RIA Compliance Blog

FINRA And SEC To Firms: Improve Branch Office Supervision

January 6, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently jointly issued a Risk Alert and a Regulatory Notice on broker-dealer branch office inspections designed to help securities industry firms better supervise their branch offices, as well as to underscore the importance of that supervision.

“An effective risk based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interest,” stated Stephen Luparello, Vice Chairman of FINRA.

The risk alert specifically makes the following recommendations to firms, including:

Increasing the frequency of branch inspections, especially unannounced visits;
Customizing examinations to branch activity based on risk assessments;
Involving more senior personnel in exams;
Insuring that examiners have no conflicts of interest; and
Increasing supervision of certain offices based upon surveillance data and requiring corrective actions to address deficiencies noted.

Mid-Sized Advisers Should Have Already Commenced Transition

December 11, 2011 | Steve Parker

As we first reported on this blog site in September, the North American Securities Administrators Association (NASAA) held a forum, through its Investment Adviser subcommittee, to discuss transition issues for Mid-Sized Advisers under the Dodd-Frank Wall Street Reform Act. As we approach the annual December moratorium on new registrations and renewals, it seems appropriate to review and comment on some of NASAA’s suggestions.

The first step that any Mid-Sized Adviser should take should be to contact his or her state regulatory agency to determine whether it has adopted special rules, forms, or timetables for use. However, the NASAA committee generally provided the following procedure that its state members intended to follow:
Continue reading ›

SEC Hits Mid-Sized RIA’s for Compliance Violations, Signaling Continued Interest

December 6, 2011 | Steve Parker

The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.

OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
Continue reading ›

SEC Snares Hedge Funds Using Risk Analytics

December 5, 2011 | Steve Parker

The Securities and Exchange Commission (SEC) has implemented a new program — called the Aberrational Performance Inquiry (API) — that has resulted in enforcement proceedings against three hedge funds for overstating material aspects of their business. API looks to find statements made by funds relating to its investment strategy, performance or size, and compares those claims to market data using proprietary analytical processes. In a statement, the SEC stated that API is being used to find the same type of misleading information from registered investment advisers, not just hedge funds.

“We’re using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement — earlier detection and prevention,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, according to an SEC enforcement release. Robert Kaplan and Bruce Karpati, Co-Chiefs of the SEC Enforcement Division’s Asset Management Unit, added, “The extraordinary returns reported by these advisers and portfolio managers were, in most cases, too good to be true. In other cases, outlier returns were a telltale sign that something else was amiss.”
Continue reading ›

Quant Hedge Fund Halted by SEC Enforcement Action

November 29, 2011 | Steve Parker

The Securities and Exchange Commission (“SEC”) announced earlier this month that it obtained an asset freeze against a Boston-area money manager and his investment advisory firm who allegedly mislead advisers in a quantitative hedge fund and diverted a portion of investor money into his personal bank account.

In its allegations, the SEC claimed that Andrey C. Hicks and Locust Offshore Management, LLC made false representations to “create an aura of legitimacy when selecting individuals to invest in a purported million dollar hedge fund.” Hicks is alleged to have raised $1.7 million from several investors. According to the SEC’s complaint, Hicks misrepresented that he had obtained an undergraduate and graduate degree at Harvard University and that he previously worked for Barclays Capital. He also misrepresented that the hedge fund held more than $1.2 billion in assets, according to the complaint.

U.S. District Court Judge Richard Sterns of the District Court for Massachusetts issued the restraining order and asset freeze.
Continue reading ›

Private Fund Reporting Form Approved

November 17, 2011 | Steve Parker

On October 26, 2011, the Securities and Exchange Commission (“SEC”) announced the adoption of Form PF, which stands for “Private Fund.” Required by the Dodd Frank Wall Street Reform and Consumer Protection Act, the adoption of the form seeks to require reporting by larger hedge fund and venture capital private advisers in an effort to assess systemic risks.

The minimum amount of assets under management before the reporting requirement is triggered is $150 million, meaning that smaller private fund advisers are not required to file Form PF at all. Once this threshold is reached, however, there is a tiered reporting requirement base on the level of assets under management within different categories as established by the form. The exclusion for the smaller advisers is justified because their funds have a minimal impact on a broad based systemic risk analysis, according to a statement by SEC Chairman Mary Shapiro delivered in connection with the adoption of the form.
Continue reading ›

Bill Requiring State Adviser SRO Draws Mixed Response

November 2, 2011 | Steve Parker

Congressman Spencer Bachus (R – Ala), Chairman of the House Financial Services Committee, recently published draft legislation and held hearings concerning whether a self-regulatory organization (SRO) should regulate registered investment advisers. In addition to assigning regulatory responsibilities for SEC-registered firms to an SRO, Bacchus’s bill would apparently do the same for state-regulated advisers. In the recently passed Dodd-Frank Act, the SEC was assigned the task of studying the concept of extending SRO oversight to IA firms.

IA groups are split on whether an SRO should replace all or part of current SEC/State oversight . For example, the Financial Planning Coalition, comprised of the CFP Board, the FPA and NAPFA, said in September that an SRO “is not the solution” to improve and increase IA examinations. However, the Financial Services Institute (FSI) has encouraged adoption of such a plan.
Continue reading ›

Regulators Issue Report on Investment Adviser Violations

October 30, 2011 | Steve Parker

With the increase in authority granted by the Dodd-Frank Act to state regulators over registered investment advisers, there has been a noticeable uptick in the number and intensity of state examinations of IA firms. In a national survey coordinated by NASAA, and released this fall, 40 state RIA examiners were found to have uncovered 3,543 violations in examinations of 825 firms during the first half of this year, an average of over 4 violations per firm. The survey found that registration and books and records violations predominated, with violations related to unethical practices and supervision not far behind.

Well over half of the firms examined were cited for registration violations, and 45% for books and record violations. The examinations also found significant numbers of violations in the areas of advertising, compliance with privacy rules, financial disclosure, fees charged and custody of funds.
Continue reading ›

Georgia SOS Publishes Proposed IA Rules

October 19, 2011 | Steve Parker

On October 13, 2011 the Georgia Secretary of State published proposed rules under the Georgia Uniform Securities Act of 2008 (“the 2008 Act”). Among the proposed rules are twenty (20) rules governing investment advisers and investment adviser representatives.

Although many of the proposed rules are consistent with the applicable rules under the prior Georgia Securities Act of 1973, quite a few of the proposed rules are new, and are designed to respond to the changing business and regulatory environment, including passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Firms currently registered in Georgia should pay careful attention to the regulatory changes. In addition, formerly SEC-registered advisers that are switching to Georgia registration will find the Georgia regulatory landscape, under both the old rules and the new ones, if adopted, to be quite different than what they are accustomed to.
Continue reading ›

State Investment Adviser Regulators Hold Forums

September 13, 2011 | Steve Parker

Two Parker MacIntyre attorneys — Bob Terry and Steve Parker — attended forums held this week by the Investment Adviser Section of the North American Securities Administrators Association, and by the NASAA members of the Joint NASAA/FINRA CRD/IARD Steering Committee, at the NASAA Annual Conference in Wichita, Kansas. The forums’ panelists included Melanie Senter Lubin, Securities Administrator for the State of Maryland, NASAA General Counsel Joseph Brady, Michigan Securities Director Linda Cena, and other Section and Committee members. Bob Terry, Counsel to Parker MacIntyre, served as Vice Chair of the CRD/IARD Committee for over three years until he left the office of the Georgia Secretary of State in January of 2011.

The hottest topics of both forums were details relating to transitioning to state registration of mid-sized advisers, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank’) and implementing regulations.

At least 20 states to date have conducted training seminars to investment advisers seeking information about switching to state registration and what to expect from becoming state-registered. NASAA has provided training materials and logistical support to securities administrators in those states. The goal is to introduce the prospective registrants to state-specific issues that may affect their registration process or their ongoing operations, particularly in the areas of regulation that may differ slightly or even significantly from the SEC rule or practice that the adviser to which the adviser is accustomed.
Continue reading ›