Custody | FINRA Examinations | FINRA Rule Changes | Form ADV Disclosure | SEC News | Strict Liability

Regulatory Update for December 2016

  • SEC Chair Mary Joe White to Step Down. After nearly four years as head of the SEC, Mary Joe White announced on November 14, 2016 that she intends to leave the agency at the end of the Obama administration.
  • FINRA Amends Rules Governing Communications with the Public: Amendments to FINRA Rules 2210 (Communications with the Public), 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings) and 2214 (Requirements for the Use of Investment Analysis Tools) go into effect on January 9, 2017, reducing the burden on firms with respect to communication filings and disclosures.  The Rules have been amended to clarify the filing and disclosure requirements related to investment company shareholder reports, offering documents for unregistered securities, communication templates, backup material for performance rankings and comparisons, generic investment company communications, investment analysis tools, and bond fund volatility ratings.  We’ve prepared a summary of these changes on our blog.  
  •  Advisers May Have Custody and Not Even Know it. The SEC has been issuing deficiencies in exams of investment advisers for failure to comply with the custody rule.  The questions raised by the SEC are focused on an adviser’s authorization to transfer funds between same-registered accounts at different custodians.  Check out our blog for details. 
  • Attention FINOPs – SEC Issues Relief Regarding Broker-Dealers’ Treatment of Operating Leases Under Exchange Act Rule 15c3-1: The SEC staff issued a no-action letter to SIFMA that will allow a broker-dealer to compute net capital by treating operating lease assets’ value as a “good asset,” to the extent of its associated operating lease liabilities, so that the two amounts effectively offset each other.  This letter was issued in response to the release by the Financial Accounting Standards board of Accounting Standards Update No. 2016-0.  This was simply a technical change in accounting treatment, but taken in conjunction with the plain language of the net capital rule, it would have required broker-dealers to recognize significant liabilities associated with long-term obligations without receiving any regulatory credit on the asset side.  This update to the accounting treatment of operating leases, absent SEC interpretation, would most likely have had a material, negative impact on a broker-dealer’s net capital and excess net capital calculations.
  • FINRA Sweep of Bank/Broker-Dealer Cross Selling Initiatives: In late October, FINRA launched a sweep examination of bank-affiliated broker-dealers to probe cross selling programs.  Firms were required to produce 15 categories of documents covering a five-year period, including information on incentives and compensation, tracking and performance metrics, revenues for cross selling activities, training presentations, marketing materials, and reports of complaints and discipline. We recommend that broker dealers affiliated with banks evaluate incentive programs for cross-selling in preparation for their next FINRA exam.  These firms should have documented, detailed descriptions of each cross-selling program, which address training programs and materials, incentive compensation structures, criteria to measure performance and revenue, and supervisory tools including surveillance reports. 

 Lessons Learned from Recent SEC Actions:

Private fund managers beware:  SEC will hold you accountable for breach of fiduciary duty.  Lying to investors, and taking additional profits by engaging in deals with affiliates will land you in big trouble with the SEC, even if you are an unregistered investment adviser.  Derek J. Todd ends up getting banned from the industry for five years, fined $50,000 and required to disgorge his ill-gotten gains to the tune of $205,673.

Lying to an SEC Administrative Judge leads to Life Time Industry Bar:  The headline says it all.

SEC Denies Adviser’s Claim of Due Care for Failure to Disclose a Conflict of Interest.  Despite an early administrative law judge’s finding that an adviser had exercised due care in relying on the advice of compliance professionals for Form ADV disclosures, the SEC issues a smack down.  Check out our blog post for the details, but the SEC is cracking down on failure to clearly disclosure conflicts of interest.

Worth Reading:

 Let us know what you think of this new section:  email jhummel@hardincompliance.com with your comments. 

 

Filing Deadlines and To Do List for December

For Investment Advisers and Broker Dealers 

  • Annual Renewal Program for Investment Advisers and Broker Dealers: The payment deadline is December 16, 2016.    2017 Preliminary Renewal Statements will be available beginning November 14, 2016.

For Investment Advisers that Manage Cayman Island Investment Entities

  • FATCA Deadline: Sponsored Investment Entities must Register with the IRS:  All “sponsored entities” must register with the IRS and obtain separate GIINs by the later of (i) December 31, 2016, or (ii) 90 days after the date on which a U.S. “Reportable Account” is first identified. “Sponsoring entities” may continue to administer the compliance requirements of their respective “sponsored entities,” but each entity must have its own GIIN as of January 1, 2017 (or such later date, as applicable).