We urge our clients to consult Pillsbury’s comprehensive COVID-19 Resource Center for information regarding Responding to a Global Crisis, Business Interruption, Cybersecurity, Employer Concerns and other general matters related to the COVID-19 pandemic. We also recommend the following specific measures to mitigate risks of business interruption and regulatory noncompliance resulting from the COVID-19 pandemic.
While acknowledging the challenges in applying the securities laws to digital assets, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), in a joint statement on July 8, 2019, reaffirm that those rules equally apply to digital assets, and promise they will continue to engage the industry in finding solutions.
Read the full public statement HERE.
In a press release issued by the Securities and Exchange Commission on December 20, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2019 Examination Priorities.
This year’s examination priorities, although not exhaustive, are divided into 6 categories:
- Compliance and risk at registrants responsible for critical market infrastructure;
- Matters of importance to retail investors, including seniors and those saving for retirement;
- FINRA and MSRB;
- Digital assets;
- Cybersecurity; and
- Anti-money laundering programs.
Read the OCIE 2019 Examination Priorities in full HERE.
The rapid growth of cryptocurrency markets, digital asset products and initial coin offerings (ICOs), and the alarmingly high number of fraudulent ICO attempts among them, has prompted the SEC to engage the public in some creative investor education.
The future of the Department of Labor’s Fiduciary rule is in limbo following the Fifth Circuit’s decision striking it down “in toto.”
- The future of the Fiduciary rule is uncertain, particularly in light of the Fifth Circuit’s decision vacating the rule.
- Retirement plan fiduciaries should continue to stay apprised of the viability of the Fiduciary rule with an eye towards the services provided by their plans’ investment advisors.
- Industry experts are hopeful that the DOL and SEC will coordinate their efforts to provide clear guidance to investment advisers and broker-dealers, plan fiduciaries and plan participants.
Read this article and additional Pillsbury publications at Pillsbury Insights.
This alert contains a summary of the primary annual and periodic compliance-related obligations that may apply to investment advisers registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Advisers”), and commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) (collectively with Investment Advisers, “Managers”). Due to the length of this Alert, we have linked the topics to the Table of Contents and other subtitles for easy click-access.
This summary consists of the following segments: (i) List of Annual Compliance Deadlines; (ii) New Developments; (iii) 2018 National Exam Program Examination Priorities; (iv) Continuing Compliance Areas; and (v) Securities and Other Forms Filings.
Read this article and additional Pillsbury publications at Pillsbury Insights.
- 3(c)(1) funds should update their offering documents to reflect $2.1 million net worth requirement.
- Assets under management threshold remains unchanged at $1 million.
- Only new client relationships entered and new investors admitted in private funds after August 15, 2016 are affected; new contributions by pre-August 15 investors are grandfathered.
The Securities and Exchange Commission (the “SEC”) issued an order on June 14, 2016 raising the net worth threshold for “qualified clients” in Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Effective August 15, 2016, the dollar amount of the net worth test increased from $2 million to $2.1 million. The dollar threshold of the assets-under-management test has not changed and remains at $1 million. Adjustments to the dollar thresholds for the assets-under-management and net worth tests under Rule 205-3 are made pursuant to section 418 of the Dodd-Frank Act and section 205(e) of the Advisers Act and are intended to reflect inflation. The adjusted amounts would reflect inflation from 2011 until the end of 2015.
Under the Advisers Act, an investment adviser is generally prohibited from receiving performance fees or other performance-based compensation. Section 205(e) of the Advisers Act provides for an exemption to this prohibition and Rule 205-3 under the Advisers Act permits an investment adviser to receive performance fees only from “qualified clients.” The increased threshold affects private funds that rely on the exception to the definition of investment company provided in section 3(c)(1) of the Investment Company Act (“3(c)(1) Funds”) which, under the rule, are allowed to pay performance-based fees if their investors are qualified clients. Accordingly, 3(c)(1) Funds must amend their offering documents to conform to the new qualified client net worth threshold.
Grandfathering: Subject to the transition rules of Rule 205-3, the June 2016 SEC order generally does not apply retroactively to clients that entered into advisory contracts (including investors that invested in a private fund) prior to the August 15, 2016 effective date.
On July 14, 2016, the Securities and Exchange Commission (SEC) announced an enforcement action against RiverFront Investment Group, LLC, a registered investment adviser serving as sub-adviser to clients in wrap fee programs established by various sponsors. The enforcement action resulted from RiverFront’s materially inadequate disclosure about changes in its trading practices and attendant transaction costs which exceeded wrap fees and caused millions of dollars in extra transaction costs for its clients.
In its role as sub-adviser, RiverFront had discretion to determine whether to send trades to sponsor-designated broker-dealers (whose costs were covered under the wrap fee program) or to other brokers in which case the clients would pay additional transaction costs. Wrap fee programs enable clients to pay one fee to cover a bundle of services, including, for example, trading, investment management and custody. From 2008 to 2011, RiverFront disclosed on its Form ADV that trades were “generally” executed through designated broker-dealers. It also disclosed that it may trade away in an effort to obtain best execution on behalf of its clients. A “trade away” is the practice of sending trades to a broker-dealer that has not previously been designated. In 2009, RiverFront started trading away significantly more transactions and charging clients fees that were not included in the annual wrap fee. However, in its annual Form ADV amendment filings from 2009 to 2011, RiverFront did not change its disclosures to reflect the frequency of its trade aways.
It was RiverFront’s failure to accurately and timely disclose on its Form ADV its trading practices and the potential for additional transaction costs that resulted in the SEC sanctions. The SEC held that RiverFront willfully violated Sections 207 and 204(a) of the Investment Advisers Act of 1940 and Rule 204-1(a) thereunder.
The SEC imposed sanctions against RiverFront, namely:
- censorship; and
- a $300,000 fine.
RiverFront also undertook to disclose quarterly on its website the volume of trades executed with non-designated brokers and the costs to be passed onto clients.
The RiverFront enforcement action serves as a reminder to investment advisers to review their Forms ADV to ensure that trading practices, costs and other material information regarding their advisory businesses are adequately and accurately disclosed. Please contact an Investment Funds and Investment Management Group attorney for assistance with issues pertaining to Form ADV disclosure and related matters.
The SEC Press Release can be found here.
The full text of the SEC order can be found here.
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.
Earlier this month, the SEC announced the creation of its Office of Risk and Strategy to operate within its Office of Compliance Inspections and Examinations (OCIE). The new office will consolidate and streamline OCIE’s risk assessment, market surveillance, and quantitative analysis teams and provide operational risk management and organizational strategy for OCIE.
Headed by Peter B. Driscoll, a former E&Y auditor with law and CPA degrees, the Office of Risk and Strategy will lead the OCIE’s risk-based and data-driven National Examination Program. Mr. Driscoll emphasized at the Investment Adviser Association’s annual compliance conference in Washington that private equity funds and private fund advisors would “continue to be a big focus” for the exam unit as well this year. While this is no surprise, Driscoll also added that the focus on hedge funds will zero in on such areas as portfolio management, trading and back-office operations. This may suggest a broader, deeper and more focused scrutiny on hedge funds than just the trading offenses we are familiar with from national headlines.
The SEC has been busy: it has visited at least 25% of ‘never-before-examined’ advisers, numbering over 700, which surpasses the SEC’s own goal. There is no reason to expect the SEC’s enthusiasm to decline in this area in 2016. If you are a hedge fund manager that has never been examined before, you may get a knock on your door this year.