FINRA Examinations | Form ADV | IARD | MiFID II

Form ADV Deadlines, Updates to Compliance Programs, FINRA Priorities and Protection of Specified Adults: Regulatory Update for February 2018

  • Regulatory Review 2017: HCC put together a list of the top regulatory hot buttons from 2017 to help you focus your compliance efforts in 2018.
  • 11 Key Takeaways for Updating your Compliance Program in 2018: HCC put together a review of the regulatory landscape in 2017, with a list of 11 recommendations for updating your compliance program.
  • Form ADV Update deadline: Procrastinators beware!  The deadline for filing the Form ADV update for investment advisers with a fiscal year end of December 31 is March 31, 2018, which is a Saturday.   IARD is open on Saturday March 31, therefore the deadline for filing an annual updating amendment will NOT be extended to Monday April 2, 2018.
  • Investment Advisers Compliance To Do List: For investment advisers, private and hedge fund managers:  a handy list of regulatory deadlines for 2018 to use to update your compliance calendar.
  • Broker Dealer Compliance To Do List: For broker-dealers, a list of regulatory deadlines for 2018.
  • FAQs on Liquidity Risk Management Rule: The staff of the SEC’s Division of Investment Management has released FAQs for the new Liquidity Risk Management Rule for open-end funds and ETFs (Rule 22e-4).  The FAQs address two topics:  (1) the scope of responsibilities that can be delegated to a subadviser under a Liquidity Risk Management Program (LRM Program); and (2) the definition of “In-Kind ETF.”
  • FINRA releases its annual Regulatory and Examination Priorities Letter: The 2018 Regulatory and Examination Priorities Letter (“Letter”) should be read together with the 2017 Examination Findings Report (“Report”) to help improve your firm’s compliance program and prepare for a FINRA exam. The Report provides insight into what FINRA deems to be best practices that foster effective compliance programs, as well as common pit-falls that may lead to examination findings or enforcement actions.

FINRA is working to improve the efficiency of its examination program through the development of several “surveillance patterns” designed to review the market integrity of transactions.  In addition, FINRA will launch several new report cards to assist firms with their surveillance programs.  The Letter gently warns that examiners will be reviewing to determine if and how firms are utilizing these report cards!

A majority of the focus areas are repeats and long-time favorites of FINRA.  This means the examiners are mastering the topics, making for a more robust review.  FRAUD is the headliner of the Letter this year with a spotlight on sales practices targeting senior investors (complex products, microcap schemes, rollovers from qualified plans to non-qualified accounts, and high-pressure sales tactics).  Supervision of high-risk brokers remains a focus of this year’s priorities as FINRA plans to examine a firm’s supervision of bad-actors, remote office locations, outside business activities, private securities transactions, recommendations of complex products, and registered representatives with control of investors’ finances (e.g., power-of-attorney, trustee).

New to the priorities this year is the review of digital assets (such as cryptocurrencies and initial coin offerings).  FINRA plans to review member firms’ supervisory, compliance and operational infrastructure to ensure compliance with applicable laws, regulations and rules.  Also, TRACE for treasuries will be examined for timely and accurate reporting.  Expect FINRA to review electronic communications for discrepancies between the transaction information included in correspondence with customers and the information reported to TRACE.

Finally, FINRA will be reviewing to ensure Firms are working to develop and implement procedures in order to comply with new rules which go into effect in 2018.   Contributed by Rochelle Truzzi, Senior Compliance Consultant

  • FINRA Rules regarding Financial Exploitation of Specified Adults go into effect on February 5th: Amendments to FINRA Rule 4512 (Customer Account Information) will require firms to make reasonable efforts to obtain the name of and contact information for a Trusted Contact Person for client accounts.  FINRA Rule 2165 (Financial Exploitation of Specified Adults) will allow firms to place a temporary hold on suspicious disbursements of funds or securities from accounts of Specified Adults under special circumstances.  Firms should amend their procedures manuals to address the identification, escalation and reporting of suspected incidents of financial exploitation of Specified Adults.  Procedures should also identify, by title, each associated person authorized to place, extend, or terminate a temporary hold.  A firm’s Firm-Element Continuing Education Plan should include a module addressing the firm’s procedures on Financial Exploitation of Specified Adults.  If the new account application utilized by the firm does not include a section for designation of a Trusted Contact Person, the firm should incorporate a separate designation form within the account paperwork required at account opening.  Contributed by Rochelle Truzzi, Senior Compliance Consultant
  • Grace Period LEI Numbers – for firms with business in EU: If your firm is doing business with companies subject to the MiFID II regime (financial institutions governed by the European Securities and Markets Authority, “ESMA”), you may need a Legal Entity Identifier (“LEI”), if  you haven’t already done so.   ESMA has granted a six-month grace period as of December 20, 2017.  To learn more, check out this video from DTCC about how to use the Global Markets Entity Identifier utility to apply for an LEI.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

Lessons Learned from Recent SEC and FINRA Cases:

It’s a whole new world out there…or is it?  In an effort to provide clarity and guidance on cyber currency, virtual crowdfunding and blockchains, the Securities and Exchange Commission issued a “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” on July 25, 2017.  In the report, the SEC analyzes the different components of the sale of DAO (Decentralized Autonomous Organization) tokens by an unincorporated German entity, the DAO, using a website to promote interest. The objective was to sell DAO tokens to investors in exchange for Ether (“ETH”), a virtual currency used on the Ethereum Blockchain.  The proceeds of the offering would be used to fund “projects”.  Holders of DAO tokens would share in the anticipated earnings of the projects as a return on investment.  In addition, holders of the DAO tokens could resell their DAO tokens on a secondary market in crypto space and investments in the DAO were made using pseudonyms.

At the end of the day, the SEC analyzed the offering using the age-old Howey test to determine that the DAO Tokens were essentially securities.  Investors who purchased DAO Tokens were investing in a common enterprise and reasonably expected to earn profits through the efforts of others.  The fact that the tokens were purchased with a virtual currency and were offered by an unincorporated organization made no difference, since investors were still exchanging value and expecting a return on their investment.  Therefore the SEC concluded that the DAO Tokens were securities, and the DAO should have registered them under the Securities and Exchange Act of 1934.

The SEC also concluded that the platforms used to trade DAO Tokens met the definition of a securities exchange, and should have been registered as a national securities exchange. They, however, did not analyze whether the DAO was an investment company because they never commenced business operations funding projects.  This is an interesting read for those trying to determine whether or not bitcoins and cyber currency are securities. Fact and circumstances still rule, but the SEC in its conclusion states that regardless of the language being used and the arena for exchange, there are certain requirements that are fundamental to making a determination on registration. At the end of the day, if it looks like a duck, swims like a duck and quacks like a duck, it’s probably a duck. Contributed by Heather Augustine, Senior Compliance Consultant

SEC Fines and Bars Fund Manager in Series Trust  Like the late, great Yogi Berra said, it’s deja vu all over again.  James Dailey, owner, managing member and portfolio manager of Team Financial Asset Management, LLC (“TFAM”), was facing significant losses for the mutual fund his firm managed, the TEAM Asset Strategy Fund (the “Team Fund”).  Instead of facing the music, Dailey decided to play increasingly bigger odds to recover his losses, using a strategy reminiscent of Barings Bank rogue trader Nick Leeson.  Dailey started the Team Fund in 2009 to capitalize on his success managing his Global Macro Strategy.  During its first year, the Team Fund did very well, with returns of 15.10%.  In 2011, performance declined and Dailey began trading extensively in derivatives.  As his exposure to derivatives increased, so did the risks. The losses started to pile up, so Dailey decided to double down by selling short equity securities in massive amounts.  Ultimately the Team Fund lost 80% of its value, as assets plunged from roughly $60 million to only $4.8 million in 2013.  Although some of the losses were due to redemptions, about $24.9 million was attributable to derivatives trading.  Unable to meet its expenses, the Team Fund closed in November 2013.

The SEC found numerous violations of the Advisers Act, Investment Company Act and the Securities and Exchange Act.  But all the violations stemmed from a finding that found Dailey and his firm failed to disclose the substantial change in investment strategy and the increased risks posed by investing in derivatives.  Consequently Dailey was banned from the industry, and required to pay disgorgement of $65,052, and a penalty of $130,000.  Dailey’s firm, TFAM, voluntarily terminated its registration in 2014.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

De-registered investment adviser nailed by SEC for compliance failures. It’s not over until the SEC says it’s over…In the case of LKL Investment Counsel LLC (“LKL”) and Mark H. Love, the SEC got the last word.  In 2016, Mr. Love, CCO, President, sole member and managing partner of private funds and his firm LKL were cited Sections 207, 204(a) and 206(4) violations of the Investment Advisers Act by the SEC.  In the deficiency letter, the SEC claimed that LKL made false representations on Form ADV, did not perform an annual review for 7 years, had fee errors that required reimbursement, failed to implement policies and procedures, and failed to provide records to examination staff. Subsequently, Mr. Love reimbursed clients their pro-rated fees and partially corrected the LKL Form ADV but failed to provide the materially changed form to clients within 120 days of the update. By July 2017, LKL withdrew its SEC registration.

Case closed? Not so fast.  The SEC in January 2018 issued a cease and desist order against LKL and Mr. Love. The SEC is requiring LKL to send a copy of the January 2018 cease and desist order, within 30 days, to former advisory clients.  In addition, Mr. Love has to provide the cease and desist order to any advisory firm with which he associates within 10 days of association and provide certification to the SEC that he complied with both notifications. Further, Mr. Love may not act in any compliance capacity with any SEC regulated entity and is required to pay a $100,000 fine. Rarely can a one-man shop be all things to all people.  Clearly, Mr. Love was in over his head in trying to meet the firm’s compliance obligations. What is interesting is that the SEC has made it clear that after de-registering a firm you can’t just disappear and fade into the sunset without adhering to its demands. Contributed by Heather Augustine, Senior Compliance Consultant

One of these days I’m going to get help for my procrastination problem.   Although I usually have a soft spot for CCOs, it’s hard to feel sympathetic in this case, where the CCO apparently had notice, help and resources to fix known issues.  The CCO, Anthony LaPeruta, worked for Southwind Associates of NJ Inc. (“Southwind”).  In 2011, Southwind hired a compliance consulting firm to review its compliance program.  The consultant issued a report, which included a spreadsheet with 59 separate action items relating to various compliance areas, including custody, electronic communications, books and records requirements, and compliance manual and policies.

OCIE examined Southwind in 2013, and discovered that the firm had failed to remedy many of the issues noted by the consultant, including failure to (1) comply with the Custody Rule and (2) maintain and preserve electronic records (e.g., email).  The CCO was nailed for his failure to administer the firm’s compliance policies and procedures, to review and update the compliance program annually, and to perform ongoing reviews and testing of the firm’s policies and procedures. Southwind’s president was sanctioned by the SEC because he was aware of many of the issues related to the compliance program, but did nothing to fix them.

The SEC mandated that Southwind send a letter to all of its existing clients notifying them of the SEC’s action and including a summary of the administrative order.  The firm’s Form ADV also had to include disclosure about the order.  Additionally, the firm was required to hire an independent compliance consultant to review its compliance program.  Southwind and its owner were required to pay a penalty of $50,000.  Finally, LaPeruta, the CCO, was banned from acting in a supervisory or compliance capacity in the financial services industry.   Contributed by Jaqueline M. Hummel, Partner and Managing Director

 Worth Reading:

Check out this awesome checklist of new and amended Form ADV Items from IAA.

What Asset Managers Can Expect from the SEC In 2018:  Insightful article predicting SEC actions for 2018 from David Tittsworth.

Electronic Communications in SEC Examinations and Investigations:  Excellent (and scary) article on the perils of instant messaging by hedge fund employees!

SEC Compliance Outreach Program June 13, 2017, Chicago Regional Office:  Just found this!  A transcript from the SEC’s Compliance Outreach Program from the Chicago Regional Office, held on June 13, 2017, and accompanying materials.   From the SEC’s mouth to your ears!

New DOL ERISA Fiduciary Regulation Takes Effect (at Least for Now):  Great info for private funds on DOL rule — check out the notice for ERISA and IRA investors!

Private Funds Regulatory Compliance Calendar 2018:  Great resource from Paul Weiss for updating your compliance calendar. Includes regulatory filings, general compliance obligations, and deadlines for all those pesky treasury forms (TIC Form S, Form SLT, Form BC, etc.)

2017-18 Compliance Developments & Calendar for Private Fund Advisers  Great resource form Akin Gump!

Filing Deadlines and To Do List for February


  • Form 13F: Form 13F (institutional manager) quarterly filing for Q4 2017 is due within 45 days after the end of the calendar quarter, on February 14, 2018.
  • Form 13H: Form 13H (large trader) annual filing is due for advisers that already have a Form 13H filing obligation by February 14, 2018 (Not required if quarterly amendment was filed for the fourth quarter.)
  • Form 13D & 13G: Annual amendments are due for advisers that have changes to disclosure information on previously filed 13D or 13G forms, on February 14, 2018.


  • Form PF for Large Hedge Fund Advisers must be filed within 60 days of each quarter end on the IARD system (March 1, 2018).
  • Initial Form PF: For Hedge Fund Advisers that have reached $1.5 billion regulatory assets under management (“RAUM”) attributable to hedge funds as of December 31, 2018 must make initial filing (the initial quarterly Form PF filing within 60 days of quarter end if an adviser’s hedge fund RAUM exceeds $1.5 billion as of the previous quarter end).  (March 1, 2018)


  • Reaffirm YOUR CPO and CTA Exemptions: Firms that claim exemptions from Commodity Pool Operator (“CPO”) registration under CFTC Rule 4.5 or CTFC Rule 4.13(a)(3) (the “de minimis exemption”), or Rules 4.13(a)(1), 4.13(a)(2), 4.13(a)(5), and firms that claimed an exemption from Commodity Trading Adviser (“CTA”) registration pursuant to CFTC Rule 4.14(a)(8) must re-affirm those exemptions by March 1, 2018 or those exemptions will be automatically withdrawn.


  • Form PR should be filed with National Futures Association (“NFA”) for registered Commodity Trading Advisors for the year ended December 31, 2017, by February 14, 2018.
  • CFTC CPO-PQR Form (All Schedules): Large Commodity Pool Operator Form CPO-PQR is required to be filed with the NFA for all Large Commodity Pool Operators by March 1, 2018.


  • Form OBS: For the Quarter ending December 31, 2017.  Unless subject to the de minimis exception, all clearing, self-clearing, and carrying firms and those firms that have a minimum dollar net capital requirement equal to or greater than $100,000 and at least $10 million in reportable derivatives and other off-balance sheet items must submit Form OBS as of the last day of a reporting period within 22 business days of the end of each calendar quarter via eFOCUS.  Firms that claim the de minimis exemption must affirmatively indicate through the eFOCUS system that no filing is required for the reporting period.  Due date is February 1, 2018.
  • Annual Entitlement User Account Certification: FINRA requires firms to conduct an annual review of the FINRA application user accounts established for firm personnel and ensure that access and entitlements are appropriate for the personnel’s role and responsibilities. The certification period typically begins in the beginning of January and ends approximately 30 days later.  The Super Account Administrator (“SAA”) is responsible for conducting the review, amending and deleting user accounts/entitlements as necessary, and submitting the certification through WebCRD.  Only the SAA has access to this certification.  Failure to complete the certification by the established deadline will result in all user accounts associated with the firm to be suspended until certification is complete. The due date is February 8, 2018.
  • Rule 17a-5 Monthly and Fifth FOCUS Part II/IIA Filings:  For period ending January 31, 2018. For firms required to submit monthly FOCUS filings and those firms whose fiscal year-end is a date other than a calendar quarter. Due date is February 24, 2018.
  • Annual Audit Reports for FYE December 2017 are due March 1, 2018. Firms need to file their audited Financials with FINRA, the SEC, SIPC (if a member of SIPC), and with the following state regulators, if registered in their jurisdiction:  Arizona, Hawaii, Louisiana (only if domiciled there), and New Hampshire.  Financials must be electronically filed with FINRA through the Firm Gateway.  This electronic filing with FINRA will also satisfy the firm’s filing requirements with SIPC.  The SEC accepts either electronic filings through the Edgar Filing system or hardcopy mailings to both the DC office and the Regional office.   The state regulators accept hardcopy mailings.

  • Supplemental Inventory Schedule (“SIS”): For the month ending January 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 March 1, 2018. 
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of December 31, 2017.  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 March 1, 2018. 

Hardin Compliance Consulting provides links to other publicly-available legal and compliance websites for your convenience. These links have been selected because we believe they provide valuable information and guidance.  The information in this e-newsletter is for general guidance only.  It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.