SEC Applying Current Rules to Past Deeds

The SEC recently showed that it can and will impose the expanded rules provided by the Dodd-Frank Act to actions that occurred before the statute became effective. The case in question involves a hedge fund manager alleged to have engaged in various fraudulent activities. The SEC imposed a permanent bar against the advisor prohibiting him from associating with a broker-dealer, municipal securities dealer, NSRSO, etc. even though the law prior to Dodd-Frank only permitted a ban from associating with an investment adviser. The SEC stated this action was necessary to protect the public from future harm.

Since the SEC has no issue applying current rules to past deeds, we must all be aware and determine how this view might affect our firms.

To read the full enforcement action, please click here

Massachusetts' RIAs Must Obtain Bond

The Massachusetts Securities Division (“MSD”) issued a statement to remind Massachusetts registered advisers who are located in the state and have investment discretion that they must obtain a bond of at least $10,000 from a Massachusetts bonding company.  The MSD defines "investment discretion" as the "authority to execute buy or sell transactions." The MSD will be reviewing the bonding requirements during their routine exams.

To read the entire statement, please click here

New direction for SEC Enforcement?

News agencies are reporting that Robert Khuzami, the Director of the SEC Division of Enforcement, is leaving the SEC. According to the reports, this has not been confirmed by Mr. Khuzami but it could happen as soon as next month. Does this mean the SEC will be looking for an even tougher Director of Enforcement? Click here for one article discussing his alleged departure.

Social Media Policies for Investment Advisers

Blogs, Twitter, Facebook, LinkedIn, Google+, internet forums are all social media tools widely utilized in today’s technology age and a prevalent, almost expected, part of doing business and maintaining personal social connections. Businesses provide information about their company and services and clients and prospective clients have typically adapted to many forms of electronic media, and frequently use technology to research companies or individuals. Social media has become an integral part of modern society and a critical component of Investment Adviser compliance programs.

Social media content may be considered advertising or client correspondence, may inadvertently contain testimonials, investment advice, and may violate anti-fraud provisions or privacy regulations.

The SEC issued a National Examination Risk Alert, dated January 4, 2012, addressing the use of social media by Investment Advisers. While the SEC does not have specific regulation regarding the use of social media, Rules 206(4)-7 (Compliance Program), 206(4)-1 (Advertising), and 204-2 (Books and Records) are applicable.

Considerations: Investment Advisers need to be aware of their web presence, as well as the activities of their associated personnel, and incorporate social media into their policies and procedures. Although not an all-inclusive list, Investment Advisers should consider the following when evaluating its current social media usage and policies:

Advertising, Anti-Fraud Provisions, Testimonials, and Record Retention:

• Websites, blogs, social media profiles, and status updates could be considered advertising and should be in compliance with advertising rules.
• Comments responding to blog posts or status updates may be considered advertising or correspondence.
• LinkedIn recommendations, Facebook “likes”, Twitter “Favorites”, Google+ “likes”, dependent on content, may be considered testimonials.
• Record keeping obligations apply to any advertising and correspondence. Information available electronically must meet books and records retention rules.
• What information is available about the Adviser, and associated persons, through non-related or third party sites?

Recommendations: Investment Advisers should review their current practices, written compliance policies and procedures, and evaluate whether they, or their personnel, utilize social media.

Written compliance policies and procedures should contain a precise and reasonably designed policy regarding social media use by the firm and associated personnel as well as methods for detecting and addressing violations. The policy may include a listing of authorized social media platforms and guidelines for the monitoring of information, updates, retention, and content. Advisers should address personal use of social media by employees including what information is authorized for use in personal profiles and guidelines or restrictions on content relating to the Adviser.

General best practices include:

• Business Use: business email addresses, company information, social media profiles, etc. should be limited to business communications and reviewed as part of the compliance program.
• Personal Use: prohibitions or limitations on the use of company email address, website address, and any marketing materials on personal profiles or blogs.
• Restrictions or prohibitions on participation in business related internet chat rooms or forums.
• Disclosure of social media use, training for personnel, and periodic acknowledgement or certification of the firm’s policies and procedures.

Additionally, it is recommended that Advisers review and monitor information available electronically via third parties and utilized by Solicitors. Information disseminated by third parties or solicitors may also be considered advertising or testimonials and need to be considered when creating and monitoring social media policies.

Click here for the full National Examination Risk Alert

Time for Annual Renewals – Important Dates and Deadlines

As the holiday season approaches, so does the deadline for annual renewals. Annual Renewals are due December 13, 2012. To ensure that your renewal process is completed in timely and accurate matter, we recommend that you review current registrations for both your firm and registered persons of your firm to determine that they are up to date and accurate so that your fees are properly assessed by the regulators on your Preliminary Renewal Statement. Important deadlines are as follows:

• NOVEMBER 12, 2012: Preliminary Renewal Statements are available via IARD/WebCRD; we recommend you review your statement for accuracy.
• DECEMBER 10, 2012: Renewal payments submitted electronically should be made to ensure that payment is posted by the December 13th payment deadline.
• DECEMBER 13, 2012: The total amount due on your firm’s Preliminary Renewal Statement should be paid and received by IARD/WebCRD.
• DECEMBER 21, 2012: Year-end form filings through IARD/WebCRD must be submitted by 6pm eastern time.
• JANUARY 2, 2013: Final Renewal Statements are available via IARD/WebCRD; we recommend that you retain this statement for your records and review registration statuses for your firm, branches and registered persons to ensure all registrations are accurate.
• FEBRUARY 1, 2013: Any amount due according to your Final Renewal Statement should be paid and received by IARD/WebCRD.

FINRA provides a handy 2013 IARD Renewal Program Checklist. For a copy, click here.

For the complete 2013 Renewal Program Calendar provided by FINRA, click here.

If you have any questions or would like Red Oak to assist you in completing your annual renewal, we are here to help. We can provide guidance on all of your compliance needs. Please contact us for further information.

A New Chapter for the SEC Fort Worth Office

In the aftermath of Allen Stanford’s $7 billion Ponzi scheme and blistering congressional and SEC reviews, the Fort Worth office is under new management and rebuilding its reputation into one of legal and regulatory advocacy for the SEC rather than the informal character of years past.

With such a transformation, the office is seeing increased morale, greater enforcement and increasing specialty in review of bribery cases and oil and gas investments. The office is now seen as a more formidable enforcement entity where careers can be made and high profile cases are under investigation. At present, the office is conducting probes into Chesapeake Energy and Wal-Mart and has hired a geophysicist to assist in the examination of natural gas claims in related securities offerings.

High profile, complex investigations are currently ongoing alleging inappropriate financial perks for Chesapeake Energy’s CEO and another separate investigation alleging a cover-up of widespread bribery involving Wal-Mart’s operations in Mexico. Further, defense attorneys have also shared opinions that the office is less accommodative and less flexible than in previous times.

The SEC Forth Worth Office includes Arkansas, Texas, Kansas and Oklahoma as part of its jurisdiction as well as oversight of prominent public companies such as AT&T, Dell and Exxon-Mobile. With the office now towing the line of Washington’s “cop-on-the-beat” attitude, industry participants in the region should be well prepared when working together with the SEC Fort Worth Office.

Source

Conflicts of Interest and Risk Governance

At the recent National Society of Compliance Professionals conference October 22, 2012, Carlo di Florio, the SEC's Director of the Office of Compliance Inspections (“OCIE”) and Examinations, instructed broker-dealers and advisers to increase their efforts to prevent conflicts of interest. The National Exam Program (“NEP”) has adopted a risk-based strategy to determine who to examine and they have identified conflicts of interest as a key area for their risk analysis.

Mr. di Florio defined a conflict of interest to include favoring the firm over a client, one client over another client, or employees over their firm. He also stressed the importance of practices that "may be technically within the letter of the law, but are not in keeping with the spirit of the law." Mr. di Florio discussed the high-priority conflicts that the OCIE will scrutinize: sales practices, outside business activities, mutual fund wrap programs, side-by-side portfolio management, affiliations between advisers and broker-dealers, and valuation practices.

Mr. di Florio stated that firms should create a "cross-functional leadership team to identify and understand all conflicts within their business model." In addition, firms should create and implement specific conflicts of interest policies and procedures which include prohibited practices, training, monitoring, and discipline. Finally, Mr. di Florio assigned responsibility to the firm's business line as "the first line of defense" with additional monitoring and testing responsibilities designated to compliance and internal audit.

Firms need to take this seriously and create and implement a specific conflicts of interest policy and procedure to include the elements outlined by Mr. di Florio in his speech. Click here to download the full speech.

Red Oak Compliance Solutions is able to help you design and implement a robust conflicts of interest policy.

Coordinated Examinations Identify Top Broker-Dealer Compliance Violations

Based upon coordinated examinations of broker-dealers throughout the United States, the North American Securities Administrators Association (NASAA) has identified the top compliance violations and offered a series of recommended best practices for broker-dealers to consider in improving their compliance practices and procedures.

The examination results were released at NASAA’s annual conference which was held in San Diego along with best practices to help firms manage their compliance functions efficiently.

These best practices were developed after a series of examinations of broker-dealers, conducted by state securities examiners, revealed a significant number of problem areas. The 2012 examinations were conducted under the guidance of NASAA’s Broker-Dealer Operations Project Group.

A total of 236 examinations conducted between January 1 and June 30, 2012, found 453 types of violations in five compliance areas. The highest percentage of violations were in the books and records area with supervision, sales practices, registration & licensing, and operations rounding out the list.

The top five types of violations found involved: failure to follow written supervisory policies and procedures, suitability, correspondence/e-mail, maintenance of customer account information, and internal audits.

Best Practices
Based upon the examination results, NASAA recommended 10 best practices to help broker-dealers develop compliance practices and procedures in the following areas:

• Suitability. Broker-Dealers must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111 require registered persons to “know your customer” and receive training sufficient to demonstrate knowledge of the products before a sale occurs.
• Develop, Update, and Enforce Written Supervisory Procedures. BDs also should ensure that staffing and expertise are commensurate with the size of the BD, type(s) of businesses engaged in by the firm, and the individual responsible for specific procedures.
• Exception Reports. Introducing dealers should obtain the necessary exception reports from the clearing dealer to ensure proper compliance. Upon the generation of exception reports, all BDs must document and resolve “red flags” in a timely manner. BDs that rely solely upon conversations with salespersons to address exception reports without contacting investors may subject themselves and supervisory staff to regulatory and/or legal action.
• Branch Office Audits. Develop a branch audit program that includes a meaningful audit document/plan, unannounced visits, a means to convey audit results, and a follow-up plan requiring that the branch take corrective action.
• Selling Away. BDs must ensure that adequate procedures are in place to address private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis. The BD’s procedures must have a mechanism to conduct a meaningful review of the request and in the instance where the request is denied, a process to determine the salesperson is/has not engaged in the activity./li>
• Outside Business Activity. Written outside business activity requests from salespersons must be received, reviewed and approved by the firm prior to the activity. The BD and salesperson are required to report the outside business activity on the salesperson’s Form U4. The firm should have a supervisory procedure in place to address its approval/denial process and a requirement that the salesperson promptly report any changes to the approved outside activity.
• Advertisements. Advertisements and sales literature MUST be fair and balanced and must be reviewed and approved by the BD and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the BD. In instances where the salespersons routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.
• Correspondence. Correspondence, both electronic and hard copy, must be effectively monitored by the BD. This includes a system of capturing and maintaining electronic, business-related correspondence sent by salespersons from websites and social network service providers outside the firm. For additional guidance, refer to FINRA NTM 11-39.
• Customer Complaints. Upon receipt of a complaint, firms must acknowledge the receipt, conduct and document a thorough review of the customer’s allegations, and, if necessary, update the salesperson’s Form U4. In situations where the firm discovers wrongdoing, the firm should remediate customer harm. Timely reporting and remediating customer harm are some of the factors under NASAA guidelines to determine if the firm is entitled to credit for cooperation.
• Working with Seniors. Baby Boomers are moving into retirement, and as individuals age, cognitive abilities begin to diminish. BDs and financial professionals should develop procedures/best practices for handling accounts of “senior” investors. A number of recommendations relating to these best practices are contained in joint reports issued in 2008 and 2010 by NASAA, SEC, and FINRA.

For a copy of the complete NAASA report please click here.

Revised Performance Fee Rule now effective, are you in compliance?

Revised provisions under the Advisers Act, Rule 205-3, are effective as of 5/22/2012. As an Investment Adviser, you may charge performance based fees providing natural person(s) meet minimum assets under management or net worth tests. If you currently charge performance based fees we recommend you review the rule, changes to the accredited investor definition, and updated provisions to ensure your firm’s policies and procedures are in compliance.

Red Oak is providing this guide to highlight the new requirements and the grandfather provisions.

Background

The Dodd-Frank Act amended section 205(e) of the Advisers Act , requiring the SEC to revise the definition of qualified or accredited investor, taking into account inflation as well as provide an exclusion of the client’s primary residence in the calculation of net worth. In response, the SEC has amended section 205(e) of the Advisers Act and Rule 205-3 with the following:

• The SEC adjusted for inflation the AUM dollar amount thresholds as well as the net worth standards under the definition of “accredited investor” or “qualified client”. Paragraph (d) has been adjusted to require a minimum of $1 million of assets under management with the adviser OR a net worth of a minimum of $2 million. Client’s primary residence and specified residence secured debts are EXCLUDED from the calculation. Debt secured by the primary residence, in excess of the fair market value OR obtained within 60 days of entering into the advisory contract, will count as a liability against the clients net worth calculation.
• The SEC is now required to review the thresholds every 5 years and issue an order adjusting as necessary.
• The SEC now identifies the price index future increases will be based upon, the Personal Consumption Expenditures Chain-Type Price Index (“PEC Index”) published by the Department of Commerce.

Grandfather Provisions

The SEC included grandfather provisions in the revisions, Advisers may rely on the grandfather provisions and continue to charge performance fees if:

• Client(s) were considered “qualified clients” prior to rule changes
• Newly registered advisers, who previously charged performance fees, may continue to charge those clients

These grandfather provisions only apply to existing clients in which a contractual advisory arrangement was entered into prior to the rule’s effective date.

Recommendation

We recommend Advisers review and revise as necessary, policies and procedures, disclosure documents, and client contracts to ensure definitions are consistent with new rules. If you charge performance fees, now is an opportune time for training and education of staff regarding the performance fee rule. Additionally, if you intend to rely on the grandfather provisions, we recommend you compile a record of clients subject to the exemption.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

New Form PF Filings Update

An investment adviser meeting all of the following will be required to file Form PF:

• the adviser is an SEC-registered investment adviser or an SEC-registered investment adviser that is also registered with the Commodity Futures Trading Commission as a commodity pool operator or commodity trading adviser;
• the adviser manages one or more private funds;
• the adviser and its related persons had at least $150 million in private fund assets under management as of the last day of its most recently completed fiscal year.

Initial filing dates, frequency and timing of filings and which sections of Form PF are required to be completed will depend upon the type of private fund adviser, regulatory assets under management and the adviser’s fiscal year end.

• Liquidity fund advisers with over $5 billion in assets under management (and a December 31 fiscal year end) must file by July 15, 2012 and within 15 days of the end of each fiscal quarter thereafter.
• Hedge fund advisers with over $5 billion in hedge fund assets under management must file by August 29, 2012 and within 60 days of the end of each fiscal quarter thereafter
• Private fund advisers with over $5 billion in hedge fund assets under management must file within 120 days of the end of the fiscal year.

Initial filing dates for all other private fund advisers with a December 31 fiscal year end will be no later than April 30, 2013.

Form PF information will be submitted and viewed via a new system called the Private Fund Reporting Depository (PFRD). The PFRD system is scheduled to be live June 4, 2012 and user testing is already in progress. SEC-registered advisers are scheduled to receive entitlement to the PFRD system on June 1, 2012. The information on Form PF will not be available to the public. It will be used to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system.

With these deadlines looming on the horizon, now is a good time to examine the data that this form will require and make certain you have everything in place to accomplish this easily. You may need to amend your subscription agreements in order to obtain all the required information.

Section 1a - Information about you and your related persons

All private fund advisers required to file Form PF must complete Section 1a. Section 1a asks general identifying information about you and the types of private funds you advise.

Section 1b - Information about the private funds you advise

All private fund advisers required to file Form PF must complete Section 1b. Section 1b asks for certain information regarding the private funds that you advise. You will need to fill out a separate Section 1b for each private fund you advise.

Section 2a - Aggregated information about hedge funds that you advise

You are required to complete Section 2a if you and your related persons, collectively, had at least $1.5 billion in hedge fund assets under management as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter. You are not required to include the regulatory assets under management of any related person that is separately operated.

Section 2b - Information about qualifying hedge funds that you advise

If you are required to complete Section 2a, you must complete a separate Section 2b with respect to each qualifying hedge fund that you advise.

However, if you are reporting separately on the funds of a parallel fund structure that, in the aggregate, comprises a qualifying hedge fund, you must complete a separate Section 2b for each parallel fund that is part of that parallel fund structure (even if that parallel fund is not itself a qualifying hedge fund); and if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure in accordance with Instruction 5, you should only complete a separate Section 2b with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 3 – Information about liquidity funds that you advise

You are required to complete Section 3 if (i) you advise one or more liquidity funds and (ii) as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter, you and your related persons, collectively, had at least $1 billion in combined money market and liquidity fund assets under management. You are not required to include the regulatory assets under management of any related person that is separately operated.

You must complete a separate Section 3 with respect to each liquidity fund that you advise.

However, if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure, you should only complete a separate Section 3 with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 4 - Information about private equity funds that you advise

You are required to complete Section 4 if you and your related persons, collectively, had at least $2 billion in private equity fund assets under management as of the last day of your most recently completed fiscal year. You are not required to include the regulatory assets under management of any related person that is separately operated. You must complete a separate Section 4 with respect to each private equity fund that you advise.

However, if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure in accordance with Instruction 5, you should only complete a separate Section 4 with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 5 - Request for temporary hardship exemption

You must complete Section 5 if you are requesting a temporary hardship exemption pursuant to SEC rule 204(b)-1(f).

Good Faith Estimates

You may respond using “good faith estimates based on data currently available” to the manager with respect to interests purchased prior to March 31, 2012 that have not been transferred on or after that date. The SEC is allowing this they realized that “advisers managing funds with securities outstanding prior to the adoption of Form PF would have to take additional steps in order to obtain this information because the investor diligence process will already have been completed.” The SEC expects that managers will have had the time to take those additional steps to acquire data with respect to the beneficial ownership of interests purchased (or transferred) on or after March 31, 2012.

For a copy of the Form PF please click here.

For more information on the PFRD system please click here.

Mark your Calendar! Upcoming Compliance Dates.

With new regulations and registration requirements, the middle part of 2012 looks to be a busy one with compliance dates around every corner. Planning ahead to meet compliance obligations is crucial; to assist you we’ve compiled this reminder of key dates.

April 2012:
4/30/12: Annual delivery of Form ADV Part 2 Brochure or delivery of a Summary of Material changes with an offer for the full brochure.

May 2012:
5/22/2012: Performance Fees- Provisions under the revised Rule 205-3 under the Advisers Act go into effect.

June 2012:
6/28/2012: Switch deadline from SEC to State registration for RIAs. RIA’s no longer able to register with the SEC must complete their appropriate state registration and withdraw from SEC registration by this date.

July 2012:
7/1/2012: ERISA 408(b)(2) Fee Disclosure Effective Date.

August 2012:
8/30/2012: ERISA 404(a) and 408(b)(2): Fee Disclosures- For calendar year plans, initial annual disclosure deadline (60 days after effective date of regulation).

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

Quarterly Round-Up- Q1 2012

2012 is moving quickly and the first quarter has drawn to a close. Here’s a round-up of key regulatory news and compliance dates which occurred in Q1 2012, as well as a reminder of compliance considerations we recommend you focus on in the first quarter of the year as you plan ahead to the remainder of 2012.

Q1 2012 Compliance Dates:

We’ve included the following dates solely as a reminder to verify your firm has met the deadlines. We also recommend this is a logical time to review your privacy policies, as well as deliver the privacy policy and Form ADV Part 2 Brochure to your existing clients.

3/1/2012: Massachusetts Privacy Rules Effective.

3/31/2012: Annual ADV Filing Deadline- ALL SEC registered Advisers as of 1/1/2012 required to file an update, regardless of whether they are withdrawing from SEC Registration.

Q1 Regulatory News:

1/4/2012: SEC Office of Compliance Investigations and Examinations (OCIE) issues a Regulatory Alert discussing the use of social media.
http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf

1/19/2012: SEC issues updated FAQs regarding the definition of “Family Office” addressing questions received due to the adoption of Rule 202(a)(11)(G)-1 in 2011.
http://www.sec.gov/divisions/investment/guidance/familyofficefaq.htm

2/2/12: ERISA Section 408(b)(2) Rule Finalized and published.
http://www.dol.gov/ebsa/pdf/2012-02262-PI1.pdf

2/15/12: SEC adopts final rule amendments to 205-3 under the Advisers Act regarding the charging of performance fees.
http://www.sec.gov/news/press/2012/2012-29.htm

2/27/12: SEC Office of Compliance Investigations and Examinations (OCIE) issues Risk Alert- Unauthorized Trading
http://www.sec.gov/news/press/2012/2012-33.htm

During the first quarter, the Red Oak blog covered topics such as the new ERISA rule, getting your compliance house in order, Massachusetts privacy laws, and the revision to the accredited investor definition. If this is your first visit to the blog, Welcome, and we recommend you review the links contained within this post, spend some time reviewing previous posts, and explore the site.

New ERISA Section 408(b)(2) Rule Finalized

The final rule is designed to help clients understand the fees that are being charged so they determine whether they are reasonable. It’s your job to meet these new disclosure requirements while helping your clients understand why these fees are reasonable given all the services performed.

The final rule, which was published on February 2nd, includes a new effective date of July 1, 2012, to ensure that covered service providers and other parties have sufficient time to prepare for compliance with the rule.

This rule applies to those covered service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or record-keeping services or otherwise receive indirect compensation for providing certain services to a plan.

Although affiliates or subcontractors of the covered service providers may provide some or all of the services under the contract or arrangement or may receive some or all of the compensation for the services, the affiliates or subcontractors do not, themselves, become "covered service providers" solely as a result of the services they perform. In an arrangement where multiple services are provided to a plan, only the party entering into the agreement with the Plan is responsible for making the 408(b)(2) disclosures.

The DOL did not provide a specific format for the required disclosures, but stated that they must be written. The required disclosures include:

• Description of the services to be provided
• The compensation paid
• The method of payment

Disclosure Requirements

Services - A description of the services to be provided pursuant to the contract or agreement.

Status - If applicable, a statement that the provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services as an Investment Adviser registered under the Advisers Act or any State law acting as a fiduciary of the plan.

Compensation - All compensation that will be received by the covered service provider, its affiliates, or subcontractors including:

• Direct compensation - A description of all direct compensation received by the provider, affiliate, or sub-contractor in connection with the services, usually payment received directly from the Plan assets. Direct compensation, however, does not include payments from the Plan Sponsor that are not from plan assets.
  
  Direct compensation" includes (i) compensation initially paid by the Plan Sponsor, but which is then subsequently reimbursed from the plan, and (ii) compensation paid directly from participants' and beneficiaries' accounts.


• Indirect compensation - A description of all indirect compensation received by the provider, an affiliate, or a subcontractor in connection with the services. The disclosure for indirect compensation must include (i) the services for which the indirect compensation will be paid; (ii) the payers of the indirect compensation; and (iii) a description of the agreement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, regarding such indirect compensation.


• Related Party - Any compensation that will be paid among the covered service provider, an affiliate, or a subcontractor, that it is set on a transaction basis (e.g., commissions, soft dollars, finder’s fees or other similar incentive compensation based on business placed or retained) or is charged directly against the covered plan's investment and is reflected in the net value of the investment. The disclosure must include (i) identification of the services for which such compensation will be paid; and (ii) identification of the payers and recipients of such compensation (including the status of a payer or recipient as an affiliate or a subcontractor).

An estimate of the cost of record keeping services (if record keeping is provided).

An estimate of investment fees and expenses (if designated investments are provided). Compensation for Termination – A description of any compensation that the provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the termination of the contract or agreement, and how any prepaid compensation will be calculated and refunded upon termination.

Manner of Receipt - Describe how compensation will be received (i.e., billed to plan, deducted from plan accounts, etc.) and, if applicable, must disclose the manner in which direct compensation is determined (e.g., as an amount, formula, per capita charge or percentage of plan assets.

In the future, covered service providers may be required to furnish Plan Fiduciaries with a summary or guide, separate from the initial disclosures, identifying certain information such as the document, section and page number where descriptions of services and compensation may be found. The Final Regulations contain an appendix as a sample guide. Presently, the use of the sample guide is strictly voluntary. However, the DOL has indicated that it will issue proposed regulations on this issue in the near future, and the sample guide, or something similar, may be required in the future.

The Final Regulations also requires that upon receipt of a written request from a Plan Fiduciary, the covered service provider must provide the information reasonably in advance of the deadline for reporting and disclosure requirements, unless the disclosure is impossible due to extraordinary circumstances beyond the CSP's control (in which case the information must be disclosed as soon as reasonably possible).

A covered service provider must disclose any changes to this disclosure information, corrections to the information provided or omitted information as soon as possible, but no later than 60 days after discovering the change, error or omission.

Is your Compliance House in order?

As the first quarter of 2012 winds down, is your firms’ compliance house in order? Do you feel prepared to meet your compliance obligations or do you find yourself putting compliance planning on a back burner, intending to address items as needed with no clear plan in place? Running a financial services practice involves dedication, focus, and a vast time commitment, often times certain areas may not receive as much attention as others due to where resources are directed.

Creating and maintaining a compliance program is a key component of running your business and attention to this critical business area is necessary to mitigate risk, both for your firm and your clients. As Q1 closes and you head into April here are suggested areas to focus thought and create plans, as well as some key dates.

Compliance Calendar - Has your firm analyzed key compliance dates for 2012, such as regulatory filing dates or required annual mailings, internal risk management tasks, and annual review testing dates? Are those dates mapped out on a Compliance Calendar to guide your risk management process throughout the year?

Annual Review - Have you conducted an annual risk assessment of your firm, reviewed any previous year’s reports for risk items, findings, and a status check on how those items may be addressed? Have you taken action on any previous findings, both from an internal annual review and any regulatory reviews? Is there a testing plan created for conducting an annual review?

Form ADV Filing - Due to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Form ADV filing requirements have changed for 2012. Registered advisers are required to file an updated Form ADV with the SEC on an annual basis, within 90 days of fiscal year end. In 2012, ALL advisers registered with the SEC as of 1-1-12, must file an amended Form ADV with the SEC by 3-30-12. Advisers no longer eligible for SEC registration must still file the amended Form ADV, if they were registered with the SEC as of 1-1-12 and must start the state registration process. There is a 90 day window for filing with the state regulators and withdrawing from SEC registration, with a compliance date of 6-28-12.

Massachusetts Privacy Rules - As explored in a previous blog post, Massachusetts enacted new consumer privacy information, with a compliance date of 3-1-12. Has your firm examined its client list to identify any residents of Massachusetts and ensured your privacy policy and contracts with third-party service providers are in compliance?

Annual Mailings - Clients should receive, on an annual basis, your privacy policy and your Form ADV Part 2A Brochure as well as any supplements. Prior to the revised Form ADV Part 2 rule, advisers were only required to offer the Form ADV Part 2. Advisers are now required to deliver the Form ADV Part 2A Brochure, including or accompanied by a summary of material changes or a summary of material changes with an offer and instruction on how to obtain the Form ADV Part 2A Brochure.

Additionally, we recommend you annually review your compliance policies and procedures, your books and records maintenance system, and new regulations, keeping in mind changes to your organizational structure, business lines, and new products or services you’re engaged in or plan to add to your business.

The areas highlighted above are certainly not an all-encompassing example of a comprehensive compliance program, the list is intended to serve as reminders and triggers for thought as you look back on Q1 and forward to the remainder of a successful 2012.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

Massachusetts Personal Information Security Law Grandfather Expires March 1, 2012

Massachusetts enacted 201 CMR 17.00: Standards for the Protection of Personal Information of Residents of the Commonwealth, new regulation regarding the safeguarding of Massachusetts residents personal information, in 2009 with compliance date of March 1, 2012. The regulation set standards to be met by persons, including Investment Advisers, with clients residing in Massachusetts to have privacy protection clauses or language contained within the contracts entered into with third party service providers. The compliance requirements of the law and regulations contained a grandfathering provision for any contract entered into prior to March 1, 2010. Under the grandfather provision, Investment Advisers with service provider contracts entered into before March 1, 2010 were deemed to be in compliance even if the contract made no reference to data protection. We’re highlighting the regulation today to remind you the grandfather provision EXPIRES on March 1, 2012. As of this date, all investment advisers with clients residing in the state of Massachusetts must be in compliance with this law, regardless of when the contract was entered into.

What does this mean for you?

If you have clients residing in Massachusetts, you have an obligation to ensure third party service providers you do business with, that may have access to client information, implements and maintain appropriate security measures for the protection of client personal information. The regulation established minimum standards to be met in connection with the safeguarding of personal information, covering both paper and electronic records. Section 17.03(2)(f): “Oversee service providers, by:

1. Taking reasonable steps to select and retain third—party service providers that are capable of maintaining appropriate security measures to protect such personal information consistent with these regulations and any applicable federal regulations; and

2. Requiring such third-party service providers by contract to implement and maintain such appropriate security measures for personal information…”

The contract between the Investment Adviser and service provider must contain language requiring the service provider to have protection measures in place.

We recommend you:

• Review your client list, identify whether you have clients residing in Massachusetts


• Review your contracts with third party providers that may provide services to Massachusetts clients


• If the contracts do not contain the required terms, re-negotiate and execute contracts to be compliant with the regulation Review your Privacy Policy and Procedures, verify against the standards required and ensure the firm is in compliance with the standards and includes all the provisions of Section 17.03: Duty to Protect and Standards for Protecting Personal Information.

If you have clients residing in Massachusetts, it’s critical you address this regulation in a timely manner, as there are penalties for non-compliance.

Red Oak Compliance Solutions is available to help. We can review your privacy policies, assist in the creation or updating of your privacy policies, as well as provide guidance on all of your compliance needs. For more information on the Massachusetts privacy regulations or to request information on how we can help, please contact us.

SEC Modifies Standard for Accredited Investors

The U.S. Securities and Exchange Commission ("SEC") has modified the rules used to determine whether an individual is qualified as an accredited investor. To qualify as an "accredited investor" an investor must have a net worth, alone or with a spouse, greater than or equal to $1 million, excluding the value of the home. The rule also excludes from the $1 million net worth calculation, any liabilities secured by the individual's primary residence. If the secured liabilities exceed the fair market value of the primary residence, then the indebtedness that is greater than the value of the residence is applied against the individual's net worth. In addition, secured loans must have originated more than 60 days prior to the purchase of the unregistered security to prevent individuals from taking out a second line of equity on their home in order to invest in unregistered securities. This new rule will go into effect 60 days after it has been published in the Federal Register.