Articles Tagged with Regulatory Compliance

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The following are some of the 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.

This summary consists of the following segments: (i) List of Annual Compliance Deadlines; (ii) 2017 Enforcement Priorities In The Alternative Space; (iii) New Developments; and (iv) Continuing Compliance Areas.

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Table of Annual Compliance Deadlines……………………………………………………………. 3

2017 Enforcement Priorities In The Alternative Space………………………………………. 5

New Developments………………………………………………………………………………………. 7

 

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On December 5, 2016, a Notice of reporting requirements was filed in the Federal Register by the U.S. Department of Treasury informing the public of the Treasury’s mandatory survey, due every 5 years, of ownership of foreign securities by U.S. residents as of December 31, 2016.  All U.S. persons who meet the reporting requirements must respond to, and comply with, this survey on Form TIC-SHC by March 3, 2017.

Who Must Report? 

i. Fund Managers and Investors.  U.S. persons who own foreign securities for their own portfolios and/or who invest in foreign securities on behalf of others (referred to as ‘‘end-investors’’), including investment managers and fund sponsors such as:

  • Managers of private and public pension funds
  • Hedge fund managers
  • Managers and sponsors of private equity funds, venture capital companies and similar private investment vehicles
  • Managers and sponsors of commingled funds such as money market mutual funds, country funds, unit-investment funds, exchange-traded funds, collective-investment trusts, and similar funds
  • Foundations and endowments
  • Trusts and estates
  • Insurance companies
  • U.S. affiliates of foreign entities that fall into the above categories.

These U.S. Persons must report on Form SHC if the total fair value of foreign securities—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.

ii.  Custodians. U.S. persons who manage, as custodians, the safekeeping of foreign securities for themselves and other U.S. persons (including affiliates in the U.S. of foreign entities). These U.S. persons must report on Form SHC if the total fair value of the foreign securities whose safekeeping they manage on behalf of U.S. persons—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.

iii.  Those Notified. U.S. persons who are notified by letter from the Federal Reserve Bank of New York. These U.S. persons must file Schedule 1, even if the recipient of the letter is under the reporting threshold of $200 million and need only report ‘‘exempt’’ on Schedule 1. U.S. persons who meet the reporting threshold must also file Schedule 2 and/or Schedule 3.

What To Report?

Information on holdings by U.S. residents of foreign securities, including equities, long-term debt securities, and short-term debt securities (including selected money market instruments).

How To Report?

Completed reports on Form TIC-SHC can be submitted electronically or mailed to the Federal Reserve Bank of New York, Statistics Function, 4th Floor, 33 Liberty Street, New York, NY 10045–0001. Inquiries can be made to the survey staff of the Federal Reserve Bank of New York at (212) 720–6300 or email: SHC.help@ny.frb.org.   Inquiries can also be made to Dwight Wolkow at (202) 622–1276, email: comments2TIC@do.treas.gov

When To Report?

The report must be submitted by March 3, 2017.

Additional information including technical information for electronic submission can be obtained from the Form SHC Instructions available here.

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In line with the Securities and Exchange Commission’s (SEC) goal to enhance regulatory safeguards in the asset management industry, the SEC yesterday released a proposed new rule and rule amendments under the Investment Advisers Act of 1940. The proposed new rule 206(4)-4 would require SEC-registered investment advisers to adopt and implement written business continuity and transition plan (BCP) and review the plan’s adequacy and effectiveness at least annually.  The proposed amendment to rule 204-2 would require such advisers to keep copies of all BCPs that are in effect or were in effect during the last five years, and any records documenting the adviser’s annual review of its BCP.

The proposed rule is designed to address operational and other risks (internal or external) related to a significant disruption (temporary or permanent) in the investment adviser’s operations. Operational risks and disruptions generally include natural disasters or calamities, cyber-attacks, system failures, key personnel departure, business sale, merger, bankruptcy and similar events.

Under the proposed rule, an SEC-registered adviser should develop its BCP based upon risks associated with the adviser’s business operations and must include policies and procedures that minimize material service disruptions and address the following critical elements:

  • System maintenance and data protection
  • Pre-arranged alternate physical locations
  • Communication plans
  • Review of third-party service providers
  • Transition plan in the event of dissolution or inability to continue providing advisory services

The comment period will be 60 days after the proposed rule is published in the Federal Register.

A full copy of the proposed rule is available HERE.

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Yesterday, Pillsbury hosted the first Fintech Roundtable of 2016,  a series of risk management and regulatory compliance roundtables for fintech companies.  Senior Managers from Prosper, SigFig and FundingCircle discussed the market and technology challenges they face (including cybersecurity risk) and approaches they have adopted.  Pillsbury partnered with  the Professional Risk Managers’ International Association (PRMIA) – a non-profit professional association, Oyster Consulting – a firm providing comprehensive consulting and compliance services for financial firms and La Meer Inc. – a risk management solutions company.

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At the end of this month, the annual updating amendments for investment advisers’ Form ADV will be due. The following are some of the 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.

This summary consists of the following segments: (i) List of Annual Compliance Deadlines; (ii) 2016 Enforcement Priorities In The Alternative Space; (iii) New Developments; and (iv) Continuing Compliance Areas.

See the deadlines below and in red

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(This article was published in the first February 2016 issue of “The Review of Securities and Commodities Regulation” and is reprinted here with permission.)

The last half of 2015 has been characterized by a lot of debate and press attention on the role of the Chief Compliance Officer (“CCO”) at investment advisers. It has attracted attention within the highest levels at the SEC as reflected in a series of public statements and speeches, including the public disagreement of two Commissioners on whether or not there is a new trend targeting CCOs. While this debate has been unusual, it has led to a healthy and productive discussion about the CCO’s role. Below, we will discuss in turn: (a) recent statements over the past six months by SEC leaders about CCOs and whether or not there is a new trend targeting them, (b) what qualities are essential to an effective CCO and whether or not the job should be outsourced, and (c) how an effective compliance leader can prevent and detect any problems and be truly effective in preparing the firm for SEC examinations.

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The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a “Risk Alert” on November 9, 2015, the purpose of which is to raise awareness of compliance issues observed in connection with the examination of registered investment advisers and investment companies that outsource their Chief Compliance Officers (“CCO”) to unaffiliated third parties.

We encourage our registered investment adviser clients, including hedge fund and private equity managers, that have outsourced their firm’s CCO function to compliance service providers or other third parties to carefully review the following SEC risk alert summary and review their outsourcing arrangement in view of the SEC’s observations.

Outsourced CCO Initiative

The OCIE staff (the “staff”) conducted 20 examinations as part of an Outsourced CCO Initiative to evaluate the effectiveness of compliance programs and outsourced CCOs by considering a number of factors such as:

  • Whether the CCOs appropriately identified, mitigated, and managed compliance risk;
  • Whether the compliance program was designed to reasonably prevent, detect and remedy violations of federal securities laws;
  • Whether there was open communication between those with compliance responsibilities and service providers;
  • Whether the CCOs have authority to influence compliance policies and procedures of the registrants and had sufficient resources to carry out their responsibilities; and
  • Whether compliance was an important part of the registrants’ culture.

Observations of successfully outsourced CCOs

The staff observed compliance strength in outsourced CCOs with the following characteristics:

  • Regular and often in-person communication between the CCOs and registrants;
  • Strong relationships between the CCOs and registrants;
  • Registrants’ support of the CCOs;
  • CCOs having independent access to documents and information; and
  • CCOs having knowledge of the registrants’ business and regulatory requirements.

Observations of unsuccessfully outsourced CCOs

The staff observed compliance weakness in outsourced CCOs with the following characteristics:

  • CCOs providing compliance manuals based on templates not tailored to the registrants’ businesses and containing inappropriate policies and procedures;
  • CCOs visiting registrants’ offices infrequently, conducting limited annual reviews of documents or insufficient evaluation and assessment of training pertaining to compliance matters;
  • CCOs not performing critical control testing procedures and lacking documentation to evidence testing of control procedures;
  • Critical areas of the registrants’ operations were not identified by CCOs resulting in certain compliance policies and procedures not being adopted, including those necessary to address conflicts of interest;
  • CCOs using generic checklists to gather pertinent information regarding the registrants;
  • Registrants providing incorrect or inconsistent information to the CCOs about firm business practices;
  • Lack of follow-up by CCOs with registrants to resolve discrepancies; and
  • CCOs having limited authority within the registrants’ organizations to improve adherence to compliance policies and procedures and implement necessary changes in disclosure practices, such as fees, expenses and other areas of client interest.

Conclusion

The staff reminds registrants that CCOs, whether direct employees, contractors or consultants, must have sufficient knowledge and authority to fulfill their role. In addition, each registrant is responsible for the adoption and implementation of its compliance program and accountable for any deficiencies.

Finally, the staff emphasizes that all registrants, and especially those that use outsourced CCOs, may find the issues identified in the Risk Alert useful to evaluate whether (i) their business and compliance risks have been appropriately identified (ii) policies and procedures are tailored to the specific risks their businesses encounter and (iii) their respective CCOs have the necessary power to effectively perform their responsibilities. Registrants and their funds are advised to review their business practices regularly to determine whether the practices are consistent with compliance obligations under Rule 206(4)-7 under the Investment Advisers Act of 1940 and Rule 38a-1 under the Investment Company Act of 1940.

Please contact the Investment Funds and Investment Management Group if you would like to discuss the SEC alert or need help reviewing your outsourcing arrangement.

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Yesterday, Pillsbury hosted the first in a series of risk management and regulatory compliance round tables for fintech companies. The meetings will explore technology-related risk and compliance issues in the financial services space, such as in mobile banking, online brokerage, automated (“robo”) investment advisers, P2P lending, to name a few. Pillsbury partnered with  the Professional Risk Managers’ International Association (a non-profit professional association), Oyster Consulting (a firm providing comprehensive consulting and compliance services for financial firms) and La Meer Inc. (a risk management solutions company).