Best Execution | Business Continuity | Conflicts of Interest | FATCA | FINRA Rule Changes | Mutual Funds | Pay to Play | Qualified Client | Regulatory Deadlines | Trading Away | Wrap Accounts

Regulatory Update August 2016

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  • REMINDER: FINRA members’ websites must include hyperlink to BrokerCheckEffective June 6, 2016, FINRA Rule 2210 (Communications with the Public) requires websites of broker-dealers to include a “readily apparent reference and hyperlink to BrokerCheck.”  The reference and link should be included on the initial web page for retail investors, and any other web page that includes a professional profile of one or more registered representatives who conduct business with retail investors.  FINRA has provided some tools, resources and guidelines to help firms comply with the new rule. 
  • New FINRA Rule Governing Accounts of Associated Persons. The SEC has approved FINRA’s proposal of a new, consolidated rule governing accounts opened or established by associated persons at firms other than the firm at which they are employed, which takes effect on April 3, 2017. The new rule, FINRA Rule 3210, (Accounts at Other Broker-Dealers and Financial Institutions) requires substantial changes for FINRA member firms and their associated persons.  Associated persons must obtain written approval from their employer before they open an account with another broker-dealer or financial institution and provide written notification of their association with the FINRA-member firm to other financial institutions when establishing a new account.  Firms should review their written supervisory procedures to determine if they are required to adopt more restrictive policies and train their associated persons on their new obligations under this rule.
  • Qualified Client StandardsEffective August 15, 2016, the dollar-amount thresholds for “qualified clients” under Advisers Act Rule 205-3 has been increased; the net worth test increased from $2,000,000 to $2,100,000. The dollar amount of the assets-under-management test remains at $1,000,000.  For investment advisers and fund managers that charge performance fees, review and update your forms or advisory contracts, including subscription documents and offering materials for new investors in private funds or existing investors increasing their subscription amounts.
  • SEC Examiners Looking at Fund Share Classes: OCIE published a Risk Alert announcing that it will be looking at whether investment advisers are meeting their best execution obligations when recommending or selecting mutual fund and 529 Plan investment to clients.  Advisers should make sure they are not recommending more expensive share classes when a less expensive class of a fund is available.  RIAs offering mutual funds to client should make sure their policies and procedures address this issue. 
  • IM Guidance Update: Business Continuity Planning for Registered Investment Companies.  The SEC’s Division of Investment Management recently published a Guidance Update with recommendations for mutual funds to consider when reviewing and updating business continuity plans.    
  • Pay-to-Play Rule applies to Republican Ticket: Donald Trump recently announced Indiana Governor Mike Pence as his running mate.  As part of his role as Governor of Indiana, Governor Pence currently has the power to appoint all nine persons to the Indiana Public Retirement System Board of Trustees.  As a result, Rule 206(4)-5 of the Advisers Act, otherwise known as the “Pay to Play” Rule, now applies to the Republican ticket. Investment advisers who manage, or plan to manage, assets for the Indiana Public Retirement System, should be very careful before making or soliciting donations for the Trump/Pence campaign.  A donation exceeding the de minimis exemption would violate the “Pay to Play” Rule and bar the adviser from receiving compensation for advising any Indiana Public Retirement Entity for two years.
  • SEC Sues RIA for Double Dipping on Fees: The SEC filed suit against Momentum Investment Partners LLC (doing business as Avatar Investment Management) (“Avatar”) essentially for increasing their advisory fees without the clients’ knowledge and consent.  The investment adviser in this case had been managing the assets of eight families in approximately 20 separately managed accounts, using an asset allocation strategy and investing in ETFs. Fees ranged from 0.10% to 0.60% of assets under management.   In May 2013, Avatar decided to launch a series of mutual funds using the same investment allocation strategies.  Avatar then transferred its client assets into these funds.  The investors then paid investment management fees both at the mutual fund level and at the account level, and ended up paying more than $110,000 in additional fees, including $61,000 to Avatar, as adviser to the mutual funds.
  • Compliance Issues Cannot Wait: In a case that incorporates at least two of the SEC’s favorite themes, wrap programs and affiliated transactions, WFG Advisors, L.P. (“WFGA”) settled administrative proceedings with the SEC.  The big issues in this case were overcharging wrap account clients, and purchasing securities on a principal basis from WFGA’s affiliated broker-dealer without getting consent from affected clients.  As with many cases, these issues came as no surprise to WFGA, since it had been warned by a compliance consultant (twice!) that the firm did not have adequate policies and procedures to detect inaccuracies in its fee billing process.  Consequently, the firm was fined $100,000, required to refund clients who over paid, and notify all current clients of the SEC’s action.  Additionally, WFGA had to hire yet another compliance consultant to review its policies and procedures related to fee billing, principal transactions, and disclosure to clients.   The lesson in this case is when an issue affecting clients is identified, such as overcharging or engaging in transactions with affiliates, it must be addressed promptly.
  • RIA Firms Slammed for Failing to Disclose Conflict of Interest: Forgivable Loans from Clearing BrokersThe SEC issued two fines of $50,000 or more against two separate RIA firms in July for failing to disclose forgivable loans from their clearing brokers in their respective Form ADV. In both cases, the forgivable loans were in excess of $1 million dollars over a 5-year period. When conducting conflict of interest reviews, it’s important to probe executives on types of revenue, additional services and financing received to determine conflicts of interest and disclosure requirements.
  • Failure to Disclose “Trading Away Costs” gets RIA in Trouble with SEC. The SEC brought an enforcement action against Riverfront Investment Group for failing to disclose transaction costs associated with brokers they used to execute trades outside a wrap-fee program sponsor.  Riverfront claimed the “trading away” strategy improved execution prices. However, it resulted in additional costs for the clients.  While RiverFront did disclose that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, rendering its disclosures materially misleading.
  • SEC charges Private Fund Manager with Fraud for Allowing Insiders and Favored Clients to Exit Funds. The SEC charged a fund-of-funds manager with defrauding investors in a $10.7 million hedge fund.  Over a period of four years, Thomas Conrad paid out redemptions and disbursements of the funds his company managed to himself, his son, his extended family, and certain favored investors, while telling other investors that redemptions were suspended.  Conrad engaged in many other misdeeds, including paying himself additional undisclosed fees from the funds’ coffers, titling fund assets in his own name, and failing to tell investors about his permanent bar from the industry back in 1971.  The SEC will aggressively pursue fund managers who use investors’ money as their own personal piggy bank, even those that are not registered with the Commission.

Filing Deadlines and to do List for August

For Institutional Investment Managers:

  • Form 13F Quarterly Filing for Q2 2016 due August 15, 2016.

 For Large Hedge Fund Advisers:

  • Form PF quarterly filings for Large Hedge Fund Advisers due August 29, 2016

For Investment Advisers that manage Cayman Islands investment entities:

  • DEADLINE EXTENDED TO AUGUST 10, 2016: Every Cayman Islands investment entity that is a “Reporting Financial Institution” under U.S. FATCA and (or its “sponsoring entity,” if applicable):
    • Is required to notify the Cayman Islands Tax Information Authority (TIA) of its first annual report under U.S. FATCA.
    • Must provide contact information for the natural person responsible for corresponding with the TIA about the investment entity’s FATCA compliance; and
    • Complete due diligence on pre-existing accounts.


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.