Articles Posted in

Published on:

The Financial Markets Association is hosting its annual Securities Compliance Seminar in Nashville, TN on April 23-25,2014.  This seminar is intensive training for intermediate as well as seasoned compliance specialists, internal auditors, attorneys, and regulators that focuses on current compliance topics, new rules or interpretations and regulatory developments, including a Dodd-Frank regulatory update.  The seminar gives attendees the opportunity to sharpen their skills through general and breakout sessions.  Satisfy CLE/CPE requirements.

Click HERE to view the complete program.

The brochure is also available on FMA’s website,

Published on:

Written by: Ildiko Duckor

The California Commissioner of Business Oversight (“Commissioner”) recently amended California’s custody rule 10 C.C.R. Section 260.237 (the “New Custody Rule”).  The New Custody Rule will be effective on April 1, 2014.

All investment advisers licensed or required to be licensed in California must comply with the New Custody Rule.  California Exempt Reporting Advisers are not affected.

What is “having custody?”

Holding or having authority to obtain possession of client funds or securities, for example:

  • Possession of client funds or securities unless received inadvertently and returned to the sender promptly.
  • Any arrangement (such as a general power of attorney) that authorizes you to withdraw client funds or securities maintained with a custodian by instructing the custodian.
  • Any capacity with authority to access to client funds or securities (such as general partner of a limited partnership, managing member of a limited liability company or trustee of a trust).

If you “have custody” of assets.

  • Qualified Custodian.  You must maintain those assets with a “qualified custodian” such as a bank, trustee, or prime broker.
  • Notice on ADV.  You must notify the Commissioner on your ADV that you have or may have custody.
  • Notice to Clients*. You must notify your client in writing of the custodian’s name and address, and the manner in which the assets are maintained, and any changes to this information.
  • Quarterly Custodian’s Account Statement*.  You must reasonably ascertain that the custodian sends quarterly account statements with specific information to each client (for example, by being cc-d on electronic statements the custodian sends).
  • Surprise Exam*.  You must retain a CPA (by written agreement) to have an annual “surprise exam” of client assets, and report the examination and any resignation of the CPA on your ADV.
  • Internal Control Report.  If you or your affiliate serves as the qualified custodian:
    • The CPA firm conducting the surprise exam must be registered with and subject to examination by the PCAOB.
    • You must obtain an annual internal control report with specified content.
  • Exceptions.  There are certain exceptions from some of the New Custody Rule’s requirements for mutual fund shares, certain private securities, and for advisers that “have custody” only because they deduct fees (if certain conditions are also satisfied).

Fund Managers’ Obligations.

If you are a general partner of an investment limited partnership or a managing member of a limited liability company (or are in a similar position with respect to a pooled fund vehicle):

  • Quarterly Investor Account Statement.  You must send to all fund investors quarterly account statements showing:
    • the total amount of all additions to and withdrawals from the fund,
    • a listing of all additions to and withdrawals from the fund by an investor,
    • the opening and closing value of the fund at the end of the quarter,
    • the total value of an investor’s interest in the fund at the end of the quarter, and
    • a listing of securities positions on the closing date of the statement pursuant to FASB Accounting Standards Codification 946-210-50-4 through 6.
  • Independent Expense Verification*.  You must retain (by written agreement) an independent accountant or attorney obligated to act in your investors’ best interests and send him/her all invoices or receipts with details regarding calculations, so the independent person can:
    • review all fees, expenses and withdrawals from the fund,
    • determine that payments conform to the fund agreement, and
    • forward to the custodian approval for payments of the invoices.
  • Audited Fund Exceptions*.  You need not comply with the following requirements:  Notice to Clients, Quarterly Custodian’s Account Statement, Surprise Exam and Independent Expense Verification; if:
    • Your fund is audited annually, in accordance with GAAP, by an independent CPA registered with and subject to examination by the PCAOB.
    • The audited financials are distributed to all investors and the Commissioner within 120 days of the end of the fund’s fiscal year.
    • A final liquidation audit is performed, in accordance with GAAP, upon the fund’s liquidation, and the audited financials are distributed to investors and the Commissioner promptly upon completion of the audit.
    • The independent CPA is required by agreement to notify the Commissioner on Form ADV if it resigns or is terminated.
    • You notify the Commissioner that you intend to use the audit exception route.

For further details and interpretation of the intricacies of the New Custody Rule as they apply to you, please contact your Pillsbury Investment Funds and Investment Management team member.

Published on:


Written by: Jessica M. Brown and Jay B. Gould

On March 10, 2014, Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted a proposed rule to the Securities and Exchange Commission (“SEC”) that would require disclosure to certain clients and FINRA regarding the details of a broker-dealer representative’s financial recruiting incentives (the “Proposed Rule”). The Proposed Rule is intended to ensure that the former clients of a representative who has changed firms are aware of: (i) the recruitment compensation that induced the representative to change firms, and (ii) all of the costs and potential risks associated with transferring their assets to the new firm (the “Recruiting Firm”). In addition to disclosures to clients, the Proposed Rule would require the Recruiting Firm to report to FINRA at the beginning of a representative’s employment, any significant total compensation increases the representative will receive in the first year, compared to the representative’s compensation the prior year.

Under the Proposed Rule, if a Recruiting Firm directly or through the representative, tries to induce the representative’s clients from a prior firm to transfer assets to the Recruiting Firm, the Recruiting Firm would be required to disclose to the potential client if the representative has received, or will receive, $100,000 or more in either (i) aggregate “upfront payments” or (ii) aggregate “potential future payments.” Upfront payments include compensation received upon commencement of association or specified amounts guaranteed to be paid at a future date (e.g. cash, deferred cash bonus, transition assistance, forgivable loans, equity awards, loan-bonus arrangements, or ownership interests. Potential future payments include those offered as a financial incentive contingent upon the representative meeting performance-based goals, allowance for additional travel or expense reimbursement in excess to what is typical for similarly situated representatives, or a commission schedule for a representative who is paid on a commission basis in excess of what is typically provided to similarly situated representatives.  Where the Recruiting Firm partnered with another entity, such as an investment adviser or insurance company, to recruit a representative, the disclosed upfront payments and potential future payments would include any payments from those third parties connected to the recruitment.

The amount of recruitment compensation received would be disclosed separately for aggregate upfront payments and aggregate potential future payments using ranges for each: $100,000 to $500,000; $500,001 to $1,000,000; $1,000,001 to $2,000,000; $2,000,001 to $5,000,000; and above $5,000,000. In addition to the amounts that must be disclosed, the Recruiting Firm would be required to disclose the basis for determining the upfront and potential future payments. Pursuant to the Proposed Rule, disclosure would not be required to be disclosed to clients that meet the definition of an “institutional account” under FINRA Rule 4512(c), however accounts held by natural persons would not qualify for the institutional account exception under the Proposed Rule.

Client disclosures, pursuant to the Proposed Rule, would also be required to include whether transferring assets from the representative’s prior firm to the Recruiting Firm would cause the client to incur any costs the Recruiting Firm would not reimburse. Further, if the assets are not transferrable, the Recruiting Firm would be required to disclose the costs the client may incur, including taxes.

The Proposed Rule would require the disclosures be made to the client at the time of first individualized contact by the representative or Recruiting Firm that attempts to convince the client to transfer assets. Written disclosures would be required if the contact is in writing. If the contact is oral, the disclosures would be made orally with written disclosures to follow. The disclosure requirement would be mandated for the representative’s first year with the Recruiting Firm.

The second component of the Proposed Rule would require the Recruiting Firm to report to FINRA if it reasonably expects the total compensation paid to the representative, in his/her first year, to increase the representative’s prior year’s compensation by the greater of 25% or $100,000. The compensation information reported to FINRA would not be available to the public under the Proposed Rule.

The SEC will review the Proposed Rule and is expected to seek public comment. The Proposed Rule has not yet been published on the SEC’s website as of the date of this posting.

Published on:


Written by:  Jessica M. Brown and Michael G. Wu

On March 10, 2014, the U.S. Commodity Futures Trading Commission and the Financial Services Agency of Japan signed a Memorandum of Cooperation which expresses the agencies’ intent to work together to supervise and oversee regulated entities that operate on a cross-border basis in Japan and the United States.  The agencies intend to cooperate in the interest of their respective derivative market regulations. The full text of the Memorandum can be found here.