RIA Compliance Advisor. Now that we are better than half way through the first quarter of 2019, many registered investment advisor (RIA) firms are reviewing their Form ADV Part 1 Annual Amendment. This review is in preparation of updating several sections within that document and submitting it by the deadline of March 31, 2019. These are RIA firms that have a December fiscal year end.
Last year, several new questions appeared on the Form ADV Part 1 Annual Amendment that are worth repeating here. As a reminder: Section 5, Information about your Advisory Business – Employees, Clients and Compensation. Specifically, Question 5K (1) Separately Managed Account Clients. For purposes of the Form ADV, “Separately Managed Account clients” are generally defined as all of your clients who investment advisors provide investment advice to EXCEPT, private funds, business development company and mutual funds. Outside of private funds, business development company and mutual funds, all other types of ‘clients’ come under this term. (i.e., individuals, High Net Worth client, corporations, pension plans, etc.).
The next question that is Question 5K (4). This is the question that is asking the advisor to provide the name of the custodian(s) that holds 10% or more of your client’s regulatory assets under management. The reporting on the corresponding schedule for Question 5K (4) is to include the name of the custodian/address, CRD/SEC number and the corresponding assets held by that custodian(s).
If you need assistance with your Form ADV Part 1 Annual Amendment filing or any other investment advisor compliance needs, contact Registered Advisor Services, your RIA Compliance Advisor, today for a free consultation!
RIA registration exemptions. As you consider your new business model for your investment advisory firm, questions will arise around which regulator are you supposed to register your new independent investment advisory firm? That is, either with the state or federal regulators. Most new RIA firms will register with their state regulator, in the state where they maintain their principal place of business.
Other new RIA firms, may avail themselves of a federal exemption and register with the Securities and Exchange Commission (SEC). The federal exemptions exist and are applicable to investment advisory firms depending upon how your business model will operate and/or the services that will be provided.
This is not a complete list of all the federal exemptions, but some of the more common to consider when thinking about your RIA registration exemptions:
- Your principal office and place of business is outside the United States;
- You are a pension consultant with respect to assets of plans having an aggregate value of at least $200,000,000;
- You are a related advisor that controls, is controlled by, or is under common control with an investment adviser registered with the SEC;
- You are a multi-state adviser that is required to register in 15 or more states;
- You are an Internet Adviser relying on Rule 203A-2(e).
Contact Registered Advisor Services today for more information concerning RIA registration exemptions!
RIA Compliance. The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) has now published its examination priorities for 2019. Their five themes are included here and below is the detail:
- Compliance and Risks in Critical Market Infrastructure
- Retail Investors
- FINRA and MSRB
- Cybersecurity; and
- Anti-Money Laundering programs.
Here are the details:
Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. They will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules.
Retail Investors, Including Seniors and Those Saving for Retirement –OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, broker-dealers entrusted with customer assets, and portfolio management and trading.
FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors.
Cybersecurity– Each of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.
Anti-Money Laundering Programs – Examiners will review for broker-dealer compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.
For all the important details and information, click here, for the 2019 Exam Priorities.
Ongoing RIA Compliance Requirements. Recently, the Office of Compliance Inspections and Examinations (“OCIE”) performed a limited-scope exam initiative of RIA firms to gain an understanding of the various forms of electronic messaging used by investment advisors and their Investment Advisor Representatives.
Their review focused on “electronic messaging” or “electronic communication” which includes written business communications conveyed electronically using, text/SMS messaging, instant messaging, personal email, and personal or private messaging.
They reviewed communications when conducted on the investment advisor’s systems. Use of “apps”, platforms or when Investment Advisor Representatives use computers or mobile devices issued by the RIA firm; or personally owned computers or mobile devices used by the Investment Advisor Representative for RIA firm business.
OCIE’s examination initiative focused on whether and to what extent advisers complied with the Books and Records Rule and adopted and implemented policies and procedures as required by the Compliance Rule.
They observed a range of practices with respect to electronic communications, including investment advisors that did not conduct any testing or monitoring to ensure ongoing RIA compliance requirements were in compliance with the RIA firm’s policies and procedures.
In this risk alert, OCIE identified several areas, including Policies and Procedures, Employee Training and Attestations, Supervisory Review, Control over Devices where RIA firms can best meet their RIA ongoing compliance requirements.
To stay compliant your ongoing RIA compliance requirements, contact Registered Advisor Services for a free consultation!
Experienced RIA Compliance Consultants. As year-end approaches RIA firms are working through their year-end compliance reviews to confirm they have meet their annual requirements.
Once such a compliance review is completed I believe it is helpful for registered investment advisors to then create a ‘summary report’ outlining the areas of review as well as any ‘findings.’
The level of detail in a summary report may vary and is up to the RIA firm to determine. Some investment advisors may choose to include a high level of detail and others may only reference the areas covered and material issues. Working with an experienced RIA Compliance Consultant can help RIA firms determine which is best for the size and scope of their advisory firm.
RIA compliance areas to consider when creating such a report could include:
Outlining new rules and regulations that came about during the year and how your investment advisory firm is prepared to respond.
If the new rules and regulations are not applicable to your investment advisory firm, document that with an explanation as to why.
Identify significant events and material changes and how they may have impacted the investment advisory firm’s policies and/or risks.
Reference the testing documentation and any exceptions.
Finally, note any focus areas for the following year, based on the results of the annual review.
Let Registered Advisor Services be your Experienced RIA Compliance Consultant. Contact us today for assistance!
RIA Compliance Testing. Registered Investment Advisors are required pursuant to Rule 206(4)-7 to perform an annual review of your firm’s policies and procedures to determine applicability to how your investment advisory firm operates. RIA compliance testing is required by investment advisors to ensure your firm’s procedures are appropriate for your current business model and to uncover any risks.
The federal and state regulators give RIA firms quite a bit of latitude in this area and do not specify how firms are to achieve this testing. Rather, they allow for RIA firms to perform testing that best suits how the RIA firm operates.
Performing the testing is one requirement to complete, but the other requirement is to ‘document’ what you have done.
Example of Testing:
For example, if your RIA firm uses Sub-Advisors to manage your client’s portfolio, you need to perform due diligence about that Sub-Advisor before and during the client relationship. Your testing can include any of the following:
- Review of the Sub-Advisor’s Form ADV Part 1, Form ADV Part 2A Brochure and Form ADV Part 2B Brochure Supplement;
- Review of the BrokerCheck and IAPD systems to confirm any disclosures on behalf of the Sub-Advisor or its Investment Advisor Representatives;
- Ask the Sub-Advisor to complete a questionnaire outlining any civil lawsuits, arbitrations, customer complaints, SEC violations, etc. that the firm has been involved in;
- Visit the Sub-Advisor at their office and meet the staff;
- Ask the Sub-Advisor for references;
- Compare services of multiple Sub-Advisors for their fees, services and product offerings;
- Review the Sub-Advisor’s performance information, in detail. What type of investments do they use/what level of risk do they undertake.
- Have a quarterly due diligence call with the Sub-Advisor.
‘Documenting’ any of the above suggestions or more is the requirement of RIA compliance testing. Registered investment advisors will be asked at the time the firm is examined by their regulator to ‘prove’ what you have completed to meet the requirement of Rule 206(4)-7. The more an advisor is able to document their testing requirement, the more this will help during an examination.
Any questions about compliance testing? Contact Registered Advisor Services today for help!
RIA state registrations and SEC notice filings. As registered investment advisors approach renewal season this is the perfect time of year to review your advisory firm’s current RIA state registrations and SEC notice filings. Confirming which states your RIA firm is currently registered in or required to be registered in will help with your year-end compliance requirements and your firm’s renewal fees.
State Registered RIA firms:
State registered RIA firms are required to register in states where they have a principal place of business; or where the firm has more than five nature persons as clients. There are four states that do not recognize this requirement and require RIA firms to register in those states before they take on one nature person as a client. Those states of New Hampshire, Nebraska, Louisiana and Texas.
Alternatively, your RIA state registered firm may be registered in a state where you no longer have a principal place of business or more than five nature persons as clients. In those instances, the RIA firm needs to make a decision if it is appropriate to de-register from that state.
SEC Notice filings:
For federally registered RIA firms, the same requirement holds true as with state RIA firms. That is, your firm is required to notice file in a state where you have an office or more than five clients in that state. The same four state exception applies for federally registered RIA firms. As well as no longer notice filing in a state if the firm is not required to.
Make today the day you review your RIA state registrations and SEC notice filings! Have questions or need help with these filings? Contract Registered Advisor Services today!
State Registered Investment Advisor. Recently, the North American Securities Administrators Association, Inc. (“NASAA”) issued a request for public comment regarding a proposed Investment Advisor model rule for information security and privacy.
NASAA is requesting public comment on a proposed state registered investment advisor model rule to address three items:
- Second, a proposed amendment to the existing investment adviser NASAA model recordkeeping requirements rule to require that state registered investment advisors maintain these records (“Proposed Recordkeeping Rule Amendment”).
- Third, a proposed amendment to the existing investment adviser NASAA model Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers (collectively “UBP Model Rules”) to include failing to establish, maintain, and enforce a required policy or procedure to the enumerated list of unethical business practices/prohibited conduct (“Proposed Unethical Business Practices Rules Amendment”).
While states can independently require investment advisers to adopt information security policies and procedures through existing state statutes or rules, NASAA hopes the Rule Proposal accomplishes the following three objectives:
- Highlight the importance of data privacy and security in our financial markets along with the need for state registered investment advisors to have information security policies and procedures;
- Provide a basic structure for how state registered investment advisors may design their information security policies and procedures; and
- Create uniformity in both state regulation and state registered investment adviser practices.
Comments on the Rule Proposal are due on or before November 26, 2018. State registered investment advisors needing compliance assistance with their written policy and procedures should contact Registered Advisor Services today!