The SEC has Published FAQs Regarding the Switch of Investment Advisers From SEC to State

The U.S. Securities and Exchange Commission (“SEC”) has posted a webpage with frequently asked questions regarding the switch of investment advisers with less than $100 million of assets under management from the SEC to state securities regulator(s). Click here to go to the SEC “FAQ” webpage.

There are only a five questions posted so far, however some of it is valuable new information. One new tidbit of information is that only RIAs located in New York and Wyoming will be required to remain registered with the SEC and will not be affected by the switch. In earlier communications it was hinted that Minnesota would be included on this list, but this is no longer the case. In addition, at the bottom of this webpage is a link to the new amended Form ADV Part 1 which is being revised to include the new investment adviser registration requirements. The new questions on the Part I will have to be answered by all investment advisors, not just the ones involved in the switch. The SEC expects this new form to be available electronically through IARD by January 1, 2012. Click here to view a copy of the amended Form ADV Part 1, here to view the instructions for filling out the amended Part 1 Appendix A and here for Appendix B.

Hopefully more questions and answers will be added in the future.

The Department of Labor - Proposed Fiduciary Definition

The Department of Labor (DOL) has proposed changes to the fiduciary definition under the Employee Retirement Income Security Act. This change has far-reaching implications for your retirement plan and individual retirement account (IRA) businesses and represents a significant adverse effect on individual investors and retirement savings.

Voting Proxies

An actively involved and voting shareholder constituency is the cornerstone to effective corporate governance. The powers vested in the shareholders to select board members by vote helps to ensure that the board members run the corporation for the benefit of the shareholders and those conflicts of interest inherent in management of the corporation by the officers and board members are mitigated to the fullest possible extent.

With the advent of Modern Portfolio Theory and Active Management, the majority of investors retain professional managers and advisers to select and implement investment strategies to help maximize return and minimize risk; nevertheless, investors are not always aware that they retain their proxy voting responsibilities or they assume that their professional managers will vote proxies on their behalf. While investors may provide their managers and advisers the discretion to vote proxies on their behalf, the process in and of itself can create conflicts of interest as the interests of the manager and/or advisor may not always be aligned with the interests of the shareholders.

Consumer Privacy

Financial markets and the financial services industry in general operate on some of the most sophisticated technology currently available. Technology has allowed greater transparency, lower costs, increased client access and greater efficiencies; however, with greater use of technology comes the possibility of its misuse. With the advent of the internet, information, both public and private, can be quickly collected and disseminated; information, especially accurate consumer information, is a highly prized commodity for producers as well as consumers.

Regulator Mind Reading

Being a CCO is a very demanding job. CCOs have to balance being the bad guy with remaining open so that people feel comfortable interacting with them. They have to keep the lines of communication open while maintaining control. It’s like a high wire act at the circus, one misstep and you better have a safety net. And with the Dodd-Frank Act and the ever changing regulatory environment, the CCOs balancing act is even more precarious.

Being able to read a regulators mind would be a very useful ability for a Chief Compliance Officer to possess. But absent that ability, reviewing the cases brought by regulators against firms can give you a pretty good idea of what’s on their mind. When I look at the cases brought by the SEC in May, I wonder if Chief Compliance Officers realize they are in the regulators crosshairs. CCOs may be the police for the industry but the regulators are internal affairs.

SEC Alleges Former Employee of Investment Adviser Aided and Abetted the Violation of SEC Rule 204-2 (Books & Records Requirements)

On June 6, 2011, the U.S. Securities and Exchange Commission ("SEC") charged a long time employee at Bernard L. Madoff Investment Securities LLC ("BMIS") with "aiding and abetting violations of Section 204 and Rule 204-2 of the Investment Advisers Act of 1940 (the Adviser Books and Records Violations)."

The SEC alleges that BMIS, "failed to make, maintain on its premises, or keep accurate, certain books and records required by law." The SEC noted several examples where the firm failed to maintain accurate cash receipts, disbursement records, accurate ledgers, and failed to keep true and accurate bank statements, cancelled checks and cash reconciliations. This is a violation of the Books and Records requirements. The SEC alleges that as an employee in investment advisory operations, the BMIS employee assisted in falsifying documents, making repeated material misrepresentations, and generated fictitious account statements; thus, violating the Investment Advisers Act of 1940, Rule 204-2 and perpetuating the firm's violations. One has to wonder how many more BMIS employees have yet to be charged?

Insider Trading

Hedge fund founder Raj Rajaratnam was found guilty on five counts of conspiracy and nine counts of securities fraud involving insider trading. This is a big victory for the government and a vindication of their aggressive use of phone taps to fight Wall Street crimes.