Thus, the Proposal applies to accounts held by seniors and other vulnerable adults.

FINRA Publishes Regulatory Notice Clarifying its Capital Acquisition Broker Rules and Sets Effective Date for Implementation

November 11, 2016 | Parker MacIntyre

On October 17, 2016, FINRA published Regulatory Notice 16-37 setting an effective date for implementation of its new Capital Acquisition Broker (“CAB”) rules (“CAB Rules”). The CAB Rules, which codify the creation and regulation of a new FINRA Membership category designed for broker/dealers that restrict their activities to certain designated corporate finance transactions, are discussed in greater detail in a recent Parker MacIntyre blog post (see “SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)”). Continue reading ›

Parker MacIntyre Features Guest Blogger Thomas W. Zagorsky

November 10, 2016 | Steve Parker

Parker MacIntyre welcomes Thomas W. Zagorsky as a guest contributor to the RIA Compliance Blog. Tom is a long-time friend of, and collaborator with, our firm. His wealth of legal experience includes serving as Assistant Commissioner of Securities for the State of Georgia from 2013 to 2015 and a practice of law, both with private law firms and investment banking and private funds, for nearly 15 years. He specializes in hedge fund formation, private securities offerings and other aspects of securities and investment services law. Tom is well-versed in the rules and regulations relating to investment advisers, including private fund advisers, managers of private equity funds and other pooled investment vehicles.

Tom has kept a keen eye on recent statutory and rule developments impacting issues such as crowdfunding, private placement reform, and other statutory and regulatory innovations relating to corporate finance and capital formation.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.

DOL Issues First Set of Rolling FAQ Guidance Regarding New Fiduciary Rule

November 9, 2016 | Patricia Klusmeyer

The Department of Labor (DOL) recently released its first set of rolling FAQ guidance regarding its new rules expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), adopting new prohibited transaction exemptions (PTEs), and amending certain previously existing PTEs. The DOL answered questions regarding the new PTEs and the amendments to existing PTEs under ERISA and the Code. The DOL also reaffirmed the applicability date of April 10, 2017, stating that this date provided adequate time for financial service providers to adjust to the rule changes.

One common area of confusion regarding the new rules was the extent to which the new Best Interest Contract (BIC) exemption would be available for use by discretionary investment managers. One of the conditions to use of the BIC exemption is that the fiduciary not have any discretionary authority or control with respect to the recommended transaction. This excludes a large portion of investment advisers that serve as discretionary investment managers. However, there are limited circumstances in which they can receive protection under the BIC exemption.

SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)

November 7, 2016 | Parker MacIntyre

A new limited broker/dealer classification framework at the federal level has been created as the result of a recent SEC Order approving a FINRA rule proposal seeking to address the longstanding industry desire for augmented exemptive relief and/or limited registration classifications for broker/dealers that restrict their activities to certain designated corporate finance transactions. The new federal broker/dealer registration category known as Capital Acquisition Brokers (“CABs”), which some observers have dubbed a “lite” form of broker/dealer registration, is the latest development in this area of securities regulation, and follows a recent string of federal and state no-action letters providing exemptive relief to so-called Mergers and Acquisitions (“M&A”) Brokers. However, enthusiasm for the new CAB Rules should be tempered somewhat in that: (1) the CAB Rules do not provide exemptive relief—i.e., they do not allow firms to avoid registration but instead set up a form of registration that is meant to be somewhat less onerous; (2) CAB registration still requires that CAB firms adhere to many of the same strictures required of full broker/dealers; and (3) opting to be regulated as a CAB may require reassessment as time goes on to the extent that a firm’s business activities change. While formally approved by the SEC, FINRA’s CAB Rules are not as yet effective. FINRA will publish the effective date in an upcoming Regulatory Notice. The full set of CAB Rules approved by the SEC may be found online at http://www.finra.org/sites/default/files/SR-FINRA-2015-054-amendment-2.pdf.

Court Reverses Illinois Department of Securities’ Administrative Order Revoking Investment Adviser’s Registration

November 3, 2016 | Elizabeth Dalziel

On July 29, 2016, the Appellate Court of Illinois entered a decision reversing a circuit court decision that affirmed an administrative order of the Illinois Secretary of State (“Secretary”) finding that Richard Lee Van Dyke, a registered investment adviser with the Illinois Department of Securities (“Department”), had defrauded clients by recommending the sale of indexed annuities in violation of Illinois law.

Section 2.1 of the Illinois Securities Law of 1953 (“Act”) provides that the term “security” is defined to include a “face amount certificate.” Section 2.14 of the Act further defines a “face amount certificate” to include “any form of annuity contract (other than an annuity contract issued by a life insurance company authorized to transact business in this State)”. However, Section 12(J) of the Act prohibits fraudulent or manipulative conduct as an investment adviser regardless of whether the investment adviser sells securities. The Van Dyke case is perhaps most notable for its rejection of the circuit court’s conclusion that Van Dyke’s practices were fraudulent. Continue reading ›

NASAA Adopts Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation

October 31, 2016 | Elizabeth Dalziel

Earlier this year, the North American Securities Administrators Association (“NASAA”) adopted a proposed model legislation or regulation (“Model Act”) aimed at protecting vulnerable adults from financial exploitation. A 2010 survey by the Investor Protection Trust Elder Fund Society found that one out of every five United States citizens age sixty-five and over has been a victim of financial fraud. As a result, the protection of vulnerable adults, such as senior investors, from financial exploitation has been one of NASAA’s priorities.

The Model Act is entitled “NASAA Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation.” It is designed to protect “eligible adults.” An “eligible adult” is defined as a person age sixty-five years or older, or a person subject to a state’s Adult Protective Services statute, such as disabled or impaired persons. Continue reading ›

Parker MacIntyre Hosts Seminar to Address Issues Faced by Registered Investment Advisers

October 24, 2016 | Elizabeth Dalziel

On October 18, 2016, Parker MacIntyre hosted a seminar addressing legal issues that registered investment advisers (“RIAs”) often face, including developing cybersecurity guidance and implications of the new Department of Labor Fiduciary Rule. The attendees consisted of sixteen individuals representing thirteen RIAs registered from around the southeast. Both SEC-registered and state-registered RIAs were represented among the attendees.

Parker MacIntyre was pleased to welcome Noula Zaharis, the Director of the Securities and Charities Division of the Secretary of State of Georgia, as a guest speaker. She began the seminar with a presentation on how the Georgia Secretary of State registers and regulates investment advisers and common deficiencies encountered by the Georgia regulators. Highlights from another presentation, entitled “Common Deficiencies, Exam Priorities, and Regulatory Initiatives,” included common deficiencies found in RIA examinations, exam priorities that RIAs should ideally be aware of, and the Secretary of State’s regulatory initiatives. Continue reading ›

Massachusetts Issues Regulatory Guidance for State Investment Advisers Who Use Third-Party Robo-Advisers

October 3, 2016 | Elizabeth Dalziel

The Massachusetts Securities Division (the “Division”) recently issued regulatory guidance for state investment advisers who use third-party robo-advisers to provide advisory services to clients. Robo-advisers have enjoyed a significant growth in popularity in the financial services industry based on perceived simplicity, ease of accessibility, and ability to service investment advisory clients who may not have sufficient assets to begin a relationship with a traditional investment adviser. As discussed previously, the Division issued a policy statement in April 2016 declaring that because automated robo-advisers cannot provide fiduciary duties to clients as traditional human investment advisers can, the Division will evaluate their Massachusetts registration applications on a case-by-case basis.

The new regulatory guidance provides that to the extent a state-registered investment adviser (“state-registered adviser”) uses a third-party robo-adviser’s services to provide asset allocation and trading functions to clients, the state-registered adviser must meet a minimum of six requirements. These six requirements are as follows: Continue reading ›