Advertising and Marketing | Best Execution | Conflicts of Interest | Custody | FINRA Rule Changes | Private Funds | SEC Examinations

Regulatory Update for October 2017

  • Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers: The Office of Compliance Inspections and Examinations (“OCIE”) shared its list of “Most Frequent Advertising Rule Compliance Issues” in the alert.  At the top of the list were misleading performance advertisements.  Not surprisingly, many of OCIE’s comments were directed at advisers that failed to state that performance shown was gross of advisory fees, or included a benchmark without discussing the limitations of the comparison.  Advisers using hypothetical and back-tested performance also received black marks for failing to explain how the returns were derived.  False claims of compliance with the Global Investment Performance Standards (GIPS®) were also noted.  Additionally, firms were cited for failing to have policies and procedures in place for review of marketing materials prior to publication/dissemination.

 Other major issues included “misleading use of third party rankings or awards.”  OCIE nailed advisors for publishing stale rankings, or claiming to be award winners without providing details such as who created and conducted the survey, how many advisers participated, and whether the adviser paid a fee to be included.  OCIE also found that disclosing professional designations could also be misleading if the adviser failed to include a description of the minimum qualifications required to achieve the designation.   Finally, OCIE reminded advisers to refrain from publishing client endorsements on the firm website or on social media platforms.  Contributed by Andrea M. Bova, Esq. Compliance Associate

  •  FINRA’s new 4530 system will go live on October 1, 2017. You will be able to access the new system by clicking a “4530 Reporting” link under the Forms & Filing tab on the Firm Gateway.  Web Access documentation for the 4530 System is available at FINRA is retiring the current Regulatory Filing Application as of September 28, 2017.  For questions, please contact the FINRA Help Desk at (800) 321-6273. Contributed by Rochelle Truzzi, Senior Compliance Consultant
  • FINRA extended the regulatory relief offered in Notice 17-27 to firms affected by Hurricanes Irma and Maria. Regulatory relief offered by FINRA covers:
    • Emergency office locations;
    • Regulatory filings and responses to FINRA inquiries, matters and investigations;
    • Form U4 and Form BR Updates;
    • Customer Communication regarding accounts, execution of trades and access to funds or securities;
    • Implementation of Business Continuity and Contingency Plans;
    • Qualification Examinations and Regulatory Element Continuing Education; and
    • Military Personnel and National Guard.

Contributed by Rochelle Truzzi, Senior Compliance Consultant

  • Time to Update your Web Browser! Effective September 30, 2017, Web CRD/IARD will only support web browsers that meet or exceed the following minimum browser requirements:
    • Chrome versions released after 2011 (4 or higher);
    • Firefox versions released after 2011 (4 or higher);
    • Internet Explorer versions released after 2013 (11 or Edge); or
    • Safari versions released after 2013 (7 or higher).
  • If your web browser does not meet or exceed the minimum requirements, you must upgrade your web browser in order to continue accessing Web CRD/IARD on or after September 30th.  Contributed by Rochelle Truzzi, Senior Compliance Consultant.

Lessons Learned from Recent SEC and FINRA Cases:

It’s Raining, It’s Pouring, the Old Investment Policy Committee is snoring: SunTrust Charged with Improperly Recommending Higher-Fee Mutual Funds. In this case, SunTrust Investment Services, Inc. “STIS” was found to violate Sections 206(2) and 206(4) of the Advisors Act, and Rule 206(4)-7, for selling, recommending and holding Class A shares of mutual funds in advisory programs where Class I shares were available.  The violations included inadequate disclosure of the conflict of interest in selling the Class A shares, failing to follow the firm’s best execution procedures (since the Class A shares were more expensive), and failing to have policies and procedures that required the firm to apply the same standard of care across multiple account types and advisory programs.   STIS and its investment adviser representatives (IARs), who were also registered representatives, received over $1 million dollars in avoidable 12b-1 fees between 2011 and 2015.   In 2011, the Investment Policy Committee (“IPC”) determined that Class A shares should no longer be purchased for ERISA accounts, however, the committee did not apply that standard of care or provide guidance on non-ERISA accounts in their advisory wrap programs. Six months later STIS mandated that Class A shares could not be purchased in any new accounts, but failed to address legacy Class A holdings in existing accounts for another year, even though conversions were free and had no tax implications. It wasn’t until 2013 that Class A shares were converted to Class I shares in 2 of the 6 advisory wrap programs.

There are a lot of competing interests in a financial services firm, and you can just imagine the discussion in the IPC meeting about how to replace the 12b-1 revenue from the Class A shares before cutting off the income stream.  Were the advisory fees larger in those two programs? Did the IARs receive a greater percentage of the advisory fees to help numb the sting of losing the 12b-1 income? Did the project manager decide on which programs to target based on resources and system capabilities?  There was no sympathy from the SEC for the ad hoc nature and length of time it took to address this issue with advisory clients. The SEC also pointed out in the Form ADV, STIS used the three-letter word “may” as in “STIS may receive 12b-1 fees” when, in fact, STIS was receiving the fees. Further, STIS also did not disclose that a cheaper alternative share class was available to clients that did not provide revenue to the firm or the IARs.  And, of course, the firm’s policies and procedures were found to be deficient. At the end of the day firms cannot slice and dice a fiduciary standard of care, it’s an umbrella that protects all advisory accounts.  Contributed by Heather Augustine, Senior Compliance Consultant

Yet Another Improper Allocation Case:  When will it end?  The SEC’s merciless pounding of private fund advisers continues, with this administrative action involving Potomac Asset Management Company, Inc. (PAMCO) and Goodloe E. Byron, Jr.  In this case, PAMCO used fund assets to compensate an employee of the adviser, pay rent and operational expenses, and pay PAMCO’s legal fees and expenses related to an OCIE examination and an SEC enforcement investigation.  The funds’ offering documents and the limited partnership agreements were pretty clear — these types of expenses were expected to be paid for by PAMCO, not the funds. Moreover, PAMCO was supposed to offset its management fee by 50 percent of any fees it received for services provided to portfolio companies, which it failed to do. The SEC found these actions to violate the anti-fraud provisions of Section 206 of the Advisers Act.  The SEC then doubled (and tripled) down on these violations, finding these same acts also violated the Custody Rule (Rule 206(4)-2), the Compliance Program Rule (Rule 206(4)-7), and Section 207 (for material misstatements on the Form ADV).   PAMCO and its principal were ordered to pay a $300,000 penalty.  The firm also hired a new Chief Compliance Officer.  The SEC required the firm to bring in an independent compliance consulting firm to review its compliance program, and to reimburse the private fund investors for management fees it failed to offset.  Contributed by Andrea M. Bova, Esq., Compliance Associate

Cherry Picking Favorable Trades for Your Own Account Doesn’t Pay.  In the Matter of Jeremy A. Licht, the SEC found that Licht, a California registered investment advisor (and former star of The Hogan Family, a sitcom that ended in 1991) engaged in a fraudulent trade allocation scheme from January 2011 to November 2015. Licht, a sole proprietary who had discretionary authority over all client accounts, traded the same securities for his personal accounts.  When he allocated the securities, however, he placed more of the favorable trades in his personal accounts, and more of the unfavorable trades in his clients’ accounts.   Through his scheme, Licht realized at least $88,504 in ill-gotten gains. The SEC has accepted Licht’s settlement offer which, in addition to being prohibited from serving in any role for a registered investment company or affiliated person, includes a disgorgement, prejudgment interest, and civil monetary penalty totaling at $278,289.34.  Investment advisors should always remember that they have a fiduciary duty to act in the best interest of their clients. Favoring a firm’s own accounts over those of its clients violates that fiduciary duty, resulting in prohibited fraudulent conduct.   Contributed by Alison R. Palmeri, Esq. Compliance Associate

Worth Reading:

BICE and Related Exemptions:  Limiting your Liability until Full Implementation:  The Wagner Law Group provides a great “to do” list for the Transition Period for the DOL’s Fiduciary Rule.

New SEC Custody Rule Requirements for Advisors with Third-Party SLOA Authority:  Struggling to understand whether a “Standing letting of Authorization” gives your firm Custody?  Chris Stanley of Beach Street Legal spells it out.

We’re sending our daughters into a workplace designed for our dads:  check out Melinda Gates’ first LinkedIn post.

Filing Deadlines and To Do List for October


  •  Form 13H: Form 13H (large trader) quarterly filing for Q3 2017 is required for advisers that already have a Form 13H filing obligation and have changes to any of the information reported. Due date is October 10, 2017.
  • 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. Filing for Q3 2017 is due October 15, 2017.


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.