SEC Chairman Mary Jo White Wants to Focus Additional Resources on Investment Advisers

In testimony before a Congressional Subcommittee, SEC Chairman Mary Jo White described how the proposed 2014 SEC budget would add significant additional resources to supervise investment advisers. She indicated that the new budget would include funds to hire 250 additional examiners "to increase the proportion of advisers examined each year, the rate of first-time examinations, and the examination coverage of investment advisers and newly registered private fund advisers." Another 60 jobs would be added to "improve oversight and examination functions related to broker-dealers, clearing agencies, transfer agents, self-regulatory organizations (SROs), and municipal advisors." She also stated that another 131 hires would be added to the Enforcement staff. She believes more funds were necessary for "expanding oversight of investment advisers and improving their regulation and compliance -- a point at which investors are most at risk of being defrauded and harmed." To read the full testimony about budget priorities, please click here.

SEC Official Raises Broker-Dealer Registration Question for Private Equity Firms

The Chief Counsel of the SEC’s Division of Trading and Markets, David Blass, raised concerns during his speech given April 5th, that private equity fund sponsors may be ignoring broker-dealer registration and licensing requirements when selling fund shares or transacting with portfolio companies. Mr. Blass explained that broker-dealer registration and representative licensing requirements are triggered when firm personnel focus on selling fund shares and receive transaction-based compensation. He described activities that may require broker-dealer registration: marketing fund shares, soliciting or negotiating transactions, and handling investor funds or securities. He explained that the issuer exemption (Rule 3a4-1) is very narrow and would not likely be available to most private equity personnel involved with fundraising. Mr. Blass further stated that broker-dealer registration may be required when fund sponsors receive investment banking or success fees for transactions involving portfolio companies. Mr. Blass rejected any argument that private equity firms should be exempt from broker-dealer registration and stated: “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He also discussed the consequences of failing to register including possible rescission of all securities transactions involving unregistered personnel.

To read the full text of his speech please click here.

Law to Speed Advisor Registrations

On Tuesday, a state senate committee unanimously approved a bill that would make Florida a "notice-filing" state, which means that representatives of out-of-state SEC registered financial firms seeking to do business in Florida would be automatically approved upon filing their application, and at that point could immediately begin offering advice to clients in the state. Final passage would bring Florida in line with almost every other state's registration process. Only five states aside from Florida -- Connecticut, Maine, Nevada, Texas and Vermont -- haven't adopted a notice-filing system. Please click here to read the full story.

SEC Concerned About Small Adviser’s Compliance Programs

Elisse Walter, in a recent speech to NASAA voiced her concerns about the often ineffective compliance programs at smaller advisory firms. She said, "We recognize that small firms present special challenges. For example, many of them don't have comprehensive compliance programs in place. Many more have off-the-shelf programs that aren't tailored to their actual businesses." She further said that CCOs that have multiple job responsibilities "have too many priorities on their plates to devote adequate time to compliance efforts." Additionally, they have "conflicting responsibilities — concerns about cost, privacy, investment strategies and so on." She emphasized the benefits of continued cooperation and sharing between the SEC and the state regulator and stated that securities regulators need more resources to examine more advisers. One thing is clear from this speech, the SEC has concerns about small advisers and wants to help the state regulators get out and audit them effectively. To read the full speech, please click here.

Red Oak Compliance Solutions is available to help with any questions you may have about this release or any others. 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.

Private Fund Enforcement

A private fund sponsor has agreed to settle an enforcement action alleging that its violations of the custody and compliance rules allowed a rogue employee to misappropriate client funds. According to the SEC, the adviser sponsored private funds investing in real estate that produced annual dividends which were to be paid to investors. One of the principals delegated to an "administrative and clerical" employee the task of preparing the dividend checks. The SEC alleges that the clerical employee wrote checks to himself, thereby misappropriating client funds. The SEC charges that the firm had custody of the funds' assets but violated the compliance rule (206(4)-2) by failing to send quarterly account statements or an annual fund audit to clients. The SEC also charges the firm for failing to conduct an annual review of the firm's compliance policies and procedures as required by the compliance rule (206(4)-7). To read the full accounting, please click here.

SEC Adopts Rules to Help Protect Investors from Identity Theft

The Securities and Exchange Commission voted unanimously to adopt rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the agency to adopt programs to detect red flags and prevent identity theft.

The SEC adopted the rules jointly with the Commodity Futures Trading Commission (CFTC) in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

“Under these rules, certain businesses regulated by the SEC and CFTC would be required to adopt and implement programs to detect and respond to indicators of possible identity theft,” said SEC Chairman Mary Jo White. “These rules are a common-sense response to the growing threat of identity theft to all Americans who invest, save, or borrow money.”

The final rules will become effective 30 days after publication in the Federal Register, and the compliance date will be six months after the effective date.

To read the full release please click here.

FINRA Sanctions Shows Number of Fines Jump by 15%

Sutherland Asbill & Brennan recently released an analysis of the 2012 FINRA disciplinary actions. The analysis shows an increase in enforcement actions and fines. Total actions increased for the fourth year in a row. FINRA filed 1541 actions last year as compared to 1488 in 2011. This is the fourth consecutive year that enforcement actions have increased. Total fines increased by a much greater margin from $68 million in 2011 to $78.2 Million in 2012.

Sutherland identified the top enforcement issues (based upon total fines) as suitability, due diligence especially of complex products and alternative investments, research reports, advertising, and exchange-traded funds, especially inverse and leveraged ETFs. Each of these categories had fines ranging from $7.6 million to $19.4 million.

Sutherland also identified the following FINRA enforcement trends and areas of focus: supersized fines of more than $1 Million, complex product cases, electronic communication, and Auction Rate Securities. To read the full report, click here.