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The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

SEC Proposes to Update Longstanding Investment Adviser Advertising and Solicitation Rules

Posted in Investment Adviser Regulation

The Securities and Exchange Commission (SEC) proposed amendments to both the advertising rule and the cash solicitation rule under the Investment Advisers Act of 1940 (the “Advisers Act”) on November 4, 2019. Neither rule — adopted in 1961 and 1979, respectively — has been amended significantly since it was adopted, although the SEC and its staff have, from time to time, granted no-action relief and otherwise interpreted the application of these rules. According to the SEC, the proposed amendments are intended to update such rules to reflect changes over the past half-century in “technology, the expectations of investors seeking advisory services, and the evolution of industry practices.”

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SEC Clarifies Investment Adviser Standard of Conduct

Posted in Investment Adviser Regulation

On June 5, 2019, the SEC issued an Interpretive Release designed to “reaffirm, and in some cases clarify, the standard of conduct that investment advisers owe to their clients.” The Interpretive Release highlights existing principles relevant to an adviser’s fiduciary duty; it does not create any new regulation.

The Interpretive Release sets forth the SEC’s views on the application of Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”) to SEC-registered advisers, state-registered advisers and investment advisers that are exempt from registration (including exempt reporting advisers) or that are subject to a prohibition on registration under the Advisers Act. In short, any entity or individual that meets the definition of “investment adviser” set forth in the Advisers Act will be held to the standards outlined in the Interpretive Release.

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Self-Regulatory Organizations and the Constitutional Privilege Against Self-Incrimination

Posted in Broker-Dealer Regulation

How do self-regulatory organizations, such as ones acting for the futures industry and broker-dealers, steer clear of being deemed a government actor for purposes of the Constitution’s Fifth Amendment privilege against self-incrimination, while at the same time coordinating with a governmental authority enough to avoid duplication or disruption?  When can respondents in such cases successfully assert their Fifth Amendment rights?

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New SEC Privacy and Cybersecurity Risk Alert Tells Broker Dealers and Investment Advisers Common Deficiencies to Avoid

Posted in Broker-Dealer Regulation, Cybersecurity/Privacy

The SEC’s new Risk Alert provides valuable insight as to what the OCIE wants to see broker dealers and investment advisers accomplish with their privacy notices and their cybersecurity policies and procedures. The SEC wants this written documentation to be comprehensive, to accurately reflect the registrant’s practices, and to be implemented effectively throughout their business. Broker dealers and investment advisers can, and should, use this Risk Alert to benchmark their own specific practices against the SEC’s expectations.

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SEC Announces Settlements Resulting from the Share Class Selection Initiative

Posted in Investment Adviser Regulation, SEC Enforcement

On March 11, 2019, the SEC announced settlements with 79 investment advisers who self-reported violations of the Investment Advisers Act of 1940 (the “Advisers Act”) in connection with the Division of Enforcement’s Share Class Selection Disclosure Initiative (the “Share Class Initiative”). The advisers, collectively, agreed to return more than $125 million in fees and prejudgment interest to clients.

Form ADV requires investment advisers to make full and fair disclosure to their clients and prospective clients concerning their material conflicts of interest. Among other things, advisers are specifically required to disclose compensation and fees that they and their supervised persons receive, including from asset-based charges and service fees. The general instructions to Form ADV also remind advisers of their general obligation to fully disclose material facts relating to their advisory business.

The Share Class Initiative, which was announced in February 2018, encouraged investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. The initiative enabled investment advisory firms to avoid civil money penalties if they timely self-reported the use of higher-cost share classes, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure and procedures.

According to the SEC, without adequately disclosing their conflicts of interest, the settling advisers placed their clients in mutual fund share classes that charged rule 12b-1 fees when lower-cost share classes of the same fund were available. The SEC said that the rule 12b-1 fees were “routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.”

Without admitting or denying the findings, SEC-registered investment advisers that entered into settlements consented to cease-and-desist orders finding violations of Section 206(2) and Section 207 of the Advisers Act and agreed to distribute improperly disclosed fees and prejudgment interest to affected clients. The settling advisers also agreed to review and correct existing disclosure concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class (and, if so, to move them).

SEC Chairman Jay Clayton expressed his appreciation that so many investment advisers chose to participate in this initiative. This may be only a first wave of settlements, however, since the announcement suggests that the SEC staff continues to evaluate self-reports that were received from investment advisers prior to the Share Class Initiative cut-off date.

The SEC Continues to Spread Sunshine on Private Equity: Reflections on Two Recent Enforcement Actions

Posted in Fund Regulation, SEC Enforcement

The end of 2018 was notable for two SEC enforcement actions against private equity fund managers for violations of the Investment Advisers Act of 1940 arising from improper allocations of expenses, undisclosed conflicts of interest, and insufficient compliance policies and procedures.  The two actions demonstrate the SEC’s continued focus on private equity fund managers’ use of “operating partners” or consultants and the particular issue of how the expenses of such operating partners or consultants are allocated.

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FINRA’s 2019 Risk Monitoring and Examination Priorities Letter Highlights Broker-Dealer Online Distribution Platform Activities

Posted in Broker-Dealer Regulation, Enforcement, FINRA Enforcement

FINRA recently published its 2019 Risk Monitoring and Examination Priorities Letter (“Priorities Letter”) highlighting topics upon which FINRA will focus in the coming year. Unlike letters in prior years, the Priorities Letter focuses primarily on areas that FINRA considers to be material new priorities. Of particular interest to the growing number of companies providing financial services through an online platform is the first materially new priority highlighted by FINRA in its Priorities Letter—online distribution platforms (including crowdfunding platforms, digital asset–related platforms, and online advisory platforms, among others). Our lawyers unpack FINRA’s online distribution platform concerns in our client alert.

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