DOL Fiduciary Rule | Form ADV Disclosure | MSRB Rules | Municipal Advisors | Regulatory Deadlines

Death Knell for Fiduciary Rule? MSRB Requires Disclosure of Mark-Ups/Mark-Downs and Reminds Municipal Advisors about Customer Complaints: Regulatory Update April 2018

  • Is the Fiduciary Rule Dead? The Department of Labor announced that it will not be enforcing the Fiduciary Rule “pending further review,” after the Fifth Circuit Court of Appeals vacated the Fiduciary Rule and all related exemptions on March 15.  This might not be the end, however.  The DOL has until April 30 to request a review of the ruling by a full panel of the Fifth Circuit. If no appeal is sought, the Fiduciary Rule will be vacated by May 7.  The DOL also has until June 13, 2018 to petition the Supreme Court to hear its appeal.

So what happens if the Fiduciary Rule is vacated?  The prior rule will be reinstated, including the five-party test of fiduciary status.  So a financial adviser would not become a fiduciary under ERISA unless it provided investment advice that is (1) individualized, (2) provided on a regular basis, (3) related to securities or other property, (4) pursuant to a mutual agreement, and (5) the primary basis for investment decisions by the recipient. This would mean that one-time roll-over advice would generally not be considered fiduciary advice.   Until the DOL makes a decision on whether to appeal the Fifth Circuit’s opinion, it’s too early to revert to the pre-June 9, 2017 practices.

For more details, check out our blog post. Contributed by Cari Hopfensperger, Compliance Consultant

  • MSRB Rules requiring Disclosure of Mark-Ups and Mark-Downs Effective May 14: Amendments to MSRB Rules G-15 (Confirmations) and G-30 (Prices/Commissions) are set to take effect on May 14, 2018.  The Municipal Securities Rule-Making Board’s (MSRB) intent in issuing these amendments is to provide meaningful transparency to investors and to promote consistent compliance by brokerage firms with their fair pricing obligations.
    • Rule G-15 – requires brokerage firms to disclose the markup or markdown (collectively “markups”) on municipal bond trades to retail investors.
    • Rule G-30 – provides guidance on for determining the prevailing market price and reasonable markups.

Disclosure Requirements

When a firm buys a municipal bond as principal from one party and sells the bond as principal to a retail investor, the firm must disclose on the following information on the trade confirmation:

  1. Price charged to the buyer;
  2. Price the firm paid to acquire from the seller (reference price); and
  3. Difference between the two prices.

Disclosure Requirement Exceptions

  1. Offsetting trades done by a functionally separate trading desk;
  2. Primary market trades executed at the listed offering price; and
  3. Municipal fund security transactions (mutual funds, closed-end funds, ETFs, etc.).

Prevailing Market Price

Currently under Rule G-30 brokerage firms are obligated to exercise reasonable diligence when establishing the prevailing marketing price (“PMP”) for a security.  Therefore, brokerage firms are expected to establish policies and procedures to apply consistently for all retail investors for determining the PMP of a security.  The amendment to this rule establishes factors that must be complied with for reasonably determining the PMP that is in turn used to calculate the compensation to be received.

Brokerage firms should look at their contemporaneous trades of the same security to establish a presumption of the PMP.  If this data is not available then additional factors may then be considered for determining the PMP.  Those factors, in their successive order, are as follows:

  1. Contemporaneous trades of the security in interdealer trades;
  2. Trades of the muni between other dealers and institutional investors;
  3. Trades on alternative trading systems or other electronic platforms;
  4. Contemporaneous trades of similar securities (firm must use non-exclusive factors like credit quality, size of issue, and comparable yield when determining if securities are “similar”);
  5. The firm’s contemporaneous cost as incurred, or contemporaneous proceeds as obtained; and
  6. Prices or yields as derived from economic models.

The MSRB recently released updated FAQs to assist Dealers with compliance by May 14th.  MSRB G-15 & G-30 Implementation Guidance is another useful resource.  Contributed by Doug MacKinnon, Senior Compliance Consultant

  • MSRB Reminds Dealers about Best Execution Obligations and Standards of Conduct for Filtering Bids and Offers: According to the MSRB, when a Municipal dealer filters bids and offers through a broker’s broker or an alternative trading system (“ATS”), it has an obligation to ensure the use of such filters does not limit access to and competition in the market. Although there may be legitimate purposes justifying the use of filters, the dealer must be able to demonstrate a reason that is not anti-competitive.  To this end, dealers must develop and review policies and procedures addressing when and how the firm uses filters.  Such procedures should document:
    • The criteria for or factors considered when establishing, modifying and removing filters, and how they are determined;
    • The processes for establishing, modifying and removing filters, including authorization;
    • The process for reviewing filters; and
    • The process for reviewing the policies and procedures related to the practice of filtering.

Contributed by Rochelle Truzzi, Senior Compliance Consultant

Electronic Customer Complaint Log

Under MSRB Rule G-8, Dealers and Advisors must maintain a customer complaint log in an electronic format, defined in Supplementary Material .01 as, “any computer software program that is used for storing, organizing and/or manipulating data that can be provided promptly upon request to a regulatory authority.”  The complaint log must include additional data fields set forth in Rule G-8(a)(xii), including complaint product and problem codes.  These codes can be found in the MSRB Rule G-8 Customer and Municipal Advisory Client Complaint Product and Problem Codes Guide.    As per Rule G-9, complaint records must be maintained for a period of not less than six years.

Notifications Regarding Customer Education and Protection

MSRB Rule G-10 was overhauled to require Dealers and Advisors to provide customers with regular notifications about their registration status and the availability of educational material and information about filing a complaint.

Advisors are required to provide these notifications promptly after the establishment of a municipal advisory relationship, and no less than once each calendar year during the course of the relationship.  Dealers are only required to provide the notification annually.  The notifications must: (1) disclose that the Firm is registered with the MSRB and the SEC; (2) provide the MSRB’s website address; and (3) disclose that there is a brochure available on the MSRB website that describes the protections available under MSRB rules, and how to file a complaint with an appropriate regulatory authority.  Firms are no longer required to deliver the actual Investor Brochure to customers.  If you are an introducing broker/dealer and rely on your clearing firm to deliver the required annual notification, you should verify that such notifications have been sent and contain the required information.  Also, please ensure that notifications are being delivered to your direct-business municipal customers. Contributed by Rochelle Truzzi, Senior Compliance Consultant

 Lessons Learned from Recent SEC and FINRA Cases:

 If it walks like a duck, swims like a duck, and quacks like a duck…. Then it just may be a duck. The SEC censured and fined Financial Fiduciaries, LLC, a SEC registered investment advisor and Thomas Batterman for violating the custody rule because a dual employee also had trust powers.  Thomas Batterman was the majority shareholder of WTC, Inc. (“WTC”) which also was the sole member of Financial Fiduciaries, LLC.  WTC entered into two arrangements with Investors Independent Trust Company (‘IITC”) whereby both entities not only shared office space but also the services of one employee.  Financial Fiduciaries, per the second arrangement, would provide investment advisory services to IITC’s trust clients. The dual employee worked as a bookkeeper for WTC and for IITC she performed trust administrative activities on behalf of IITC’s clients. In this capacity, the dual employee had direct access to and control over assets of Financial Fiduciaries trust clients.  IITC paid WTC $2,000 a month towards the dual employee’s salary and it also paid WTC “variable” monthly rent based on 50% of trust administrative fees it generated. Financial Fiduciaries benefited from recommending IITC’s trust services but did not disclose the conflict to its clients.

The SEC found Financial Fiduciaries breached its fiduciary duty by not disclosing the conflicts of interests in the arrangements, as well as violating “The Custody Rule” for not having a qualified custodian handle the assets, failing to conduct an independent audit, and for not maintaining the assets in separate accounts.  Furthermore, the SEC charged Batterman with filing an inaccurate Form ADV by not disclosing that his firm had custody of client assets. Contributed by Heather Augustine, Senior Compliance Consultant

BD/IA pays $2.2 million to Compensate Investors for Recommending More Expensive Mutual Fund Share Classes.   Ameriprise Financial Services, Inc. is yet another in casualty in the SEC’s crackdown on firms that sell investors mutual fund shares classes with higher expenses.  Ameriprise settled a case with the SEC and agreed to pay back investors $2.2 million in remediation for recommending higher-cost mutual fund share classes. According to the settlement order, Ameriprise recommended and sold Class A Shares with an up-front sales charge (when load-waived shares were available), and Class B or Class C shares with a back-end deferred sales charge that had higher ongoing fees and expenses than other share classes.  These recommendations were made without checking to see whether investors qualified to purchase load-waived Class A Shares, or telling investors that Ameriprise would receive more money as a result of selling the more expensive share classes.

Ameriprise has become yet another poster child for the SEC’s Share Class Disclosure Initiative.  To avoid a similar fate, advisers should be looking at their processes for selecting mutual fund share classes to make sure that they have taken into consideration which share classes are the best deal for the client.  Firms should also review their disclosures to ensure that they tell investors if they have a conflict of interest in recommending one share class over another.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

Cautionary tale:  SEC goes after CCO for Aiding and Abetting Fraud Scheme.  The SEC charged three oil and gas companies and their executives for engaging in a fraudulent scheme to raise $11.7 million for drilling projects.  The complaint alleges that the four executives targeted unsophisticated investors to buy shares in oil and gas drilling operations that they claimed were already profitable. What makes this case different from all the other fraudulent oil drilling schemes is that the corporate compliance officer was also charged for his role in the offering.  According to the complaint, the CCO knew what was going on and assisted in the sales efforts by drafting and reviewing communications to investors and filing Forms D with incorrect information.  The CCO played a key role in the scheme, according to the complaint, by “adding an aura of legitimacy.”  The lesson here is that CCOs can also become the targets of regulators for failing to take the securities laws seriously.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

Worth Reading:

 How The Product Distribution Industry Beat DOL Fiduciary By Proving Their “Advisors” Aren’t Real Advisors.  Great analysis of latest developments on Fiduciary Rule by Michael Kitces!

Pillsbury provides a comprehensive to do list for RIAs.  If you are updating your compliance program, this is a great resource!

In-Depth Discussion of the Fifth Circuit’s decision.  Check out Nevin E. Adams discussion of the opinion and its implications.

Filing Deadlines and To Do List for April


  • Form ADV Part 2A:  Registered investment advisers are required to distribute to each client an updated Form ADV Part 2A or a summary of material changes with an offer and information on how to obtain the updated Form ADV Part 2A, within 120 days of fiscal year end.  Due April 30, 2018.
  • State Filings: A registered investment adviser and an exempt reporting adviser may be required to make a state notice filing in any state in which an adviser has a specified number of clients, called “Notice Filings.” Notice filings may be made on Form ADV by checking the relevant box in Part 1A and depositing the appropriate state fees into the adviser’s IARD account. Exempt reporting advisers may also be required to register as an investment adviser in some states. Notice filing and investment adviser registration requirements differ from state to state. Each adviser should check the requirements for any relevant state in which it operates or has clients.  Deadline:  April 2, 2018.
  • Form 13H: Following an initial filing of Form 13H, all large traders must make an amended filing to correct inaccurate information promptly (within 10 days) following the quarter-end in which the information became stale (unless they are on Inactive Status). The due date is April 2, 2018.
  • Form ADV Part 2BRegistered investment advisers should review their Form ADV Part 2B Brochure Supplements to ensure continued accuracy.
  • Exempt Reporting Advisers Form ADV Filing: Exempt Reporting Advisers (i.e., exempt private funds advisers and venture capital advisers) need to update Form ADV Part 1A by April 2, 2018.
  • ERISA Schedule C of Form 5500 Disclosure: An adviser may be required to report certain information to its ERISA plan clients and investors for their use in completing Department of Labor Form 5500, including information about compensation received with respect to ERISA plan assets that the adviser manages or that are invested in the adviser’s funds. If you have ERISA plan clients, they may request this information in order to file Form 5500 by July 31, 2018.


  •  Form PF for Large Liquidity Fund Advisers: Large liquidity Fund advisers must file Form PF with the SEC on the IARD system within 15 days of each fiscal quarter end (April 15, 2018).
  • Distribute Audited Financial Statements for Private Funds: Private fund investment advisers should have their funds audited by an independent, PCAOB-registered accountant and deliver the audited financial statements to the funds’ investors within 120 days of the end of the funds’ fiscal year (for funds with December 31, 2018 year-end, the date is April 30, 2018). The deadline for private funds that are fund of funds is 180 days of the funds’ fiscal year end. That’s June 29, 2018 for funds with December 31 year-end.
  • Form PF Annual Amendment: Form PF Annual Amendment is due within 120 days of fiscal year-end for private fund advisers that are not Large Hedge Fund Advisers or Large Liquidity Fund Advisers and manage more than $150 million in regulatory assets under management attributable to private funds. The due date is April 30, 2018.
  • Form PF Quarterly Update:  Form PF quarterly update is due for “large hedge fund advisers” and “large liquidity fund advisers” who did not submit information relating to their other private funds with their fourth- quarter filing.  Due April 30, 2018.


  •  CFTC Form CPO-PQR Schedule A must be filed by small CPOs (i.e. CPOs with less than $150 million in aggregated gross pool AUM as of the close of business on any business day during a calendar year), by April 2, 2018.
  • CFTC Form CPO-PQR Schedules A and B must be filed by mid-sized CPOs (at least $150 million to $1.5 billion in aggregated gross pool AUM as of the close of business on any business day during a calendar year) by April 2, 2018.
  • Annual Reports for 4.7 Exempt CPOs. 7 Exempt CPOs must electronically file audited annual reports, including statements of financial condition, statements of operations and appropriate footnotes, for their pools with the NFA and distribute them to their investors by April 2, 2018.


  •  Annual Audit Reports for the Fiscal Year-End January 31, 2018:  FINRA requires that member firms submit their annual audit reports in electronic form.  Firms must also file the report at the regional office of the SEC in which the firm has its principal place of business and the SEC’s principal office in Washington, DC. Firms registered in Arizona, Hawaii, Louisiana, or New Hampshire may have additional filing requirements.  Due date is April 2, 2018.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of January 31, 2018.  SIPC members are required to file the SIPC-7 General Assessment Reconciliation Form together with the assessment owed (less any assessment paid with the SIPC-6) within 60 days after the Fiscal Year-End. Due date is April 2, 2018. 
  • Customer Complaint Quarterly Statistical Summary: For complaints received during the 1st Quarter, 2018.  FINRA Rule 4530 requires Firms to submit statistical and summary information regarding complaints received during the quarter by the 15th day of the month following the calendar quarter.  Due date is April 16, 2018. 
  • Rule 17a-5 Quarterly FOCUS Part II/IIA Filings:  For Quarter ending March 31, 2018. FINRA requires that member firms file a FOCUS, (Financial and Operational Combined Uniform Single) Report Part II or IIA on a quarterly basis. Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Due date is April 24, 2018. 
  • Quarterly Form Custody:  SEC requires that member firms file Form Custody pursuant to SEA Rule 17a-5(a)(5) for the quarter ending March 31, 2018. Due date is April 24, 2018. 
  • Supplemental Statement of Income (“SSOI”): For the quarter ending March 31, 2018.  FINRA requires firms to submit additional, detailed information regarding the categories of revenues and expenses reported on the Statement of Income (Loss) page of the FOCUS Report Part II/IIA.  Due date is April 27, 2018.
  • Supplemental Inventory Schedule (“SIS”): For the month ending March 31, 2018. The SIS must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, with inventory positions as of the end of the FOCUS or FOGS reporting period, unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000; or (2) inventory positions consisting only of money market mutual funds.  A firm with inventory positions consisting only of money market mutual funds must affirmatively indicate through the eFOCUS system that no SIS filing is required for the reporting period.  Due date is April 27, 2018.
  • Annual Audit Reports for Fiscal Year-End February 28, 2018. FINRA requires that member firms submit their annual audit reports in electronic form.  Firms must also file the report at the regional office of the SEC in which the firm has its principal place of business and the SEC’s principal office in Washington, DC. Firms registered in Arizona, Hawaii, Louisiana, or New Hampshire may have additional filing requirements. Due date is April 30, 2018.
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of March 31, 2018 AND claiming exclusion from SIPC Membership under Section 78ccc(a)(2)(A) of the Securities Investor Protection Act of 1970.  This annual filing is due within 30 days of the beginning of each fiscal year. Due date is April 30, 2018.
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of September 30, 2017.  SIPC members are required to file for the first half of the fiscal year a SIPC-6 General Assessment Payment Form together with the assessment owed within 30 days after the period covered. Due date is April 30, 2018.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of February 28, 2018.  SIPC members are required to file the SIPC-7 General Assessment Reconciliation Form together with the assessment owed (less any assessment paid with the SIPC-6) within 60 days after the Fiscal Year-End. Due date is April 30, 2018.

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