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.

Coordinated Examinations Identify Top Broker-Dealer Compliance Violations

Based upon coordinated examinations of broker-dealers throughout the United States, the North American Securities Administrators Association (NASAA) has identified the top compliance violations and offered a series of recommended best practices for broker-dealers to consider in improving their compliance practices and procedures.

The examination results were released at NASAA’s annual conference which was held in San Diego along with best practices to help firms manage their compliance functions efficiently.

These best practices were developed after a series of examinations of broker-dealers, conducted by state securities examiners, revealed a significant number of problem areas. The 2012 examinations were conducted under the guidance of NASAA’s Broker-Dealer Operations Project Group.

A total of 236 examinations conducted between January 1 and June 30, 2012, found 453 types of violations in five compliance areas. The highest percentage of violations were in the books and records area with supervision, sales practices, registration & licensing, and operations rounding out the list.

The top five types of violations found involved: failure to follow written supervisory policies and procedures, suitability, correspondence/e-mail, maintenance of customer account information, and internal audits.

Best Practices
Based upon the examination results, NASAA recommended 10 best practices to help broker-dealers develop compliance practices and procedures in the following areas:

• Suitability. Broker-Dealers must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111 require registered persons to “know your customer” and receive training sufficient to demonstrate knowledge of the products before a sale occurs.
• Develop, Update, and Enforce Written Supervisory Procedures. BDs also should ensure that staffing and expertise are commensurate with the size of the BD, type(s) of businesses engaged in by the firm, and the individual responsible for specific procedures.
• Exception Reports. Introducing dealers should obtain the necessary exception reports from the clearing dealer to ensure proper compliance. Upon the generation of exception reports, all BDs must document and resolve “red flags” in a timely manner. BDs that rely solely upon conversations with salespersons to address exception reports without contacting investors may subject themselves and supervisory staff to regulatory and/or legal action.
• Branch Office Audits. Develop a branch audit program that includes a meaningful audit document/plan, unannounced visits, a means to convey audit results, and a follow-up plan requiring that the branch take corrective action.
• Selling Away. BDs must ensure that adequate procedures are in place to address private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis. The BD’s procedures must have a mechanism to conduct a meaningful review of the request and in the instance where the request is denied, a process to determine the salesperson is/has not engaged in the activity./li>
• Outside Business Activity. Written outside business activity requests from salespersons must be received, reviewed and approved by the firm prior to the activity. The BD and salesperson are required to report the outside business activity on the salesperson’s Form U4. The firm should have a supervisory procedure in place to address its approval/denial process and a requirement that the salesperson promptly report any changes to the approved outside activity.
• Advertisements. Advertisements and sales literature MUST be fair and balanced and must be reviewed and approved by the BD and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the BD. In instances where the salespersons routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.
• Correspondence. Correspondence, both electronic and hard copy, must be effectively monitored by the BD. This includes a system of capturing and maintaining electronic, business-related correspondence sent by salespersons from websites and social network service providers outside the firm. For additional guidance, refer to FINRA NTM 11-39.
• Customer Complaints. Upon receipt of a complaint, firms must acknowledge the receipt, conduct and document a thorough review of the customer’s allegations, and, if necessary, update the salesperson’s Form U4. In situations where the firm discovers wrongdoing, the firm should remediate customer harm. Timely reporting and remediating customer harm are some of the factors under NASAA guidelines to determine if the firm is entitled to credit for cooperation.
• Working with Seniors. Baby Boomers are moving into retirement, and as individuals age, cognitive abilities begin to diminish. BDs and financial professionals should develop procedures/best practices for handling accounts of “senior” investors. A number of recommendations relating to these best practices are contained in joint reports issued in 2008 and 2010 by NASAA, SEC, and FINRA.

For a copy of the complete NAASA report please click here.

Revised Performance Fee Rule now effective, are you in compliance?

Revised provisions under the Advisers Act, Rule 205-3, are effective as of 5/22/2012. As an Investment Adviser, you may charge performance based fees providing natural person(s) meet minimum assets under management or net worth tests. If you currently charge performance based fees we recommend you review the rule, changes to the accredited investor definition, and updated provisions to ensure your firm’s policies and procedures are in compliance.

Red Oak is providing this guide to highlight the new requirements and the grandfather provisions.

Background

The Dodd-Frank Act amended section 205(e) of the Advisers Act , requiring the SEC to revise the definition of qualified or accredited investor, taking into account inflation as well as provide an exclusion of the client’s primary residence in the calculation of net worth. In response, the SEC has amended section 205(e) of the Advisers Act and Rule 205-3 with the following:

• The SEC adjusted for inflation the AUM dollar amount thresholds as well as the net worth standards under the definition of “accredited investor” or “qualified client”. Paragraph (d) has been adjusted to require a minimum of $1 million of assets under management with the adviser OR a net worth of a minimum of $2 million. Client’s primary residence and specified residence secured debts are EXCLUDED from the calculation. Debt secured by the primary residence, in excess of the fair market value OR obtained within 60 days of entering into the advisory contract, will count as a liability against the clients net worth calculation.
• The SEC is now required to review the thresholds every 5 years and issue an order adjusting as necessary.
• The SEC now identifies the price index future increases will be based upon, the Personal Consumption Expenditures Chain-Type Price Index (“PEC Index”) published by the Department of Commerce.

Grandfather Provisions

The SEC included grandfather provisions in the revisions, Advisers may rely on the grandfather provisions and continue to charge performance fees if:

• Client(s) were considered “qualified clients” prior to rule changes
• Newly registered advisers, who previously charged performance fees, may continue to charge those clients

These grandfather provisions only apply to existing clients in which a contractual advisory arrangement was entered into prior to the rule’s effective date.

Recommendation

We recommend Advisers review and revise as necessary, policies and procedures, disclosure documents, and client contracts to ensure definitions are consistent with new rules. If you charge performance fees, now is an opportune time for training and education of staff regarding the performance fee rule. Additionally, if you intend to rely on the grandfather provisions, we recommend you compile a record of clients subject to the exemption.

Red Oak Compliance Solutions is available to help. 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.

New Form PF Filings Update

An investment adviser meeting all of the following will be required to file Form PF:

• the adviser is an SEC-registered investment adviser or an SEC-registered investment adviser that is also registered with the Commodity Futures Trading Commission as a commodity pool operator or commodity trading adviser;
• the adviser manages one or more private funds;
• the adviser and its related persons had at least $150 million in private fund assets under management as of the last day of its most recently completed fiscal year.

Initial filing dates, frequency and timing of filings and which sections of Form PF are required to be completed will depend upon the type of private fund adviser, regulatory assets under management and the adviser’s fiscal year end.

• Liquidity fund advisers with over $5 billion in assets under management (and a December 31 fiscal year end) must file by July 15, 2012 and within 15 days of the end of each fiscal quarter thereafter.
• Hedge fund advisers with over $5 billion in hedge fund assets under management must file by August 29, 2012 and within 60 days of the end of each fiscal quarter thereafter
• Private fund advisers with over $5 billion in hedge fund assets under management must file within 120 days of the end of the fiscal year.

Initial filing dates for all other private fund advisers with a December 31 fiscal year end will be no later than April 30, 2013.

Form PF information will be submitted and viewed via a new system called the Private Fund Reporting Depository (PFRD). The PFRD system is scheduled to be live June 4, 2012 and user testing is already in progress. SEC-registered advisers are scheduled to receive entitlement to the PFRD system on June 1, 2012. The information on Form PF will not be available to the public. It will be used to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system.

With these deadlines looming on the horizon, now is a good time to examine the data that this form will require and make certain you have everything in place to accomplish this easily. You may need to amend your subscription agreements in order to obtain all the required information.

Section 1a - Information about you and your related persons

All private fund advisers required to file Form PF must complete Section 1a. Section 1a asks general identifying information about you and the types of private funds you advise.

Section 1b - Information about the private funds you advise

All private fund advisers required to file Form PF must complete Section 1b. Section 1b asks for certain information regarding the private funds that you advise. You will need to fill out a separate Section 1b for each private fund you advise.

Section 2a - Aggregated information about hedge funds that you advise

You are required to complete Section 2a if you and your related persons, collectively, had at least $1.5 billion in hedge fund assets under management as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter. You are not required to include the regulatory assets under management of any related person that is separately operated.

Section 2b - Information about qualifying hedge funds that you advise

If you are required to complete Section 2a, you must complete a separate Section 2b with respect to each qualifying hedge fund that you advise.

However, if you are reporting separately on the funds of a parallel fund structure that, in the aggregate, comprises a qualifying hedge fund, you must complete a separate Section 2b for each parallel fund that is part of that parallel fund structure (even if that parallel fund is not itself a qualifying hedge fund); and if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure in accordance with Instruction 5, you should only complete a separate Section 2b with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 3 – Information about liquidity funds that you advise

You are required to complete Section 3 if (i) you advise one or more liquidity funds and (ii) as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter, you and your related persons, collectively, had at least $1 billion in combined money market and liquidity fund assets under management. You are not required to include the regulatory assets under management of any related person that is separately operated.

You must complete a separate Section 3 with respect to each liquidity fund that you advise.

However, if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure, you should only complete a separate Section 3 with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 4 - Information about private equity funds that you advise

You are required to complete Section 4 if you and your related persons, collectively, had at least $2 billion in private equity fund assets under management as of the last day of your most recently completed fiscal year. You are not required to include the regulatory assets under management of any related person that is separately operated. You must complete a separate Section 4 with respect to each private equity fund that you advise.

However, if you report answers on an aggregated basis for any master-feeder arrangement or parallel fund structure in accordance with Instruction 5, you should only complete a separate Section 4 with respect to the reporting fund for such master-feeder arrangement or parallel fund structure.

Section 5 - Request for temporary hardship exemption

You must complete Section 5 if you are requesting a temporary hardship exemption pursuant to SEC rule 204(b)-1(f).

Good Faith Estimates

You may respond using “good faith estimates based on data currently available” to the manager with respect to interests purchased prior to March 31, 2012 that have not been transferred on or after that date. The SEC is allowing this they realized that “advisers managing funds with securities outstanding prior to the adoption of Form PF would have to take additional steps in order to obtain this information because the investor diligence process will already have been completed.” The SEC expects that managers will have had the time to take those additional steps to acquire data with respect to the beneficial ownership of interests purchased (or transferred) on or after March 31, 2012.

For a copy of the Form PF please click here.

For more information on the PFRD system please click here.

Mark your Calendar! Upcoming Compliance Dates.

With new regulations and registration requirements, the middle part of 2012 looks to be a busy one with compliance dates around every corner. Planning ahead to meet compliance obligations is crucial; to assist you we’ve compiled this reminder of key dates.

April 2012:
4/30/12: Annual delivery of Form ADV Part 2 Brochure or delivery of a Summary of Material changes with an offer for the full brochure.

May 2012:
5/22/2012: Performance Fees- Provisions under the revised Rule 205-3 under the Advisers Act go into effect.

June 2012:
6/28/2012: Switch deadline from SEC to State registration for RIAs. RIA’s no longer able to register with the SEC must complete their appropriate state registration and withdraw from SEC registration by this date.

July 2012:
7/1/2012: ERISA 408(b)(2) Fee Disclosure Effective Date.

August 2012:
8/30/2012: ERISA 404(a) and 408(b)(2): Fee Disclosures- For calendar year plans, initial annual disclosure deadline (60 days after effective date of regulation).

Red Oak Compliance Solutions is available to help. 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.