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Regulatory Update July 2017

  • Updates to Form ADV FAQs: SEC’s Division of Investment Management announced updates to its FAQs on Form ADV and IARD in its latest Information Update dated June 2017.  Here’s a summary of what was added to the FAQ: 
    • Item 1.I., clarifying that an adviser only needs to report website addresses and accounts on publicly available social media platforms where the adviser controls the content.
    • Item I.J., discussing reporting whether the firm’s Chief Compliance Officer is compensated by another firm.
    • Item 1.O., where the SEC updated the response, stating that the term “assets” in that question refers to the firm’s total assets on the adviser’s balance sheet, not assets under management.
    • Item 5.D., clarifying whether certain types of private funds should be considered “pooled investment vehicles”.
    • Item 5.K., describing how to respond to this item if the registrant is relying on Rule 203A-2(c) to register and currently does not manage any assets.
    • Item 7.B, two new questions were added, one providing directions on how to find out whether an auditing firm is registered with the PCAOB, and the second clarifying how to answer question 23(g) of Schedule D, regarding the delivery of the most recent audited financial statements to fund investors.
    • Schedule R includes a number of questions (and answers) on how to report “relying advisers” (replacing prior guidance in the ABA Letter on umbrella registration).

Contributed by Jaqueline M. Hummel, Partner and Managing Director

  • FINRA’s TRACE for Treasuries Program Gets Underway: Beginning Monday, July 10th, FINRA members will be required to report transactions in Treasuries to the Trade Reporting and Compliance Engine (“TRACE”).  In October of 2016, FINRA released Regulatory Notice 16-39, which announced the details of the TRACE for Treasuries program, and established a webpage as a resource for its members.  Introducing broker-dealers, if you have not done so already, amend your FINRA Participation Agreement to allow for reporting of Treasuries through TRACE.  Your clearing firm cannot do this for you.  The FINRA Participation Agreement can be found on FINRA Firm Gateway under Forms and Filings.  The amendment must be submitted prior to July 10th, otherwise such transactions will be rejected by TRACE.  For additional guidance, refer to TRACE for Treasuries FAQ or consult a Hardin Compliance team member.  Contributed by Rochelle Truzzi, Senior Compliance Consultant
  • FINRA Amends Reporting Rules And Forms To Support Compliance With DOL Fiduciary Rule and Muni Advisors Conflicts of Interest: New Problem Code “69 – DOL Fiduciary Rule” has been added to Rule 4530 Applications in order to report complaints and information on required documents [filed under Rule 4530 (f) and (g)], resulting from the Department of Labor’s Fiduciary Rule and the related exemptions.   Beginning October 1, 2017, new Problem Code “15 – Municipal Advisor Conflict of Interest” will be available to report complaints associated with a firm’s municipal advisory services.  In addition, the Rule 4530 Application will include two new selections under the “Related To” field in order to identify complaints and disclosure events related to non-registered associated persons and municipal advisory services.  These amendments will address MSRB rule changes that extend its customer complaint and related recordkeeping rules to municipal advisors.  Firms now have only thirty (30) calendar days from submission of a Disclosure event and thirty (30) calendar days after the due date for filing a Quarterly Statistical Summary, to amend the filings.  For more details, refer to Regulatory Notice 17-21.  Contributed by Rochelle Truzzi, Senior Compliance Consultant
  •  Nevada Imposes Statutory Fiduciary Duty On Broker-Dealers: Just like the industry has been predicting, “the cat’s out of the bag” when it comes to fiduciary duty.  In a recently passed statute, Nevada has taken a page out of the Department of Labor’s book and revised its Securities Act to impose a “fiduciary duty” on any broker-dealer, sales representative, investment adviser or investment adviser representative effective, July 1, 2017. Previously the law was designed to regulate financial planners in the state of Nevada by holding them to a fiduciary standard. The amendments passed in June have removed the exclusions from this definition for broker-dealers, investment advisers and the representatives of both types of firms, effectively imposing on them a fiduciary duty and requiring simultaneous disclosure of any type of profit or commission gained for the recommended advice.  Firms and their representatives must also remain knowledgeable about a client’s financial goals and objectives on an ongoing basis.  Additionally, the law opens up broker dealers, investment advisers, and their representatives to potential law suits from investors where gross negligence or actual violations of fiduciary duty may have occurred. Investors can sue for their losses as well as attorney fees and costs.  Broker-dealers and their representatives doing business in Nevada will arguably feel the largest impact, particularly in their non-retirement business, as this new law exceeds the current “suitability standard” they are held to.  Contributed by Cara Sharbaugh, Compliance Consultant.
  • CFTC Amends Recordkeeping Rule: On May 23, 2017, the Commodity Futures Trading Commission (CFTC) took steps to modernize its recordkeeping rules by amending Rule 1.31. According to the CFTC’s press release, the amendments “modernize and make technology neutral the form and manner in which regulatory records must be kept.” The amendments will be effective as of August 28, 2017.   Under the new Rule, advisers will no longer be required to:  
    • Keep all US Commodity Exchange Act (CEA) required books and records in their original form (for paper records) or native file format (for electronic records)
    • Keep all electronic records in a “non-rewritable, non-erasable format”; or 
    • Retain, if they are a covered entity, a third-party technical consultant to make certain representations in CFTC filings regarding access to the entity’s electronic regulatory records.

In the adopting release, the CFTC stated that the amended Rule was meant to provide a more flexible standard for record retention, allowing records to be retained “in a form and manner necessary to ensure the records’ and recordkeeping systems’ authenticity and reliability.”  While the amendments simplify how and in which format the records can be maintained, the types of records that must be inspected, produced and maintained remain the same.  Contributed by Alison Palmeri, Esq., Compliance Associate

Lessons Learned From Recent SEC Cases:

Portfolio Manager Gets Jail Time for Inflating Valuation of Bonds:  It only took the jury about 90 minutes to convict former portfolio manager, Stefan Lumiere, guilty of securities fraud and conspiracy charges for mis-marking securities held in a particular fund from 2011 to 2013 in order to overstate the net asset value (“NAV”) of the fund that was reported to investors on a monthly basis.  Although prosecutors pushed for a 14-year jail sentence, Judge Rakoff gave Lumiere an 18-month jail sentence and three additional years of supervised release.  Bottom line:  lying to investors can lead to jail time.

Lumiere worked for Visium Asset Management LP (“Visium”), which managed a credit fund (the “Credit Fund”), in operation from 2009 until September 2013.  The Credit Fund invested primarily in debt instruments issued by healthcare companies.   Here’s how the fraud worked:  Lumiere and others at the firm used two friendly brokers to provide inflated quotes on certain securities, thereby overvaluing the Credit Fund’s NAV.  Lumiere also purchased securities that were already held by the fund at inflated prices, resulting in a further increase of the NAV.  Additionally, these purchases made the bonds look more liquid than they actually were, which induced investors to remain in the Fund.  The case is U.S. v. Lumiere, U.S. District Court, Southern District of New York, No. 16-cr-00483. Contributed by Jaqueline M. Hummel, Managing Director and Partner. 

More on CCO liability from the Stanford Ponzi scheme: Although the Madoff case may have stolen its thunder, R. Allen Stanford and the Stanford Group Company (“SGC”) defrauded more than 28,000 investors, and misappropriated approximately $7 billion in assets.  Mr. Stanford was convicted in 2012, but the fallout continues.  The SEC upheld an Administrative Judge’s ruling that former CCO of SGC, Bernerd Young, was negligent and liable for approving disclosures in marketing materials that Young knew were false and misleading.  Young is now appealing to the U.S. Circuit of Appeals Court in D.C.  Young disputed his liability claiming that “he reasonably carried out his compliance and due diligence obligations in good-faith reliance on other SGC officials, outside professionals, and regulators” which makes this an excellent read for compliance professionals.

The SEC outlined the specific areas they believe he had liability.  First, he approved misleading marketing materials and misstatements regarding insurance coverages in the financial advisors training manual. Then he trained the financial advisors using that same manual, despite its inaccuracies. Young was also responsible for the due diligence of the firm and failed to verify assets backing the rogue CDs upon which the Ponzi scheme was built.  As the CCO and former senior regulator with the NASD, he understood he was required to be truthful when responding to regulators and clients, yet he deliberately misled them in his responses.  When the clearing firm fired SGC for not providing portfolio holdings, Young helped provide a false explanation for the termination to SGC financial advisors. Finally, Young approved misleading talking points regarding the Madoff situation to reassure investors.   The Commission found that “(a) compliance role does not preclude liability where the respondent engages in conduct that otherwise violates the securities laws or aids and abets or causes a violation.”  In addition to being barred, Young was required to disgorge half his salary while at SGC. To read more on this case, check out the SEC’s opinion and this article by Doug CorneliusContributed by Heather Augustine, Senior Compliance Consultant

Worth Reading:

Filing Deadlines and To Do List for July


  • Rule 4350 Events and Customer Complaint Filings:  FINRA Rule 4530(d) requires firms to report quarterly statistical and summary information regarding written customer complaints.  The due date for filing for the quarter ending June 30, 2017 is July 17, 2017.
  • Rule 17a-5 Quarterly FOCUS Part II/IIA Filings:  FINRA requires that member firms file a FOCUS, (Financial and Operational Combined Uniform Single) Report Part II or IIA on a quarterly basis. Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Filings for the quarter ending June 30, 2017 are due by July 26, 2017.
  • Quarterly Form Custody:  FINRA requires that member firms file Form Custody pursuant to SEA Rule 17a-5(a)(5) for the quarter ending June 30, 2017 by July 26, 2017.
  • Annual Audit Reports:  FINRA requires that member firms submit their annual audit reports in electronic form.  For the period ending May 31, 2017, the due date is July 31, 2017.
  • Supplemental Statement of Income:  FINRA Rule 4524 requires that all FINRA members file the SSOI as a supplement to the FOCUS Report.  The due date for the quarter ending June 30, 2017 is July 31, 2017.

Click Here for Additional Filing Deadlines that Might Apply to Your Broker Dealer Firm.


  • Form 13H: Form 13H (large trader) annual filing is due for advisers that already have a Form 13H filing obligation by July 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.  Due date is July 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.