On May 25, 2011, the SEC adopted final rules implementing the new whistleblower program that was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules go into effect on August 12, 2011.
The whistleblower program is intended to encourage individuals to report securities law violations by paying to the whistleblower an award of between 10% and 30% of the monetary sanctions collected by the SEC or certain other agencies.
The whistleblower must be an individual or a group of individuals who provide the SEC with information that pertains to a possible violation of federal securities law. A whistleblower must voluntarily disclose information. This information must be “original” information, and it must not have already been known by the SEC. The information must lead to a successful enforcement action(s). The enforcement action(s) by the SEC or certain other agencies must result in a monetary sanction in excess of $1,000,000. Some of these rules are complex and may require a detailed analysis by the whistleblower or his attorney.
The law provides certain anti-retaliatory provisions that protect the whistleblower and give the whistleblower the right to bring a private cause of action if retaliation occurs.
The rules permit a whistleblower to bypass the company’s internal reporting obligations and report possible violations directly to the SEC. Most companies would prefer a whistleblower to report possible violations to appropriate company management. A whistleblower may still receive an award if he reports the possible violations to company management. In order to encourage a whistleblower to report possible violations to the company, and not to the SEC, top company management must establish policies and procedures that make the whistleblower believe that reports will be quickly and effectively addressed and that no retaliation will occur.
Wednesday, July 27, 2011
Thursday, June 23, 2011
SEC Issues Rules Related to the Implementation of Dodd-Frank by Investment Advisers, Hedge Funds, and Family Offices
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010. Title IV of that Act imposed many changes on investment advisers and hedge funds and other pooled investment funds that are managed by advisers. Most of those new laws were scheduled to become effective on July 21, 2011. However, in April 2010, the SEC told state regulators this deadline for mid-sized advisers to register with the states may be extended because the SEC had not completed its rulemaking and the IARD system used by advisers to register would have to be re-programmed. On June 22, 2011, the SEC adopted several rules which extended the deadline for certain provisions in Dodd-Frank and gave advisers and hedge funds needed guidance in several areas.
Although I don’t yet have the final rules, I have included a summary of those rules from two press releases issued by the SEC.
In press release 2011-133, the SEC described rules that it adopted that included, but are not limited to, the following:
1. Private-fund advisers that must register as investment advisers with the SEC for the first time because of Dodd-Frank must be registered by March 30, 2012.
2. On their application for registration, Form ADV, private-fund advisers will have to provide the following: (a) basic organizational and operational information about each fund they manage, (b) general information about the size and ownership of the fund, (c) general fund data, (d) the adviser’s services to the fund, and (e) identification of the “gatekeepers” that assist the adviser and the private fund (i.e., auditors, prime brokers, custodians, administrators, and marketers).
3. Form ADV was amended (yes, again) to include information about (a) the types of clients advised,
(b) the adviser’s employees, (c) the adviser’s advisory activities, and (d) their business practices that may present significant conflicts of interest. (Some of this seems duplicative of the information already required. When we see the final rule, we may be able to make some distinctions.)
4. Although exempt from registration, the SEC imposes the following duties on advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in assets under management in the U.S.
a. File and periodically update reports with the SEC using Form ADV. This information will be filed electronically on the IARD system and will be available to the public.
b. Instead of completing the entire Form ADV, these “exempt reporting advisers” will disclose (a) basic identifying information about the adviser, (b) the identity of its owners and affiliates, (c) information about the private funds the adviser manages, (d) information about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest, and (e) the disciplinary history of the adviser and its employees that may reflect on the integrity of the advisory firm.
5. Dodd-Frank requires that advisers who have assets under management of between $25 million and $100 million switch their registration from the SEC to the applicable state(s), if certain requirements are met. The new rule states that:
a. Advisers registered with the SEC will have to declare that they are permitted to remain SEC registered in a filing to be made in the first quarter of 2012.
b. Advisers who no longer are eligible for SEC registration will have until June 28, 2012, to complete the switch to state registration.
6. The relatively new pay-to-play rule was amended to allow an adviser to pay a registered municipal advisor to act as a placement agent to solicit government entities on its behalf, if the municipal advisor is subject to a pay-to-play rule adopted by the MSRB that is at least as stringent as the investment adviser pay-to-play rule.
7. The SEC defined “venture capital fund,” which was undefined in Dodd-Frank.
In press release 2011-134, the SEC defined “family offices,” which was also left undefined by Dodd-Frank. Family offices are entities established by wealthy families to manage their wealth and provide other services to family members. Historically, family offices used the private adviser exemption to avoid registration as an investment adviser, but Dodd-Frank eliminated the private adviser exemption. Dodd-Frank exempted family offices from registration as an investment adviser and left the definition up to the SEC.
According to the new rule, a family office that is exempt from registration is any company that:
1. Provides investment advice only to “family clients,” as defined in the rule;
2. Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule; and
3. Does not hold itself out to the public as an investment adviser.
Family offices that do not meet this definition must register with the SEC or with the applicable state(s) by March 30, 2012.
The new rule states that existing exemptive orders from the SEC remain effective and that certain family offices may be deemed to meet the new definition under a grandfathering provision.
Although I don’t yet have the final rules, I have included a summary of those rules from two press releases issued by the SEC.
In press release 2011-133, the SEC described rules that it adopted that included, but are not limited to, the following:
1. Private-fund advisers that must register as investment advisers with the SEC for the first time because of Dodd-Frank must be registered by March 30, 2012.
2. On their application for registration, Form ADV, private-fund advisers will have to provide the following: (a) basic organizational and operational information about each fund they manage, (b) general information about the size and ownership of the fund, (c) general fund data, (d) the adviser’s services to the fund, and (e) identification of the “gatekeepers” that assist the adviser and the private fund (i.e., auditors, prime brokers, custodians, administrators, and marketers).
3. Form ADV was amended (yes, again) to include information about (a) the types of clients advised,
(b) the adviser’s employees, (c) the adviser’s advisory activities, and (d) their business practices that may present significant conflicts of interest. (Some of this seems duplicative of the information already required. When we see the final rule, we may be able to make some distinctions.)
4. Although exempt from registration, the SEC imposes the following duties on advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in assets under management in the U.S.
a. File and periodically update reports with the SEC using Form ADV. This information will be filed electronically on the IARD system and will be available to the public.
b. Instead of completing the entire Form ADV, these “exempt reporting advisers” will disclose (a) basic identifying information about the adviser, (b) the identity of its owners and affiliates, (c) information about the private funds the adviser manages, (d) information about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest, and (e) the disciplinary history of the adviser and its employees that may reflect on the integrity of the advisory firm.
5. Dodd-Frank requires that advisers who have assets under management of between $25 million and $100 million switch their registration from the SEC to the applicable state(s), if certain requirements are met. The new rule states that:
a. Advisers registered with the SEC will have to declare that they are permitted to remain SEC registered in a filing to be made in the first quarter of 2012.
b. Advisers who no longer are eligible for SEC registration will have until June 28, 2012, to complete the switch to state registration.
6. The relatively new pay-to-play rule was amended to allow an adviser to pay a registered municipal advisor to act as a placement agent to solicit government entities on its behalf, if the municipal advisor is subject to a pay-to-play rule adopted by the MSRB that is at least as stringent as the investment adviser pay-to-play rule.
7. The SEC defined “venture capital fund,” which was undefined in Dodd-Frank.
In press release 2011-134, the SEC defined “family offices,” which was also left undefined by Dodd-Frank. Family offices are entities established by wealthy families to manage their wealth and provide other services to family members. Historically, family offices used the private adviser exemption to avoid registration as an investment adviser, but Dodd-Frank eliminated the private adviser exemption. Dodd-Frank exempted family offices from registration as an investment adviser and left the definition up to the SEC.
According to the new rule, a family office that is exempt from registration is any company that:
1. Provides investment advice only to “family clients,” as defined in the rule;
2. Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule; and
3. Does not hold itself out to the public as an investment adviser.
Family offices that do not meet this definition must register with the SEC or with the applicable state(s) by March 30, 2012.
The new rule states that existing exemptive orders from the SEC remain effective and that certain family offices may be deemed to meet the new definition under a grandfathering provision.
Thursday, May 5, 2011
SEC to Focus on Nine Areas when Examining Investment Advisers
On March 21, 2011, Carlo V. di Florio, the SEC’s Director of the Office of Compliance Inspections and Examinations, gave a speech in which he indicated that the SEC would focus on the following nine areas in examinations of investment advisers:
1. Valuation – a top priority, particularly when the IA manages assets that are difficult to value (e.g., alternative investments that do not routinely trade on exchanges or other established markets). SEC will review the IA’s policies and procedures regarding valuation of managed assets.
2. Conflicts of Interest – SEC will review procedures used by an IA to identify, disclose, and manage conflicts. Conflicts mentioned included allocations, analysis of insider trading, side letters, best execution, directed brokerage, and soft dollar issues.
3. Portfolio Management – SEC will test whether the strategy presented to investors is actually being carried out by the advisers.
4. Performance and Advertising Issues – If applicable, SEC will review any performance calculation and the presentation of that performance in any offering materials.
5. Asset Verification – If an adviser has custody, SEC may verify assets and controls for safeguarding assets. This analysis may include a determination of whether an adviser who says it does not have custody actually does have custody (e.g., check writing authority, power of attorney, and/or general partner to a hedge fund).
6. Risk Management – how the adviser takes and manages risk.
7. Business Continuity/Disaster Recovery – This is an item that should be in every SEC-registered adviser’s policies and procedures manual. The Director cited the recent natural disasters in Japan and New Zealand.
8. Use of Social Media – The use of social media, including websites, blogs, twitter, etc., may increase an adviser’s compliance risks. The Director cited stock picks, links to other products and services, and the difficulty in providing proper disclosures as areas that may be problematic.
9. Small Niche Mutual Funds or ETFs – These investments are subject to unusual or obscure risks where small events can have huge effects. Again the SEC will consider an adviser’s risk management procedures.
If an IA is not an SEC-registered IA, it is must be subject to an examination program conducted by your state securities regulator; therefore, a state-registered IA should also be preparing for an examination by considering the above items.
Many of the above items should be considered and/or included in an adviser’s policies and procedures manual or the new narrative version of Part 2 of Form ADV.
1. Valuation – a top priority, particularly when the IA manages assets that are difficult to value (e.g., alternative investments that do not routinely trade on exchanges or other established markets). SEC will review the IA’s policies and procedures regarding valuation of managed assets.
2. Conflicts of Interest – SEC will review procedures used by an IA to identify, disclose, and manage conflicts. Conflicts mentioned included allocations, analysis of insider trading, side letters, best execution, directed brokerage, and soft dollar issues.
3. Portfolio Management – SEC will test whether the strategy presented to investors is actually being carried out by the advisers.
4. Performance and Advertising Issues – If applicable, SEC will review any performance calculation and the presentation of that performance in any offering materials.
5. Asset Verification – If an adviser has custody, SEC may verify assets and controls for safeguarding assets. This analysis may include a determination of whether an adviser who says it does not have custody actually does have custody (e.g., check writing authority, power of attorney, and/or general partner to a hedge fund).
6. Risk Management – how the adviser takes and manages risk.
7. Business Continuity/Disaster Recovery – This is an item that should be in every SEC-registered adviser’s policies and procedures manual. The Director cited the recent natural disasters in Japan and New Zealand.
8. Use of Social Media – The use of social media, including websites, blogs, twitter, etc., may increase an adviser’s compliance risks. The Director cited stock picks, links to other products and services, and the difficulty in providing proper disclosures as areas that may be problematic.
9. Small Niche Mutual Funds or ETFs – These investments are subject to unusual or obscure risks where small events can have huge effects. Again the SEC will consider an adviser’s risk management procedures.
If an IA is not an SEC-registered IA, it is must be subject to an examination program conducted by your state securities regulator; therefore, a state-registered IA should also be preparing for an examination by considering the above items.
Many of the above items should be considered and/or included in an adviser’s policies and procedures manual or the new narrative version of Part 2 of Form ADV.
Tuesday, May 3, 2011
Are You or Your Firm Listed on BrightScope?
A new website allows investors, plan sponsors, and others to search for and find information on investment advisers. That website is http://www.brightscope.com/.
BrightScope states, “BrightScope®, Inc. is a financial information company that brings transparency to opaque markets. Delivered through web-based software, BrightScope data drives better decision-making for individual investors, corporate plan sponsors, asset managers, broker-dealers, and financial advisors. BrightScope primarily operates in two major segments: Retirement Plans and Wealth Management.”
Regarding retirement plans, BrightScope states that it provides ratings and analysis for participants, plan sponsors, and advisors. Regarding wealth management, BrightScope states that it presents information on financial advisors that can be used by investors to perform due diligence on their current or prospective advisor.
Reliable and timely information is always useful, so BrightScope’s service may be needed. However, a recent article states that many advisers claim that information presented by BrightScope about investment advisers is not accurate, especially information about an adviser’s assets under management. That article also states that an adviser can correct - for a fee - certain information displayed by BrightScope.
All investment advisers and brokers may want to determine whether information about them or their firm appears on BrightScope and, if so, verify that information.
BrightScope states, “BrightScope®, Inc. is a financial information company that brings transparency to opaque markets. Delivered through web-based software, BrightScope data drives better decision-making for individual investors, corporate plan sponsors, asset managers, broker-dealers, and financial advisors. BrightScope primarily operates in two major segments: Retirement Plans and Wealth Management.”
Regarding retirement plans, BrightScope states that it provides ratings and analysis for participants, plan sponsors, and advisors. Regarding wealth management, BrightScope states that it presents information on financial advisors that can be used by investors to perform due diligence on their current or prospective advisor.
Reliable and timely information is always useful, so BrightScope’s service may be needed. However, a recent article states that many advisers claim that information presented by BrightScope about investment advisers is not accurate, especially information about an adviser’s assets under management. That article also states that an adviser can correct - for a fee - certain information displayed by BrightScope.
All investment advisers and brokers may want to determine whether information about them or their firm appears on BrightScope and, if so, verify that information.
Friday, April 1, 2011
Now that your Brochure is filed . . . What is an Investment Adviser to do?
Most investment advisers had to electronically file the new narrative, plain English brochure (Form ADV, Part 2A) by March 31, 2011. I hope that everyone met this deadline. But what is an investment adviser to do now that its brochure has been filed? Is this regulatory burden over? Can you just file it away and glide until your annual updating amendment is due in March, 2012?
As lawyers like to say, it depends. I have gathered some thoughts and information below that may assist you regarding your additional responsibilities. (These responsibilities come from federal law, but state securities regulators are likely to apply the same laws.)
First, what should you do with the new brochure?
If you are an SEC-registered adviser, you must “deliver” a brochure and a brochure supplement(s) to each client or prospective client that contains all information required by Part 2 of Form ADV. 17 C.F.R. § 275.204-3(a).
Please note that the statute says “deliver,” not offer. For more detail on the delivery requirements, see below and/or seek legal advice.
Second, when do I start using the new brochure and brochure supplement?
An SEC-registered investment adviser must begin using the new brochure and brochure supplement by the date that the adviser was required to first electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(2). Therefore, registered advisers with a December 31, 2010 year-end must start using the new brochure and brochure supplement by March 31, 2011. (Note that this is a transition rule.)
When using the new brochure and brochure supplement, an adviser must be using the “current” version. 17 C.F.R. § 275.204-3(g)(2). Therefore, advisers should control all amendments to the brochure and brochure supplement to ensure that only the current versions are being used.
Finally, an adviser must comply with the delivery requirements. See 17 C.F.R. § 275.204-3(g)(2).
Third, in this period of transitioning to the new narrative brochure, when must I provide existing clients with a copy of the new brochure and brochure supplement?
An SEC-registered investment adviser must deliver its current brochure and brochure supplement to its existing clients within 60 days after the date that the adviser was required to electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(1). Therefore, registered advisers with a December 31, 2010 year-end must deliver the new brochure and brochure supplement to their existing clients by May 30, 2011. (Note that this is a transition rule.)
Fourth, what are the delivery requirements for the brochure?
For new clients, an adviser must deliver “your current brochure” before or at the time you and the new client execute an investment advisory contract. 17 C.F.R. § 275.204-3(b)(1).
For existing clients, see the transition rule above that requires advisers to provide the new brochure and brochure supplement within 60 days after the brochure and brochure supplement were required to be electronically filed. Thereafter, for existing clients, the annual delivery requirement is triggered ONLY “if there are material changes in the brochure since the adviser’s last annual updating amendment.” 17 C.F.R. § 275.204-3(b)(2). If these material changes exist, the adviser must deliver annually within 120 days after the end of the adviser’s fiscal year (April 30, 2011 for advisers with a December 31, 2010 year-end) the following:
• A current brochure or
• The summary of material changes to the brochure with (1) an offer to provide your current brochure, (2) the telephone number (and website address or email address, if available) by which a client may obtain the current brochure from you, and (3) the website address for obtaining information about you through the Investment Adviser Public Disclosure (IAPD) system.
17 C.F.R. § 275.204-3(b)(2)(i), (ii).
To simplify: For new clients, give a copy of your current brochure before the new client signs the advisory contract. For existing clients (where the adviser has a December 31 year –end):
• In 2011, give all existing clients a copy of your current brochure and brochure supplement by May 30, 2011.
• Thereafter, give all existing clients a copy of your current brochure by April 30, 2011.
Also an SEC-registered adviser may deliver its brochure electronically, but, as expected, electronic delivery brings its own set of regulations. (The SEC has published interpretive guidance regarding electronic delivery by investment advisers. Study this guidance or consult legal counsel before attempting electronic delivery of a brochure.)
Fifth, what are the delivery requirements for the brochure supplements?
The general rule is that an investment adviser (remember, the IA is the firm) must deliver to each client of prospective client a current brochure supplement for a supervised persons (usually the person who is giving the investment advice – that is, the investment adviser representative) before or at the time the supervised person begins to provide advisory services to the client. 17 C.F.R. § 275.204-3(b)(3). (However, keep in mind the transition rule stated above, that requires advisers to provide the brochure supplement to existing clients by May 30, 2011.)
However, the SEC has extended the compliance dates by which some advisers must deliver the brochure supplement as follows:
• Advisers registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, must prepare and begin delivering brochure supplements to new and prospective clients by July 31, 2011, and must deliver brochure supplements to existing clients by September 30, 2011.
• Newly-registered advisers filing applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to prepare and begin delivering brochure supplements to new and prospective clients and have until July 1, 2011 to deliver brochure supplements to existing clients.
Based on the general rule, BEFORE a new individual begins to serve a particular advisory client, the investment adviser must consider whether that individual is a supervised person and, if so, whether the adviser has provided the brochure supplement of that supervised person to the client.
Please note that the brochure supplement(s) may be part of the brochure, so the client may have been provided the brochure supplement(s) when he was provided the brochure.
Sixth, how often do I have to amend my brochure?
An SEC-registered investment adviser must amend its brochure as follows:
• At least annually, within 90 days of the end of its fiscal year; AND
• More frequently, if required by the instructions to Form ADV.
17 C.F.R. § 275.204-1(a).
Seventh, according to the instructions to Form ADV, Part 2, when must I amend my brochure?
According to the instructions for Part 2A of Form ADV, an investment adviser must update its brochure as follows:
• Each year at the time the adviser files its annual updating amendment (i.e., within 90 days after year-end) AND
• Promptly whenever any information in the brochure becomes materially inaccurate. (An adviser is not required to update its brochure between annual updating amendments solely because the amount of client assets it manages has changed or because its fee schedule has changed. However, if the adviser updates its brochure for a separate reason in between annual updating amendments and the amount of client assets managed or its fees schedule has become materially inaccurate, the adviser should update these items in the interim amendment.
Eighth, can I amend my brochure other than when the instructions to Part 2 require an amendment?
Yes, an adviser can amend its brochure at any time to add or correct non-material items. I’ve already seen amendments to correct typos, to improve readability, and to insert additional explanation about an adviser’s business.
Ninth, do all amendment to my brochure – material and non-material – have to be filed through the IARD system?
All amendments to the brochure (i.e., Part 2A of Form ADV) must be filed electronically with the IARD (unless the adviser has received a hardship exemption). 17 C.F.R. § 275.204-1(b). Therefore, even if an adviser amends its brochure for minor things, such as to correct a typo, the adviser must file the amended brochure in the IARD system.
Tenth, what are the delivery requirements for amendments to the brochure or brochure supplement?
The delivery requirements for amendments to the brochure and brochure supplement are triggered ONLY if the amendment adds disclosure of a disciplinary event or materially revises information already disclosed about a disciplinary event. If this is the case, an investment adviser must deliver to each client “promptly after you create an amended brochure or brochure supplement” one of the following;
• The amended brochure or brochure supplement, as applicable, and a statement describing the material facts relating to the change in disciplinary information, or
• A statement describing the material facts relating to the change in disciplinary information.
17 C.F.R. § 275.204-3(b)(4).
The delivery requirements for interim amendments (i.e., any amendments between annual updating amendments) differ. If an adviser amends its brochure because information in the brochure became materially inaccurate (see the Seventh note above), the adviser should immediately begin to use the newly amended brochure, but it does not have to promptly provide the newly amended brochure to all existing clients. However, if an adviser amends its brochure because of disciplinary events or disciplinary disclosures described above, the adviser must promptly provide the appropriate document(s) to each client.
Eleventh, what are the primary recordkeeping requirements related to brochures?
An SEC-registered investment adviser must make and keep the following records related to brochures and brochure supplements:
• A copy of each brochure and brochure supplement and each amendment or revision thereto;
• Any summary of material changes that is not contained in the brochure; and
• A record of the dates that each brochure and brochure supplement, each amendment or revision thereto, and each summary of material changes not included in a brochure was given to any client or to any prospective client who subsequently became a client.
17 C.F.R. § 275.204-2(a)(14)(i).
These records must be maintained “in an easily accessible place for a period of not less than five years.” 17 C.F.R. § 275.204-2(e)(1).
As lawyers like to say, it depends. I have gathered some thoughts and information below that may assist you regarding your additional responsibilities. (These responsibilities come from federal law, but state securities regulators are likely to apply the same laws.)
First, what should you do with the new brochure?
If you are an SEC-registered adviser, you must “deliver” a brochure and a brochure supplement(s) to each client or prospective client that contains all information required by Part 2 of Form ADV. 17 C.F.R. § 275.204-3(a).
Please note that the statute says “deliver,” not offer. For more detail on the delivery requirements, see below and/or seek legal advice.
Second, when do I start using the new brochure and brochure supplement?
An SEC-registered investment adviser must begin using the new brochure and brochure supplement by the date that the adviser was required to first electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(2). Therefore, registered advisers with a December 31, 2010 year-end must start using the new brochure and brochure supplement by March 31, 2011. (Note that this is a transition rule.)
When using the new brochure and brochure supplement, an adviser must be using the “current” version. 17 C.F.R. § 275.204-3(g)(2). Therefore, advisers should control all amendments to the brochure and brochure supplement to ensure that only the current versions are being used.
Finally, an adviser must comply with the delivery requirements. See 17 C.F.R. § 275.204-3(g)(2).
Third, in this period of transitioning to the new narrative brochure, when must I provide existing clients with a copy of the new brochure and brochure supplement?
An SEC-registered investment adviser must deliver its current brochure and brochure supplement to its existing clients within 60 days after the date that the adviser was required to electronically file its new brochure. 17 C.F.R. § 275.204-3(g)(1). Therefore, registered advisers with a December 31, 2010 year-end must deliver the new brochure and brochure supplement to their existing clients by May 30, 2011. (Note that this is a transition rule.)
Fourth, what are the delivery requirements for the brochure?
For new clients, an adviser must deliver “your current brochure” before or at the time you and the new client execute an investment advisory contract. 17 C.F.R. § 275.204-3(b)(1).
For existing clients, see the transition rule above that requires advisers to provide the new brochure and brochure supplement within 60 days after the brochure and brochure supplement were required to be electronically filed. Thereafter, for existing clients, the annual delivery requirement is triggered ONLY “if there are material changes in the brochure since the adviser’s last annual updating amendment.” 17 C.F.R. § 275.204-3(b)(2). If these material changes exist, the adviser must deliver annually within 120 days after the end of the adviser’s fiscal year (April 30, 2011 for advisers with a December 31, 2010 year-end) the following:
• A current brochure or
• The summary of material changes to the brochure with (1) an offer to provide your current brochure, (2) the telephone number (and website address or email address, if available) by which a client may obtain the current brochure from you, and (3) the website address for obtaining information about you through the Investment Adviser Public Disclosure (IAPD) system.
17 C.F.R. § 275.204-3(b)(2)(i), (ii).
To simplify: For new clients, give a copy of your current brochure before the new client signs the advisory contract. For existing clients (where the adviser has a December 31 year –end):
• In 2011, give all existing clients a copy of your current brochure and brochure supplement by May 30, 2011.
• Thereafter, give all existing clients a copy of your current brochure by April 30, 2011.
Also an SEC-registered adviser may deliver its brochure electronically, but, as expected, electronic delivery brings its own set of regulations. (The SEC has published interpretive guidance regarding electronic delivery by investment advisers. Study this guidance or consult legal counsel before attempting electronic delivery of a brochure.)
Fifth, what are the delivery requirements for the brochure supplements?
The general rule is that an investment adviser (remember, the IA is the firm) must deliver to each client of prospective client a current brochure supplement for a supervised persons (usually the person who is giving the investment advice – that is, the investment adviser representative) before or at the time the supervised person begins to provide advisory services to the client. 17 C.F.R. § 275.204-3(b)(3). (However, keep in mind the transition rule stated above, that requires advisers to provide the brochure supplement to existing clients by May 30, 2011.)
However, the SEC has extended the compliance dates by which some advisers must deliver the brochure supplement as follows:
• Advisers registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, must prepare and begin delivering brochure supplements to new and prospective clients by July 31, 2011, and must deliver brochure supplements to existing clients by September 30, 2011.
• Newly-registered advisers filing applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to prepare and begin delivering brochure supplements to new and prospective clients and have until July 1, 2011 to deliver brochure supplements to existing clients.
Based on the general rule, BEFORE a new individual begins to serve a particular advisory client, the investment adviser must consider whether that individual is a supervised person and, if so, whether the adviser has provided the brochure supplement of that supervised person to the client.
Please note that the brochure supplement(s) may be part of the brochure, so the client may have been provided the brochure supplement(s) when he was provided the brochure.
Sixth, how often do I have to amend my brochure?
An SEC-registered investment adviser must amend its brochure as follows:
• At least annually, within 90 days of the end of its fiscal year; AND
• More frequently, if required by the instructions to Form ADV.
17 C.F.R. § 275.204-1(a).
Seventh, according to the instructions to Form ADV, Part 2, when must I amend my brochure?
According to the instructions for Part 2A of Form ADV, an investment adviser must update its brochure as follows:
• Each year at the time the adviser files its annual updating amendment (i.e., within 90 days after year-end) AND
• Promptly whenever any information in the brochure becomes materially inaccurate. (An adviser is not required to update its brochure between annual updating amendments solely because the amount of client assets it manages has changed or because its fee schedule has changed. However, if the adviser updates its brochure for a separate reason in between annual updating amendments and the amount of client assets managed or its fees schedule has become materially inaccurate, the adviser should update these items in the interim amendment.
Eighth, can I amend my brochure other than when the instructions to Part 2 require an amendment?
Yes, an adviser can amend its brochure at any time to add or correct non-material items. I’ve already seen amendments to correct typos, to improve readability, and to insert additional explanation about an adviser’s business.
Ninth, do all amendment to my brochure – material and non-material – have to be filed through the IARD system?
All amendments to the brochure (i.e., Part 2A of Form ADV) must be filed electronically with the IARD (unless the adviser has received a hardship exemption). 17 C.F.R. § 275.204-1(b). Therefore, even if an adviser amends its brochure for minor things, such as to correct a typo, the adviser must file the amended brochure in the IARD system.
Tenth, what are the delivery requirements for amendments to the brochure or brochure supplement?
The delivery requirements for amendments to the brochure and brochure supplement are triggered ONLY if the amendment adds disclosure of a disciplinary event or materially revises information already disclosed about a disciplinary event. If this is the case, an investment adviser must deliver to each client “promptly after you create an amended brochure or brochure supplement” one of the following;
• The amended brochure or brochure supplement, as applicable, and a statement describing the material facts relating to the change in disciplinary information, or
• A statement describing the material facts relating to the change in disciplinary information.
17 C.F.R. § 275.204-3(b)(4).
The delivery requirements for interim amendments (i.e., any amendments between annual updating amendments) differ. If an adviser amends its brochure because information in the brochure became materially inaccurate (see the Seventh note above), the adviser should immediately begin to use the newly amended brochure, but it does not have to promptly provide the newly amended brochure to all existing clients. However, if an adviser amends its brochure because of disciplinary events or disciplinary disclosures described above, the adviser must promptly provide the appropriate document(s) to each client.
Eleventh, what are the primary recordkeeping requirements related to brochures?
An SEC-registered investment adviser must make and keep the following records related to brochures and brochure supplements:
• A copy of each brochure and brochure supplement and each amendment or revision thereto;
• Any summary of material changes that is not contained in the brochure; and
• A record of the dates that each brochure and brochure supplement, each amendment or revision thereto, and each summary of material changes not included in a brochure was given to any client or to any prospective client who subsequently became a client.
17 C.F.R. § 275.204-2(a)(14)(i).
These records must be maintained “in an easily accessible place for a period of not less than five years.” 17 C.F.R. § 275.204-2(e)(1).
Thursday, January 20, 2011
SEC Recommends Change to its Examination Program
The Dodd-Frank Act financial reform bill that was enacted on July 21, 2010, required the SEC to conduct a study on enhancing the examinations of SEC-registered investment advisers. Congress wanted to know what concerns the SEC has about conducting a good examination program and what legislative and regulatory steps it would recommend to meet these concerns.
The SEC recently released its study report. In the report, the SEC describes significant obstacles to the SEC conducting a good examination program. Specifically, the SEC describes what it calls “capacity” problems, funding problems, and additional requirements imposed under the Dodd-Frank Act.
Regarding its concerns, the SEC stated in the report that “the examination program requires a source of funding that is adequate to permit the Commission to meet the new challenges it faces and sufficiently stable to prevent examination resources from periodically being outstripped by growth in the number of registered investment advisers (i.e., it requires resources that are scalable to any future increase ― or, for that matter, decrease ― in the number of registered investment advisers).”
Regarding legislative and regulatory steps, the SEC gave Congress three approaches to consider when addressing these obstacles. These approaches include (1) imposing user fees on SEC-registered investment advisers that could be retained by the SEC to fund the investment adviser examination program; (2) authorizing one or more SROs to examine, subject to SEC supervision, all SEC-registered investment advisers; and (3) authorizing FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940.
It appears from the SEC’s study that additional costs may be imposed on investment advisers in the form of user fees or SRO registration fees. As the examination program and its obstacles are addressed by Congress and the SEC, advisers may also incur additional time and other resources understanding and complying with additional regulations regarding examinations.
Although the SEC’s study does not address state-registered advisers, it is clear that many states, which already have budget problems, may not be in a position to allocate existing resources to fund a good examination program. Resources will be further stretched after July 21, 2011, when advisers with AUM between $30,000,000 and $100,000,000 register with the states. State securities regulators must have an examination program that subjects these newly registered advisers to an examination. Therefore, expect states to impose additional costs on state-registered advisers. For example, South Carolina, which has one auditor to examine all of its registered advisers, has a securities law that allows the state to “assess a reasonable charge for conducting an audit or inspection” of an adviser. S.C. Code Ann. § 35-1-411(d). In the past, South Carolina has assessed a nominal charge. The South Carolina Securities Division could significantly increase this charge and thereby fund the salary, benefits, and overhead of the existing auditor and additional auditors.
The SEC recently released its study report. In the report, the SEC describes significant obstacles to the SEC conducting a good examination program. Specifically, the SEC describes what it calls “capacity” problems, funding problems, and additional requirements imposed under the Dodd-Frank Act.
Regarding its concerns, the SEC stated in the report that “the examination program requires a source of funding that is adequate to permit the Commission to meet the new challenges it faces and sufficiently stable to prevent examination resources from periodically being outstripped by growth in the number of registered investment advisers (i.e., it requires resources that are scalable to any future increase ― or, for that matter, decrease ― in the number of registered investment advisers).”
Regarding legislative and regulatory steps, the SEC gave Congress three approaches to consider when addressing these obstacles. These approaches include (1) imposing user fees on SEC-registered investment advisers that could be retained by the SEC to fund the investment adviser examination program; (2) authorizing one or more SROs to examine, subject to SEC supervision, all SEC-registered investment advisers; and (3) authorizing FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940.
It appears from the SEC’s study that additional costs may be imposed on investment advisers in the form of user fees or SRO registration fees. As the examination program and its obstacles are addressed by Congress and the SEC, advisers may also incur additional time and other resources understanding and complying with additional regulations regarding examinations.
Although the SEC’s study does not address state-registered advisers, it is clear that many states, which already have budget problems, may not be in a position to allocate existing resources to fund a good examination program. Resources will be further stretched after July 21, 2011, when advisers with AUM between $30,000,000 and $100,000,000 register with the states. State securities regulators must have an examination program that subjects these newly registered advisers to an examination. Therefore, expect states to impose additional costs on state-registered advisers. For example, South Carolina, which has one auditor to examine all of its registered advisers, has a securities law that allows the state to “assess a reasonable charge for conducting an audit or inspection” of an adviser. S.C. Code Ann. § 35-1-411(d). In the past, South Carolina has assessed a nominal charge. The South Carolina Securities Division could significantly increase this charge and thereby fund the salary, benefits, and overhead of the existing auditor and additional auditors.
Wednesday, January 19, 2011
South Carolina Guidance on the New Form ADV 2
Form ADV, Part 2, is used as an investment adviser’s disclosure document (or brochure), which must be provided to investment advisory clients. As you know, the SEC has changed the old form, which was in a check-the-box format with some narrative explanation, to a new form, which is entirely narrative. The SEC also now requires that an adviser electronically file its Form ADV, Part 2, with the SEC, making it available for viewing by the public.
However, many investment advisers do not register with the SEC. Generally, if an investment adviser has less than $25,000,000 of assets under management (or less than $100,000,000 of assets under management after July 20, 2011), then the adviser must register with one or more state securities regulators.
When registering with the South Carolina Securities Division, an adviser also must submit Form ADV, Part 2. The Securities Division has issued guidance on its requirements regarding Form ADV, Part 2. First, as of January 1, 2011, the Securities Division requires the new Form ADV, Part 2, to be submitted as part of any initial application for registration as an investment adviser in South Carolina. Second, as of January 1, 2011, all investment advisers who are already registered in South Carolina must include the new Form ADV, Part 2, as part of the adviser’s next annual updating amendment (or as part of any amendment to Form ADV). Therefore, advisers with a December 31 year-end must file the new Form ADV, Part 2, at least by March 31, 2011. Finally, the Securities Division encourages advisers to follow the distribution and delivery schedule of the new Form ADV, Part 2, as provided in the instructions to that new form.
If filing electronically through the IARD, an adviser must also file the new Form ADV, Part 2, electronically. It will then become available for viewing by the public. Since South Carolina allows filing an application for registration as an adviser by paper (i.e., not electronically, but by filing the documents directly with the Securities Division), a paper-filer presumably would file the new Form ADV, Part 2, directly to the Securities Division.
However, many investment advisers do not register with the SEC. Generally, if an investment adviser has less than $25,000,000 of assets under management (or less than $100,000,000 of assets under management after July 20, 2011), then the adviser must register with one or more state securities regulators.
When registering with the South Carolina Securities Division, an adviser also must submit Form ADV, Part 2. The Securities Division has issued guidance on its requirements regarding Form ADV, Part 2. First, as of January 1, 2011, the Securities Division requires the new Form ADV, Part 2, to be submitted as part of any initial application for registration as an investment adviser in South Carolina. Second, as of January 1, 2011, all investment advisers who are already registered in South Carolina must include the new Form ADV, Part 2, as part of the adviser’s next annual updating amendment (or as part of any amendment to Form ADV). Therefore, advisers with a December 31 year-end must file the new Form ADV, Part 2, at least by March 31, 2011. Finally, the Securities Division encourages advisers to follow the distribution and delivery schedule of the new Form ADV, Part 2, as provided in the instructions to that new form.
If filing electronically through the IARD, an adviser must also file the new Form ADV, Part 2, electronically. It will then become available for viewing by the public. Since South Carolina allows filing an application for registration as an adviser by paper (i.e., not electronically, but by filing the documents directly with the Securities Division), a paper-filer presumably would file the new Form ADV, Part 2, directly to the Securities Division.
Subscribe to:
Posts (Atom)