Don’t Vote Proxies

Many Advisers are under the impression that voting proxies is no big deal; you receive the ballot and you either throw it away or you cast your vote and mail the ballot back. This could not be further from the truth.

Voting proxies is much more than casting a vote and dropping the proxy ballot in the mail. The Securities and Exchange Commission (“SEC”) take proxy voting seriously. They expect that the individual casting the vote take the time and effort necessary to research the issue(s) at hand to determine how they are going to vote and why. And just conducting due diligence of the issues is not enough. You will be expected to maintain documentation to evidence what research you conducted and why you voted the way you did.

If you are an SEC registered investment adviser, and you have opted to vote proxies on behalf of your clients, you can expect the SEC to conduct a thorough review of your proxy voting files during their next audit, which you had better be maintaining. When the auditor(s) start asking why you voted this way or that, the auditor(s) will expect you to be able to provide documentation evidencing your research and how you determined to vote the way you did; “I just did”, or, “I guessed” will not be an acceptable answer. If you are a state registered investment adviser, do not think that voting proxies for your clients will be any easier. Rest assured, if the SEC thinks it is a big deal, most states will follow the SEC’s lead.

If you are registered, or registering, as an investment adviser, and feel very strongly about wanting to vote proxies for your clients, take a look at services like ISS Proxy Voting Services, or Broadridge Institutional Proxy Voting. The cost for this service may be more than you want to pay, but it would be much better to pay for a service than to pay the regulator(s) a fine and have a disclosable event on your ADV and U4.

Most registered investment advisers probably aren’t investing in products, or in amounts, that would allow them to influence the product with their vote. And many of you are probably trying to figure out why it is such a big deal. Please refer to this article published by Securities Regulatory Daily.

Tougher rules for Social Security claiming strategies

With the signing of the Bipartisan Budget Act of 2015, two popular Social Security claiming strategies have been affected. Going forward “file and suspend” will be severely limited and “restricted application” will be phased out.

If you have clients that are nearing retirement, now is a great opportunity to reach out to those individuals and schedule some time to discuss their options. For 180 days following the date the bill was enacted, up until April 30, 2016, you can still implement restricted application and file and suspend strategies under current rules. After that date you will need to revisit your strategies for developing retirement income for your clients.

For more information click here.

SEC Commission Looking at Robo Advisers and New Regulations

Robo advisors have taken off from zero to 60 in no time at all and the SEC is trying to figure out how they should regulate them. A recent study estimated that by 2020 there will over $2 trillion dollars being managed by robo advisors. Not sure what a robo adviser is, well robo advisers allow you to use your smart phone to access automated investment advice and some even allow you to open an account through their proprietary mobile apps. Service offerings range from portfolio management to asset allocation and financial planning. There is little if any human interaction but the fees and minimum investment amounts tend to be lower than traditional brick and mortar financial advisors. You carry your financial adviser in your pocket and he/she goes everywhere with you.

As technology continues to explode, the Commission is now challenged to think through what it means to regulate a robo advisor. The laws as they exist today never contemplated a world with robo advisers in it. So they question appears to be, can robo advisers fit within the existing rules or do laws need to be created or tweaked to address the new realities. If history is any indicator, the SEC will be creating new rules to address robo advisers and how they provide investment advice. Click here to read the full content of the recent speech given by Commissioner Kara M. Stein. Need help to start a robo adviser, let Red Oak Compliance Solutions guide you through the process.

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.