SEC will Vote on Final Rules for Title III Crowdfunding on Friday

Just in time for Halloween, will it be a trick or a treat? It’s been over three years in the making but finally on Friday The Securities and Exchange Commission (“SEC”) will vote on the Final Rules for Title III of the JOBS Act. The proposed rules have been viewed as problematic by many in the crowdfunding industry, so it will be interesting to see if the SEC has addressed their most pressing concerns. So trick or treat, you decide. Either way, the wait will be over and the industry can press forward to bring Title III to fruition.

The meeting is being held at the SEC and is open to the public. It will also be streamed live the SEC web site. Once the rulings are published in the federal register, they should go live 60 days after the vote. Click here for more information.

Have questions about crowdfunding, let Red Oak help you navigate the rules and regulations and keep you compliant.

The Digital Age - Cyber Security

Fourteen years ago, when thousands of financial and client records were destroyed in the 9/11 attacks on The World Trade Center, the big worry for the financial services industry was how to safely maintain and back up all of the paper copies of their books and records required to be maintained by the rules and regulations under which they operate. In 2015 maintaining required books and records and backups in hard copy format is becoming almost unheard of.

One would think that the digital age would make record keeping easier, cheaper, efficient and safer to maintain all of the records required to be maintained by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and all of the state regulatory bodies’ rules and regulations. Typically this is the case. However, one big issues most small investment advisers fail to take into consideration is the safekeeping of all of the electronic records, both those maintained locally and backed up offsite; records that contain confidential, non-public information regarding their clients and the Adviser itself. Theft of these records could cause financial ruin for both the Adviser and its clients.

In a recent blog post we discussed an SEC action against a registered investment adviser for failing to have reasonable policies and procedures in place to protect sensitive client information. Due to the lack of procedures there was an intrusion into the adviser’s network, which left all of its clients’ personal, non-public information vulnerable to theft. Over the past few years these types of intrusions have become quite prevalent. So much so that President Obama has designated October as National Cyber Security Awareness Month. You can find out more about National Cyber Security Month on the U.S. Department of Homeland Security’s website.

One final note; having a cybersecurity policy is only a good start to protecting your and your clients’ personal and confidential information. Designing a cybersecurity policy that provides safeguards that your adviser or broker-dealer will realistically be able to implement AND enforce is the only way to truly keep your electronic data safe.

If you have any questions or need help with your cybersecurity policy, please contact us. Red Oak stands ready to help you.

SEC Releases Private Funds Statistics Report

On October 16, 2015, the SEC staff published its first Private Funds Statistics Report, reflecting anonymized and aggregated data reported on Form PF. It covers the data collected from the first calendar quarter of 2013 through the fourth calendar quarter of 2014. The report includes statistics about the distribution of borrowings, an analysis of hedge fund gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

This report provides an interesting look into the private fund industry, which before Form PF was largely the subject of guesswork and conjecture. Click here to read this report.

Need help with your Form PF, let Red Oak help you through this labor intensive process.

Do You Have the Proper Disclosures in your Documents?

Full transparency of fees and potential conflicts of interest are critical in the private equity industry. The Securities and Exchange Commission (“SEC”) recently announced that as a result of their investigation of three private equity fund advisers with The Blackstone Group, they found that the advisors failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering. The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds.

The Blackstone Group agreed to pay nearly $39 million to settle charges that it breached its fiduciary duty to the funds, failed to properly disclose information to the funds’ investors, and failed to adopt and implement reasonably designed policies and procedures. Nearly $29 million of the settlement will be distributed to affected fund investors.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, has maintained, “We will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here.”

“As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Blackstone further breached its fiduciary duty by choosing to negotiate a legal fee arrangement with greater benefits for itself than the funds it advised, without properly disclosing the arrangement.”

The Division of Enforcement’s Asset Management Unit is continuing its review of private equity fee and expense issues and encourages private equity fund advisers that have identified such issues to self-report them to the staff. Self-reporting is a very important factor that the Commission considers when evaluating cooperation and determining whether and to what extent to extend credit in settlements.

Have questions about what should be disclosed, let Red Oak help you navigate the murky waters.

What Does the SEC think the CCO Job Requirements Should Be?

One of the questions we are asked frequently is “Who can be our CCO?” So often, with so many people wearing so many hats, the desire to hand the compliance duties off to someone who is not very seasoned is very high.

So let’s look at what the SEC has said publically to answer this question. At a recent industry conference, the SEC Chief of Staff Andrew Donohue said that if he were a Chief Compliance Officer, he would look at his role in terms of the following nine categories:

1. The CCO must have "first-hand knowledge" of the applicable laws and regulations including relevant exemptive orders and how these apply to the firm;
2. The CCO must have a "deep understanding" of the firm and its operations and structure and how all the areas relate to each other;
3. The CCO must identify conflicts of interest and how they are reported and resolved and who performs the various functions that are involved;
4. The CCO must understand the firm's clients, products and services including their profitability;
5. The CCO must understand the firm’s compliance and technology platforms;
6. The CCO must have a "detailed knowledge" of the firm's policies and procedures, how they are applied and monitored and what goal they are trying to achieve;
7. The CCO must gain an understanding of the markets in which the firm operates and their business practices;
8. The CCO must create an environment that puts the customer's interest ahead of the firm's interest such that the firm does what it should, not what it can, and senior management must give the CCO the power to do this;
9. Finally, CCOs have to understand what they do not know and how to fill those subject matter expert and competency gaps.

Please click here for the full article.

This message clearly indicates that the SEC expects the CCO to be qualified to perform the duties of the position, just like the rules require. This means there is a real risk to the firm in using someone who is inexperienced to be the CCO. Does your CCO need some additional training or support? Do you feel the need to explore what you don’t know yet? Let Red Oak help you fulfill this regulatory responsibility and provide seasoned and experienced compliance professionals to augment your compliance program.

Top State Investment Adviser Exam Deficiencies

Every two years state securities examiners provide sample data from their investment adviser examinations to NASAA. Using that data NASAA recently released a report on common Investment Adviser (“IA”) deficiencies.

The data shows a 30% decrease in deficiencies from the 2013 report but the following are still the top 5 common areas of deficiency:

• Top books and records deficiencies: not maintaining client suitability documentation and order memorandum.
• Top contracts deficiencies: fees not explained and not having all contracts in writing.
• Top registration deficiencies: Form ADV inconsistencies between Part 1 and Part 2 and the timely filing of amendments.
• Top fee deficiencies: fee charged does not match contract or ADV and unreasonable or excessive charges.
• Top custody deficiencies: improper client invoice for direct fee deduction and dual invoicing of client and custodian for direct fee deduction.

Some additional areas with deficiency were advertising, privacy, fees, and compliance/supervision. The following is a list of “best practices” recommended by NASAA:

• Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
• Prepare and maintain client profiles or other client suitability info.
• Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
• Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. File amendments in a timely manner.
• Prepare and distribute a privacy policy initially and annually.
• Calculate and document fees correctly in accordance with contracts and ADV.
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
• Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
• Review all advertisements, including website and performance advertising, for accuracy.
• Provide disclosure brochure to clients initially, then provide updates and offers to deliver afterwards as required.
• Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
• Review solicitor agreements, disclosures, and delivery procedures.

To see the full report click here.

If you find yourself overwhelmed or out of time give us a call. We are here to help keep you compliant while allowing you to focus on growing your business.