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Regulatory Update August 2017

  • There’s a New Sheriff in Town: On July 12, 2017, new SEC Chairman Clayton gave his first public speech at the Economic Club of New York.  He started by citing the SEC’s mission:  to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.   Not surprisingly, he noted that the driving force of the SEC’s mission is to protect the long-term interests of “Mr. and Mrs. 401(k)”.   Chairman Clayton vowed to protect “Main Street” investors by going after fraudsters, such as pump-and-dump scammers, those who prey on retirees, and those who use new technologies to defraud others.  He also noted that the SEC should more realistically consider the cost of implementing regulatory change. And, of course, like most SEC commissioners, Chairman Clayton stated that the SEC’s enforcement and examination staff will continue vigorous enforcement of misbehavior at all levels.  Clayton also indicated that he was considering scaling back the scope and breadth of the disclosure rules and compliance costs imposed on public companies to entice more corporations back into the public market.  Contributed by Jaqueline M. Hummel, Partner and Managing Director
  • SEC Sweep Examination on Electronic CommunicationsOCIE recently started a sweep exam targeting the use of electronic communications by investment advisers.  Staff wants to find out about the types of electronic message platforms being used, the devices permitted, policies and procedure to monitor and review communications, and how violations are handled.  OCIE also wants to what measures advisers are taking to secure sensitive information transmitted through electronic messaging.  Contributed by Jaqueline M. Hummel, Partner and Managing Director

Lessons Learned From Recent SEC and FINRA Cases:

Another Conflict of Interest Goes Unrecognized– KMS Financial Services, Inc. (“KMS”) agreed to settle charges with the SEC for failure to disclose conflicts of interest.  KMS, a dually registered broker dealer and investment advisor, failed to disclose compensation received from its Clearing Broker in connection with recommending no-transaction-fee mutual funds (“NTF”) in advisory accounts. The arrangement was not disclosed in KMS’ Form ADV and it provided incentive to the firm to recommend the NTF funds over other investments.  In addition, KMS negotiated a reduction in clearing and execution costs but never passed the savings on to their customers and did not analyze whether their customers were receiving best execution. In a dual registrant environment it is important for compliance professionals to have access or be involved in the review of agreements that impact the whole business. It’s easy to see in this scenario where executives of the broker dealer probably managed the relationship and negotiations with the Clearing Broker and didn’t fully understand the impact to the registered investment adviser.  To uncover hidden conflicts of interests it’s important to annually review agreements, addendums and firm financials to identify revenue streams.   Contributed by Heather Augustine, Senior Compliance Consultant

Get Control over your Firm’s use of Consolidated ReportsOn July 13th, Edward Jones signed an Acceptance, Waver and Consent (AWC) in which FINRA found the Firm failed to establish procedures regarding the creation and distribution of consolidated reports. Specifically, “[…]the Firm had no system or written procedures in place reasonably designed to minimize the risk that the reports could contain inaccurate information that potentially could be misused. In addition, although registered representatives printed the reports and provided them to customers, the Firm could track only whether a report was printed. It had no system or procedures to track whether reports were provided to customers.” Edward Jones was censured and hit with a $725,000 fine for violations of NASD Rule 3010(a) and FINRA Rule 2010.  This, despite the fact that out of the 65,000 consolidated reports reviewed, FINRA found zero instances of a report being materially inaccurate or misleading.

FINRA references Notice 10-19 throughout the AWC and highlights previous guidance related to eight key components in accessing the adequacy of your supervisory systems and procedures.  HCC recommends that you add “consolidated reports” to focus your attention on your firm’s policies and procedures regarding consolidated reports.  Documentation of procedures regarding verification of assets held away from the firm, maintaining supporting documentation for assets held away, updating the value of assets held away and dissemination to customers are key.  Also, rigorous testing of data aggregation systems on a regular basis will help the firm identify issues related to the manipulation of internal data.  Contributed by Rochelle Truzzi, Senior Compliance Consultant

Worth Reading:

Filing Deadlines and To Do List for August


  • Form 13F: Form 13F Quarterly Filing for Q2 2017 is due for advisers within 45 days after the end of the calendar quarter.  Due date is August 14, 2017.
  • Form PF for Large Hedge Fund Advisers: Large hedge fund advisers must file Form PF within 60 days of each quarter end on the IARD system.  Due date is August 29, 2017.
  • CFTC CPO-PQR Form: Large Commodity Pool Operator Form CPO-PQR (June 30 quarter-end report) required to be filed with the NFA for Commodity Pool Operators.  Due date is August 29, 2017.
  • NFA Form CPO-PQR – Small and Mid-Sized Commodity Pool Operators are required to file NFA Form CPO-PQR.  Due date is August 29, 2017.

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