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.