Articles Tagged with Investment Advisers

Published on:

By

In a February 2015 Guidance Update, the Securities and Exchange Commission’s Division of Investment Management (“SEC”), provided guidance on the acceptance of gifts or entertainment by fund advisory personnel under Section 17(e)(1) of the Investment Company Act of 1940 (the “Act”). Section 17(e)(1) provides that any affiliated person of a registered investment company, or any affiliated person of such person acting as agent, is prohibited from receiving any compensation, outside of regular salary or wages, for the purchase or sale of any property to or for the registered company or any controlled company thereof. The SEC has found that gifts or entertainment meet the definition of “compensation” as it is used in Section 17(e)(1), and proof of any intended or actual influence is not required. Pursuant to Rule 38a-1 of the Act, a fund must implement written policies and procedure designed to prevent the fund and its service providers from violating securities laws. The Guidance Update suggests that the policies and procedures concerning the receipt of gifts or entertainment should be included in the fund’s compliance policies and procedures, though it defers to the fund to determine whether there should be an outright ban, or a type of pre-clearance to determine if the gift or entertainment would violate Section 17(e)(1).

Published on:

By

We want to remind you of your firm’s annual investment adviser registration amendment (Form ADV annual amendment) which must be filed on the IARD system on or before March 31, 2015.  This deadline applies to all SEC and State registered advisers as well as Exempt Reporting Advisers (ERAs) with a December 31, 2014 fiscal year end.

Please let us know as soon as you can if you need our assistance in preparing and submitting your Form ADV annual amendment filing this year.

Also, for SEC registered advisers and ERAs, please note that your annual IARD fee must be paid before you can submit your annual amendment.  The fees are based on your firm’s regulatory assets under management as follows:

Regulatory Assets
Under Management		 Initial
Registration Fee		 Annual Updating
Amendment Fee
$100 million or more $225 $225
$25 million to $100 million $150 $150
Less than $25 million $40 $40
SEC Exempt Reporting Adviser $150 $150

To view FINRA’s current IARD Account Payment Methods and Addresses, please click HERE.

If you or your compliance officer is handling your Form ADV filing and you would like us to review your drafts, please feel free to contact us also.

Published on:

By

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its annual examination priorities.  In 2015, OCIE will focus on three primary “themes” involving broker-dealers, investment advisers and transfer agents:

  1. Retail Investors – OCIE will look at important matters for retail investors and investors preparing for retirement including whether the products, advice, services and information being offered to them is consistent with current laws, rules and regulations;
  2. Market-Wide Risks – this is a broad theme which focuses on structural risks and trends involving whole industries or multiple firms; and
  3. Data Analytics – OCIE continues to increase its ability to analyze large amounts of data to identify registrants that may be conducting illegal activity.

Retail Investors – Advisers to retail investors and investors saving for retirement will be scrutinized by the SEC in 2015. The OCIE will assess fee selection where the adviser offers a variety of fee arrangements as well as reverse churning. Further, where advisers recommend moving retirement assets from employer-sponsored plans into other investments or accounts, OCIE will examine whether the sales practices used were improper or misleading. OCIE will also be reviewing the suitability of complex or structured products and higher yield securities and how well representatives in branch offices are being supervised by the home office.  The SEC may have an interesting opportunity to demonstrate whether it is serious in going after those who target seniors.

On February 5, 2015, SEC Commissioner Luis A. Aguilar and Investor Advocate, Rick A. Fleming, gave speeches at The American Retirement Initiative Winter Summit about advocating for investors saving for retirement and protecting elderly investors from financial exploitation.

Under the umbrella theme of “retail investors,” the OCIE will be assessing alternative investment companies and the focus of the exams will be (i) liquidity, leverage and valuation; (ii) the way the funds are marketed; and (iii) the internal controls, staffing, funding and empowerment of boards, compliance and back-offices. Mutual funds with material exposure to interest rate increases will be reviewed by OCIE to ensure they have the appropriate compliance policies and procedures and trading and investment controls in place to prevent their disclosures from being misleading and to be sure their investment and liquidity profiles are consistent with the fund’s disclosures.

Assessing Market-Wide Risks – The OCIE will focus in 2015 on structural risks and trends that involve whole industries or multiple firms. In collaboration with the Division of Trading and Markets and the Division of Investment Management, the OCIE will monitor the largest asset managers and broker-dealers. Through a risk-based approach, the OCIE will conduct annual examinations of all clearing agencies that have been designated systemically important. Furthering the OCIE’s 2014 efforts to examine the cybersecurity preparedness of registrants, 2015 will see a continuation of the initiative and an expansion of the initiative to include transfer agents. OCIE will also be looking into whether firms are giving priority to trading venues due to credits or payments for order flow, thus violating their best execution duties.

Data Analytics – The OCIE has made strides in developing data analytics that it can use to identify and examine firms and other registrants that may be engaged in fraudulent or illegal activity. The examination initiatives the OCIE will be using data analytics to examine include recidivists, microcap fraud, excessive trading and anti-money laundering.

Other Initiatives – Along with the primary themes discussed above, the SEC will continue to examine never-before examined investment advisers and newly registered municipal advisers. Advisers to private equity funds can expect to have their fees and expenses examined as a result of OCIE’s observed high rates of deficiencies. In addition to examining proxy advisory service firms, OCIE will also look at investment advisers’ compliance with their fiduciary duty to vote proxies on their investors’ behalf.

Advisers and broker-dealers should always be prepared for an SEC examination and ensure all written policies and procedures are in place and regularly audited for efficacy and compliance. Should you be subject to an examination, any deficiencies noted by the SEC should be addressed and rectified in a timely manner.

Published on:

By

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its Examination Priorities for 2015.  The priorities represent certain practices and products that OCIE believes present a potentially higher risk to investors and/or the integrity of the US capital markets.  In 2015, OCIE’s priorities focus on issues involving investment advisers, broker-dealers and transfer agents and are organized into three thematic areas:

  1. Examining important matters to retail investors and investors saving for retirement, such as whether the information, advice, products and services offered is consistent with applicable law.  Specifically, OCIE has identified the following examination priorities:
  • Fee Selection and Reverse Churning – Where an adviser offers a variety of fee arrangements, OCIE will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
  • Sales Practices – OCIE will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.
  • Suitability – OCIE will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities and whether the suitability of the recommendations or determinations are consistent with existing legal requirements.
  • Branch Offices – OCIE will focus on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices, and attempt to identify branches that may be deviating from compliance practices of the firm’s home office.
  • Alternative Investment Companies – OCIE will continue to assess alternative investment companies and focus on: (i) leverage, liquidity and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.
  • Fixed Income Companies – OCIE will determine whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading.
  1. Assessing issues related to market risks.  Specifically, OCIE has identified the following examination priorities:
  • Large Firm Monitoring – OCIE will continue to monitor the largest broker-dealers and asset managers to assess risks at individual firms.
  • Clearing Agencies – OCIE will continue to examine all clearing agencies designated as “systemically important” under the Dodd-Frank Act.
  • Cybersecurity – OCIE will continue to examine broker-dealers and investment advisers’ cybersecurity compliance and controls and expand these examinations to include transfer agents.
  • Potential Equity Order Routing Conflicts – OCIE will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.
  1. Analyzing data to identify and examine registrants that may be engaging in illegal activity, such as excessive trading and penny stock, pump-and-dump schemes. Specifically, OCIE has identified the following examination priorities:
  • Recidivist Representatives – OCIE will continue to try to identify individuals with a history of misconduct and examine the firms that employ them.
  • Microcap Fraud – OCIE will continue to examine broker-dealers and transfer agents that aid and abet pump-and-dump schemes or market manipulation.
  • Excessive Trading – OCIE will continue to analyze data from clearing brokers to identify and examine brokers that engage in excessive trading.
  • Anti-Money Laundering – OCIE will continue to examine firms that have not filed suspicious activity reports (SARs) or provide customers with direct access to markets of higher-risk jurisdictions.

In addition, OCIE has identified other examination priorities for 2015, including:

  • Municipal Advisors – OCIE intends to examine newly registered municipal advisors to determine whether they comply with recently adopted SEC and Municipal Securities Rulemaking Board rules.
  • Proxy Services – OCIE intends to examine proxy advisory service firms and investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
  • Never-Before-Examined Investment Companies – OCIE will conduct focused, risk-based examinations of registered investment company complexes that haven’t been examined before.
  • Fees and Expenses in Private Equity – this continues to be an area that OCIE is focused on.
  • Transfer Agents – OCIE intends to examine transfer agents, particularly those involved with microcap securities and private offerings.

Published on:

By

Annual Compliance Obligations—What You Need To Know

As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) and Commodity Pool Operators (“CPOs”) or Commodity Trading Advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers, CPOs and CTAs (collectively, “Managers”).  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

List of annual compliance deadlines:

State registered advisers pay IARD fee November-December (of 2014)
Form 13F (for 12/31/14 quarter-end) February 17, 2015*
Form 13H annual filing February 17, 2015
Schedule 13G annual amendment February 17, 2015
Registered CTA Form PR (for December 31, 2014 year-end) February 17, 2015
TIC Form SLT January 23, 2015 (for December 2014)
TIC Form SHCA March 6, 2015
TIC B Forms Monthly report (December 2014) – by January 15, 2014Quarterly report (December 31, 2014) – by January 20, 2014
Affirm CPO exemption March 2, 2015
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 2, 2015
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2015
Registered Mid-Size and Small CPO Form CPO-PQR year-end report March 31, 2015
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2015
Annual ADV update March 31, 2015
Delivery of Brochure April 30, 2015
Delivery of audited financial statements (for December 31, 2014 year-end) April 30, 2015
California Finance Lender License annual report (for December 31, 2014 year- end) March 15, 2015
Form PF filers pay IARD fee Before submission of Form PF
Form PF for large liquidity fund advisers (for December 31, 2014 quarter end) January 15, 2015
Form PF for large hedge fund advisers (for December 31, 2014 quarter end) March 2, 2015
Form PF  for smaller private fund advisers and large private equity fund advisers (for December 31, 2014 fiscal year-end) April 30, 2015
FBAR Form FinCEN Report 114 (for persons meeting the filing threshold in 2014 and those persons whose filing due date for reporting was previously extended by Notices 2013-1, 2012-2, 2012-1, 2011-2 and 2011-1) June 30, 2015
FATCA information reports filing for 2014 by participating FFIs March 31, 2015
Form D annual amendment One year anniversary from last amendment filing.

* Reflects an extended due date under Exchange Act Rule 0-3.  If the due date of filing falls on a Saturday, Sunday or holiday, a report is considered timely filed if it is filed on the first business day following the due date.

CONTINUE READING…

Published on:

By

The U.S. Commodity Futures Trading Commission (CFTC) announced that on December 16, 2014, the U.S. District Court for the Northern District of Illinois entered a Consent Order for permanent injunction against AlphaMetrix, LLC (AlphaMetrix), a Chicago-based Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA), and its parent company AlphaMetrix Group, LLC (AlphaMetrix Group). The Order requires AlphaMetrix to pay restitution of $2.8 million and a civil monetary penalty of $2.8 million and requires AlphaMetrix Group to pay disgorgement of $2.8 million. The Order also prohibits AlphaMetrix from further violating anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.

The Order stems from CFTC charges that AlphaMetrix failed to pay at least $2.8 million in rebates owed to some of its commodity pool participants by investing the rebate funds in the pools and instead transferred the funds to its parent company, which had no entitlement to the funds. Nevertheless, AlphaMetrix sent these pool participants account statements that included the rebate funds as if they had been reinvested in the pools, even though they were not (see CFTC Press Release 6767-13, November 6, 2013).

A civil action filed by the court-appointed receiver remains pending in the U.S. District Court for the Northern District of Illinois. In that action, the receiver seeks to recover funds from former officers of AlphaMetrix and AlphaMetrix Group.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets.

Published on:

By

On November 25, 2014, the Securities and Exchange Commission (the “SEC”) brought charges against a Swiss-based bank that should serve as notice to all non-U.S. banks that maintain relationships with clients who have moved to the U.S., as well as U.S.-based banks that provide services to clients who have relocated to other countries.  The SEC found that HSBC’s Swiss-based private banking arm violated U.S. securities laws by providing investment advisory and brokerage services to U.S. clients without being properly registered as either an investment adviser or a broker-dealer.  HSBC Private Bank (Suisse) agreed to admit wrongdoing and pay $12.5 million to settle the SEC’s charges in a combination of disgorgement, prejudgment interest, and penalties.

How often do financial institutions, foreign or U.S., put themselves in the position of willfully violating the securities and banking laws of other countries?  Pretty routinely, as it turns out.  By way of example, suppose you are a citizen of a European Union country with a local banking relationship.  You work for a large multi-national company that offers you a promotion, but that new job is in New York.  Not one to decline an opportunity, off you go to the Center of the Universe.  You open a new bank account at a local New York bank, but you maintain your European bank relationship because you have a consolidated banking, investment advisory and brokerage relationship there that has worked quite well for you.  The relationship manager at your European bank certainly does not want to give up the revenue stream from your lucrative relationship, particularly now that you are making so much more money and you are willing to purchase and sell stocks more frequently.  Multiply this scenario several times over and before you know it, this certain European bank is routinely providing banking, investment advisory, and brokerage services to U.S. residents without being properly registered to do so.

This same scenario can and often does play out in reverse.  A U.S. citizen moves to a foreign country and maintains his banking, investment advisory and/or brokerage relationships with a financial institution that is not qualified to do business in the client’s new country of residence and before you know it, the U.S. financial institution is in violation of the laws of the country in which its client now resides.  And, not to gratuitously pick on any particular jurisdiction, the provision of such services in some countries pourrait être criminelle.

In the case of HSBC, the SEC found that HSBC Private Bank and its predecessors began providing cross-border advisory and brokerage services in the U.S. more than 10 years ago on behalf of at least 368 U.S. client accounts and collected fees totaling approximately $5.7 million.  HSBC relationship managers traveled to the U.S. on at least 40 occasions to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered in the U.S. as investment adviser representatives or licensed brokers, nor were they affiliated with a registered investment adviser or broker-dealer (or “chaperoned” by a registered U.S. broker-dealer).  The relationship managers also communicated directly with clients in the U.S. through overseas mail and e-mails.  In 2010, HSBC Private Bank decided to exit the U.S. cross-border business, and nearly all of its U.S. client accounts were closed or transferred by the end of 2011.

According to the SEC’s order, HSBC Private Bank understood there was a risk of violating U.S. securities laws by providing unregistered investment advisory and brokerage services to U.S. clients, and the firm undertook certain compliance initiatives in an effort to manage and mitigate the risk.  The firm created a dedicated North American desk to consolidate U.S. client accounts among a smaller number of relationship managers and service them in a compliant manner that would not violate U.S. registration requirements.  However, certain relationship managers were reluctant to lose clients by transferring them to the North American desk and stalled the process or ignored it altogether.  HSBC Private Bank’s internal review revealed multiple occasions when U.S. accounts that were expected to be closed under certain compliance initiatives remained open.  HSBC Private Bank admitted to the SEC’s findings in the administrative order, acknowledged that its conduct violated U.S. securities laws, and accepted a censure and a cease-and-desist order.

Foreign financial institutions, even those that have U.S. affiliates that are properly registered and regulated as banks, investment advisers, or broker-dealers should undertake a review of their client accounts to determine whether they are providing services that are in violation of applicable law.  It is possible, perhaps even likely, that even if a non-U.S. financial institution has properly registered U.S. entities, services are being provided to certain clients outside of those entities as a result of historical relationships.  U.S. banks should also determine whether they are providing financial services to relocated clients in countries that would either prohibit such services or require some form of notification or registration.  A failure to abide by the laws of non-U.S. countries could also place a U.S. institution in the position of violating certain U.S. laws that require diligence of and compliance with the laws of other countries.

Published on:

By

This is a reminder that the 2015 IARD account renewal obligation for investment advisers (including exempt reporting advisers) starts this November.  An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 10, 2014 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 12, 2014 – Deadline for full payment of Preliminary Renewal Statements.  In order for the payment to be posted to its IARD Renewal account by the December 12 deadline, an investment adviser should submit its preliminary renewal fee to FINRA through the IARD system by December 10, 2014.

December 28, 2014 – January 1, 2015 – IARD system shut down.  The system is unavailable during this period.

January 2, 2015 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 16, 2015 – Deadline for full payment of Final Renewal Statements.

For more information about the 2015 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

Published on:

By

On October 29, 2014, the Securities and Exchange Commission (“SEC”) announced an administrative enforcement action against an investment advisory firm and three top officials for violating rule 206(4)-2 under the Investment Advisers Act of 1940 (“Advisers Act”), the “custody rule,” that requires firms to follow certain procedures when they control or have (or are deemed to have) access to client money or securities.  This enforcement action follows closely on the heels of statements by SEC officials indicating that violations of the custody rule were a recurring theme during the “presence exams” of private equity fund advisers and other first time investment adviser registrants that have been conducted by the SEC staff over the last year and a half.

Advisory firms with custody of private fund assets can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year.  This provides investors with regular independent verification of their assets as a safeguard against misuse or theft.  The SEC’s Enforcement Division alleges that Sands Brothers Asset Management LLC has been repeatedly late in providing investors with audited financial statements of its private funds, and the firm’s co-founders along with its chief compliance officer and chief operating officer were responsible for the firm’s failures to comply with the custody rule.  As investment adviser registrants are painfully aware, chief compliance officers have personal liability for compliance failures under Advisers Act rule 206(4)-7.  This particular enforcement action was brought pursuant to section 203(f) of and rule 206(4)-2 under the Advisers Act.  It remains to be seen whether the SEC will bring a separate action against the Sands Brothers’ chief compliance officer under rule 206(4)-7.

Also nervously awaiting any further action by the SEC would be the accountants and lawyers that advised the Sands Brothers and their hedge funds with respect to the custody matter.  The accounting firm or firms that conducted the audit of the Sands Brothers hedge funds likely knew that the funds did not meet the requirements of the custody rule.  It is less certain whether the external lawyers knew or should have known about these violations.  However, if either the accountants or lawyers knew of these violations and advised that they were only technical in nature and immaterial or  unimportant, the SEC could take separate administrative action pursuant to SEC rule 102(e) to bar any such party from practicing before the SEC.  We previously wrote about the more aggressive posture that the SEC signaled with respect to service providers, specifically lawyers that assist or “aid and abet” violations of the securities laws.  The SEC has a fairly high standard to meet when bringing these types of cases, but that has not deterred the regulator from aggressively pursuing more accountants and lawyers in recent months.

According to the SEC’s order instituting the administrative proceeding, Sands Brothers was at least 40 days late in distributing audited financial statements to investors in 10 private funds for fiscal year 2010.  The next year, audited financial statements for those same funds were delivered anywhere from six months to eight months late.  The same materials for fiscal year 2012 were distributed to investors approximately three months late.  According to the SEC’s order, Sands Brothers and the two co-founders were previously sanctioned by the SEC in 2010 for custody rule violations.

If you have been late on the delivery of your audited financial statements and have not availed yourself of the “surprise audit” provision of the custody rule, or if you manage “side car” funds that have never been audited, you should immediately get in touch with your Pillsbury attorney contact.

 

Published on:

By

On September 22, 2014, the Securities and Exchange Commission (the “SEC”) charged private equity fund adviser, Lincolnshire Management, Inc. (“Lincolnshire”), with misallocating expenses shared between two portfolio companies. Lincolnshire integrated two portfolio companies that were each owned by a different Lincolnshire private equity fund. Lincolnshire owed a fiduciary duty to each fund and such fiduciary duty was breached when Lincolnshire would charge one portfolio company more than its fair share for expenses benefiting both portfolio companies.

Lincolnshire was aware of the complexity involved in sharing expenses and did have an expense allocation policy in place, though it was not in writing. The instances that resulted in a breach of Lincolnshire’s fiduciary duty were those in which the verbal expense allocation policy was not followed. The SEC also found, with respect to the integration of the portfolio companies, that Lincolnshire did not have sufficient written policies and procedures in place to prevent violations of the Investment Advisers Act of 1940 (“Adviser’s Act”). Lincolnshire agreed to a settlement with the SEC in excess of $2.3 million.

It is interesting to note that, while the SEC announced several months ago it had conducted presence exams and found many issues in private equity managers, Lincolnshire was not one of the companies subject to a presence exam. Private equity managers who have not had a presence exam should not assume they are unlikely to be examined outside of the presence exam protocol. This enforcement action reinforces the requirement that private equity fund advisers are required to have policies and procedures in place that are designed to prevent violations of the Adviser’s Act and other securities laws. More importantly, once in place, such policies and procedures must be monitored by the chief compliance officer and observed by all “covered persons.”