Compliance is Easier Than You Think: Challenges and Solutions for Hedge Fund Managers Considering the Global Investment Performance Standards (GIPS ® ) 2nd Edition -2013
Category: Compliance Articles
Compliance is Easier Than You Think: A Closer Look at the Global Investment Performance Standards (GIPS®) for Real Estate Managers – 2012
Category: Compliance Articles
Zero Deficiencies ‒ Closing the Regulatory Gap
Category: Compliance Articles
ACA Compliance (Europe) Alert: EMIR: Focus on the Reporting Requirements
Earlier this year, we published “EMIR and OTC Derivatives: Start preparing now“, which introduced the European Markets Infrastructure Regulation (“EMIR”). This regulation has an impact on both European and non-European firms.
In summary, there are 3 main aspects to EMIR:
- The reporting obligation;
- The clearing obligation; and
- Risk mitigation requirements for all uncleared OTC derivatives.
Timetable:
Since our previous note, there has been some slippage in the expected roll-out of requirements. Specifically, because reporting can only begin 90 days after the registration of a trade repository for each derivative class, we now expect that the requirement to report credit and interest rate contracts will begin in mid-September 2013 rather than June, as we previously thought. Reporting for all other derivatives classes is currently expected to begin in January 2014, but this may also be delayed.
Scope:
EMIR’s reporting and clearing obligations apply to both counterparties to a derivatives contract where either is an EU counterparty (i.e. established in an EU Member State). Note also that EMIR applies to two non-EU entities (that would be subject to the obligation if established in the EU) where they enter into a contract that has “a direct, substantial and foreseeable effect” within the EU, or where “necessary and appropriate to prevent evasion” of EMIR, although it remains to be seen how these anti-avoidance provisions will be applied. EMIR applies to all derivatives contracts as defined by MiFID, e.g. options, swaps, forwards, contracts for difference, FX derivatives and both cash and physically-settled commodities derivatives.
Overlap with Dodd-Frank:
Both EMIR and Dodd-Frank stem from the same G20 commitment to address the systemic risks posed by an unregulated global OTC market, but there are important differences: EMIR requires reporting by both counterparties, whereas Dodd-Frank requires only one (typically the registered Swap Dealer); EMIR requires the back-reporting of all contracts in existence on August 16, 2012 (when EMIR came into force), rather than on a “from this point on basis”; and Dodd-Frank driven reporting is required in real time, whereas under EMIR reporting is required by the end of the following business day.
Reporting Requirements:
Under EMIR, these apply to all OTC and exchange traded derivatives (unlike Dodd-Frank which is just OTC). There are approximately 60 data fields in total, covering the usual “who, what, when, how many and how much” aspects. Also required for all financial counterparties, and non-financial counterparties (NFCs) above certain thresholds, is the daily reporting of total exposures, including mark-to-market or model valuations on derivative positions, and posted collateral.
The detailed implementation of EMIR is still unfolding, and we will be issuing further alerts in the coming months, particularly in respect of significant issues, and ahead of major timetable events.
Please contact martin.lovick@acacomplianceeurope.com or your regular ACA consultant with any questions on this alert.
Category: Compliance Alerts
The Value of GIPS® Compliance and The Importance of Database Updates – May 16, 2013
The Value of GIPS® Compliance and The Importance of Database Updates
Time: 8:30 a.m. to 10:30 a.m.
Date: May 16, 2013
Location:
Brewer’s Hall, City of London Aldermanbury Square
London EC2V 7HR
United Kingdom
RSVP: https://events.r20.constantcontact.com/register/eventReg?oeidk=a07e7cu5naef56bd200&oseq=&c=&ch=
Sponsors: eVestment and ACA Beacon Verification Services
Details:
We would like to invite you to join eVestment and ACA Beacon Verification Services on Thursday 16 May for an exclusive breakfast seminar to discuss the effects of the GIPS standards on the investment management industry and current search trends and best practices for data population.
Join Justin Guthrie, Partner of ACA Beacon Verification Services, and John Molesphini, Senior Vice President of eVestment, for a one hour presentation followed by Q&A. This session will discuss:
- Results from the eVestment and ACA Beacon survey – The Value of GIPS Compliance
- The importance of database updates
- Recent search activity highlights
- Database best practices
GIPS® 101 Executive Workshop – June 5, 2013
Date: June 5, 2013
Time: 8:30 a.m. to 4:30 p.m.
Location:
Harvard Club of New York
35 West 44th Street
New York, NY 10036
Register: http://www.regonline.com/gips_workshops_ny
Details:
ACA Beacon is pleased to offer our second annual unique and interactive GIPS basics training workshop to be held in New York City on June 5, 2013. The workshop will incorporate best practices and case studies into a dynamic introduction to the GIPS standards. Alicia Hyde and Kamelia Dari, both ACA senior level professionals specializing in GIPS, will share their experience of working with over 200 advisers as they lead the training.
This introductory GIPS course will feature discussions and breakout sessions on fundamentals such as:
- firm definition,
- recordkeeping,
- composite construction,
- performance measurement,
- marketing and advertising,
- performance and presentation basics for alternatives and hedge funds, and
- other GIPS requirements and recommendations.
As part of our hands-on approach to education, ACA will tailor this event to participants through a post-registration profile analysis.
Who Should Attend?
- CCOs/compliance professionals
- Marketing professionals
- Operations managers
- Performance personnel
- Alternative performance analysts
Space is limited to 30 participants. To reserve your spot register now.
Questions? Email Alicia Hyde or call (866) 279-0750.
Category: Roundtables
Hong Kong Compliance Roundtable – June 6, 2013
Time: 12:30 p.m. to 5:15 p.m.
Date: June 6, 2013
Location: Sidley Austin
39/F, Two Int’l Finance Centre,
Central, Hong Kong
RSVP to Sidley by May 29: Queenie Ngan (qngan@sidley.com)
Sponsors: Sidley Austin LLP and ACA Compliance Group
Details:
Our panel will focus on Hong Kong, U.S., and European regulatory, compliance and enforcement issues for investment advisers. http://www.acacompliancegroup.com/alerts/sidley/060612-CCO-Roundtable_HK.pdf
Category: Roundtables
Celebrate the opening of the ACA Hong Kong Office – June 6, 2013
Date: June 6, 2013,
Time: 6:00 p.m. to 9 p.m.
Location:
The American Club
Floors 48-49
Two Exchange Square
Central, Hong Kong
RSVP: http://www.research.net/s/HONGKONG6613
Details: ACA Compliance Group invites you to an evening filled with fine food and wine with a magnificent view of Hong Kong from The American Club’s 49th floor.
Category: Roundtables
Menlo Park Compliance Roundtable, June 4, 2013
Title: Challenges Facing Venture Capital and Private Fund Advisers
Time: 1:00 p.m. – 3:00 p.m.
Date: June 4, 2013
Location: Rosewood Sand Hill at 2825 Sand Hill Road, Menlo Park, CA 94025
Please join ACA Compliance Group for a roundtable discussion of the SEC’s examination initiatives and other challenges facing venture capital and other private fund advisers.
Keynote Speaker Presentation
Our keynote speaker will be Ken Schneider, Assistant Regional Director of the Commission’s San Francisco Regional Office. Ken will discuss the SEC’s current exam initiatives, including priorities, focus areas, and observations from the field, and then take questions.
Roundtable Discussion
Following the Q&A, we will engage in a roundtable discussion of our recent experiences with SEC examinations and other regulatory hot topics.
Meeting Agenda
| Registration | 1:00 p.m. to 1:30 p.m. |
| Program | 1:30 p.m. to 3:00 p.m. |
| Cocktail reception on the patio | 3:00 p.m. |
Please RVSP by May 21, 2013.
Please contact Luke Wilson with questions regarding this event.
This is a free event. Seating is limited.
Category: Roundtables
Compliance Outsourcing – Key Considerations, Trends, and Best Practices – May 14, 2013
Topic: Compliance Outsourcing
Sponsor: Fidelity Investments
Location: Webinar
Speaker: Barry Schwartz, Ted Eichenlaub
Category: 2013 Speaking Engagements, Speaking Engagements
PEI Private Fund Compliance Forum – May 1, 2013
Topic: The SEC is Coming
Sponsor: PEI Media
Location:NYC
Speaker: Theodore Eichenlaub
Category: 2013 Speaking Engagements
Sidley/ACA Compliance Officer Roundtable – May 1, 2013
Topic: AIFMD Update and SEC Examinations
Sponsor: Sidley Austin and ACA
Location: Beverly Wilshire Hotel, Beverly Hills, CA
Speaker: Dan Smith, Ron Weekes, Adam Palmer
Category: 2013 Speaking Engagements
GAIM Ops – April 22, 2013
Topic: preparing for an SEC exam
Sponsor:
Location: Grand Cayman
Speaker: Gary Watkins
Category: 2013 Speaking Engagements
Morgan Stanley Latin America Investment Conference – February 26, 2013
Topic: Overview of Elements of US Regulation, Registration and Foreign Account Tax Compliance Act
Sponsor: Morgan Stanley
Location: Rio de Janeiro, Brazil
Speaker: Luke Wilson
Category: 2013 Speaking Engagements
The Blass Speech: A Call to Action for Private Fund Managers
Much has already been said about the April 5 speech given by SEC Division of Trading and Markets Chief Counsel David Blass on broker-dealer registration issues as applied to private fund managers.
Here is our take on Mr. Blass’s comments:
Sales Personnel. Mr. Blass signaled that a private fund manager’s internal investor relations personnel could face broker-dealer registration scrutiny if their sole focus is selling fund shares or if they receive transaction-based compensation as a result of such sales. However, Mr. Blass offered a series of questions that firms can consider in weighing whether broker-dealer registration is required. We think there is room in these questions for most managers, working with counsel, to ensure that their internal investor relations personnel do not fall within the broker-dealer registration requirement. Notably, Mr. Blass stated that his remarks should not be taken to suggest “that all investment raising by a private fund adviser results in the adviser being a broker-dealer.” With that in mind, we recommend that private fund managers, together with counsel, consider the options suggested by these questions when evaluating whether broker-dealer registration is required for internal sales personnel.
Deal Fees. More challenging, however, are Mr. Blass’s comments on the issue of transaction-based deal fees. In our view, private fund managers that currently receive deal or similar transaction-based fees from portfolio companies that their fund invests in should take action in response to Mr. Blass’s speech. Either the manager should register as a broker-dealer or it should give careful consideration to the issues raised in the speech, consult with counsel, and prepare its rationale for remaining unregistered. Following Mr. Blass’s talk, we have seen questions that were raised as hypotheticals in the speech being carried into the field by SEC examiners and applied to actual facts. Private fund managers have been questioned about how they can receive deal fees as a result of their fund’s purchase of interests in a portfolio company without registration as a broker-dealer. The SEC staff’s focus on the issue may cause investors to start concentrating on it as well. Absent further SEC action or guidance on this topic in the short term, private fund managers that accept deal fees in whole or in part but that are not registered as broker-dealers should be prepared to give thoughtful answers to these inevitable questions.
Of course, as Mr. Blass indicated, deal fees that are used in their entirety to offset management fees do not raise the specter of broker-dealer status. So our call to action applies only to firms that receive deal fees that do not wholly offset advisory fees.
As always, if you have any questions regarding this alert or ACA’s advisory services, please contact your consultant or Damon Zappacosta at (212) 868-5940. For information on ACA’s broker-dealer registration services, please contact Dee Stafford at (310) 322-8840 or dstafford@acacompliancegroup.com.
Category: Compliance Alerts
Identity Theft Red Flags Rules – April 21, 2013
On April 10, 2013, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) jointly adopted the Identity Theft Red Flags Rules (“Red Flags Rules”)1 and guidelines as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Red Flags Rules will require certain SEC and CFTC-regulated entities to implement programs to prevent, detect, and mitigate the effects of identity theft if that entity directly or indirectly holds a “transaction account” belonging to a customer. Specifically, the SEC-regulated entities include broker-dealers, registered investment companies (including any that act as business development firms or operate as employees’ securities firms), and investment advisers. The CFTC-regulated entities include futures commission merchants, retail foreign exchange dealers, commodity trading advisors, commodity pool operators, introducing brokers, swap dealers, or major swap participants. “Transaction accounts” are those “on which the account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others.”
The Red Flags Rules require each “financial institution” and “creditor” that offers or maintains one or more “covered accounts” (defined below) to develop and implement a written Identity Theft Prevention Program (“Program”). “Financial institution” is defined as any entity such as certain banks and credit unions and any other person that directly or indirectly holds a transaction account.
An investment adviser may be deemed to directly or indirectly hold transaction accounts if it can direct payments or transfers out of those accounts to third parties. If the transaction accounts belong to individuals, these advisers are considered financial institutions for purposes of the Red Flags Rules. For example, an investment adviser would be deemed a financial institution if
- it had the ability to direct transfers or payments from accounts belonging to individuals to third parties upon the individuals’ instructions2,
- it acted as an agent on behalf of clients that are individuals, or
- it manages private funds in which an individual invests money and the adviser to the private fund has the authority, pursuant to an arrangement with the private fund or individual, to direct the individual’s investment proceeds (e.g., redemptions, distributions, dividends, interest, or other proceeds related to the individual’s account) to third parties.
In addition, some advisers may meet the definition of “creditor.” This term applies to any person who extends or arranges credit. For example, if a private fund adviser “lends” money regularly in the ordinary course of business, short-term or otherwise, such as by recognizing an investment in the fund before it receives a wire transfer or an investor’s check clears, the adviser could be considered a “creditor.” The term does not apply, however, to an adviser that advances funds on behalf of a person for expenses incidental to a service provided to that person.
The term “covered account” mentioned above includes “an account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions” and “any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks.” If a financial institution or creditor determines that such risks only apply to certain of its accounts, it may develop and implement a Program that applies only to those accounts or types of accounts.
A financial institution or creditor that engages predominantly in transactions with businesses may determine it does not require a Program because it does not offer or maintain “covered accounts.” If a financial institution or creditor makes this determination initially, it must periodically reassess whether changes to the accounts offered or maintained or other factors set forth in the Rules would require a Program.
Pursuant to the Red Flags Rules, financial institutions and creditors that offer or maintain covered accounts must do the following:
- Develop and implement a Program reasonably designed to detect, prevent, and mitigate the effects of identity theft in connection with new and existing covered accounts. Such policies and procedures should
- identify relevant red flags,
- detect such red flags, and
- respond appropriately to any red flags detected.
- Take steps to ensure the Program’s effective implementation. This might include involving the firm’s board of directors or senior management and/or providing employee training.
- Ensure that service providers performing activities in connection with one or more covered accounts have reasonable policies and procedures in place to prevent, detect, and mitigate the effects of identity theft, as well as exercise appropriate oversight of those service providers.
The Red Flags Rules also require persons that issue credit or debit cards to establish and implement reasonable written policies and procedures regarding address change notifications.
The Red Flags Rules will become effective 30 days after publication in the Federal Register (to be determined) and the compliance date will be six months after the effective date.
Please contact ACA consultant or Damon Zappacosta at (212) 868-5940 with any questions.
Category: Compliance Alerts
New York Roundtable, May 7, 2013
Title: New York Roundtable
Time: 8:30 a.m. – 11:00 a.m.
Date: May 7, 2013
Co-sponsored by: ACA Compliance Group and Sidley Austin
Location: Offices Sidley at 787 Seventh Avenue, NY, NY 10019
On May 7, 2013, ACA and Sidley will offer a broker-dealer focused seminar for in-house counsel and compliance officers. In this seminar, expert panelists from Sidley, ACA, and the industry will discuss topics relevant to the regulatory requirements unique to broker-dealers.
Topics to be addressed include:
• Implications of Suitability Rule – Retail, Institutional, and Complex Products
• Regulatory Focus on Private Placements
• New Communications with the Public Rule
• Conflicts Considerations
• Regulatory Examination Priorities
FINRA Presentation:• Paul Mathews, Director, Corporate Finance, FINRA Roundtable Discussion:• Francois Cooke, Moderator • Madeleine J. Dowling, Panelist • David M. Katz, Panelist • Michael G. McMaster, Panelist • David M. Sobel, Panelist |
Note that, if desired, discussion questions may be submitted anonymously prior to the meeting.
There is no charge for this event.
Please contact Dee Stafford at dstafford@acacompliancegroup.com for more information.
Category: Uncategorized
SEC Puts Mutual Fund Intermediary Fees under the Microscope – April 4, 2013
As widely discussed this conference season and in recent publications, the SEC has been “fact finding” the past few months regarding intermediary fees paid by fund companies and their advisers. Over the past 10 years, distribution and shareholder servicing fee structures have become increasingly costly and, more importantly, complex in ways that make 12b-1 Plans obsolete. In addition, in the past three years, there has been a dramatic shift from network to omnibus accounts, which further complicates fee structures on different classes.
CCOs and fund boards should not take the Commission’s “fact finding” on mutual fund distribution fees lightly. Drew Bowden, deputy director of the SEC’s Office of Compliance Examinations and Inspections, likely knows from his experience at Legg Mason what skeletons lie in the closets (or should we say coffers) of broker-dealers collecting these fees. In particular, examination staff will assess whether financial intermediary fees payments comply with regulations such as Rule 12b-1 or whether they are payments for distribution and preferential treatment. Given this situation, many CCOs and boards are already trying to better grasp the situation within their own fund complex.
In working with clients regarding financial intermediary fees, we have found that many lack institutional knowledge to explain certain fee structures. They also may not know how fees and related services differ from each other, especially with regard to their application to various share classes. Given the SEC’s 2013 examination priorities regarding mutual fund distribution fees, funds and their sponsors must gain a stronger understanding of their financial intermediary fee structures and related services. To best review and analyze these fees, we recommend:
- assessing the contract and approval process for non-12b-1 fee payments,
- assessing the fees paid by type (e.g., sub-transfer agent, networking, omnibus, servicing, marketing support) and structure (e.g., basis point vs. flat fee) to determine whether payments are excessive with respect to the fund assets held by the intermediary,
- assessing how these fees are paid and which entity (e.g., adviser, fund, distributor, or a combination of these) is responsible for payment,
- assessing the validation processes used to support invoices received from intermediaries,
- ensuring that contracts accurately describe fees to be paid and that fees invoiced match contract terms,
- reviewing the adequacy of fee payment disclosures and reports made to fund boards, and
- reviewing the adequacy of fee payment disclosures made to shareholders in the Statement of Additional Information.
For more information on the assistance ACA Compliance Group provides investment advisers and their fund companies on evaluating intermediary fee payments, including manual and automated fee payment processes, please email Nick Prokos at nprokos@acacompliancegroup.com.
Category: Compliance Alerts
ACA/Sidley Roundtable in Chicago – May 2, 2013
Name of Event: ACA/Sidley Roundtable in Chicago
Date: May 2, 2013
Sponsor: ACA Compliance Group and Sidley Austin LLP
Location: Chicago
Speaker: Nick Batinich
Category: 2013 Speaking Engagements, Speaking Engagements
COO Management Roundtable – April 18, 2013
Name of Event: COO Management Roundtable
Date: April 18, 2013
Topic: Regulatory Roadmap: A Practical Guide to What’s Ahead
Sponsor: Institutional Investor – US Institute
Location: Toronto
Speaker: Robert Stype
Category: 2013 Speaking Engagements
FINRA CMA Fee Waivers for Less Significant Changes and NMA and CMA Application Withdrawal Fee Refunds – March 25, 2013
On March 6, 2013, FINRA published Regulatory Notice 13-11 (“RN 13-11″). The notice outlines the process for requesting fee waivers for continuing membership applications (“CMAs”) when changes do not require a “substantial staff review.” RN 13-11 also indicates that FINRA will refund CMA and new membership application (“NMA”) fees if applicants withdraw their applications within 30 days of submitting Form NMA or Form CMA.
CMA changes that would qualify for the application fee waiver include these examples:
- Insignificant modifications to the applicant’s business activities, management, supervision, assets, or liabilities. Under these circumstances, the applicant would only propose changes in the
- legal structure;
- equity ownership, partnership capital, or other ownership interest in the applicant held by a corporate legal structure (e.g., adding a holding company to the control chain of the applicant); or
- percentage of ownership interest or partnership capital of the applicants’ existing owners if a change in ownership or control is 25% or more.
- Specific acquisitions or transfers within the applicant such as
- a direct or indirect acquisition or transfer of 25% or more of the applicant’s aggregate assets, or
- an acquisition or transfer of any asset or business line that generates 25% or more of the applicant’s revenue.
Besides the circumstances described above, FINRA indicated it would consider fee waivers for other changes based on the individual facts and circumstances presented by CMA applicants. In all cases, to apply for CMA fee waivers, applicants must submit their requests in writing as part of their Form CMA.
As noted above, RN 13-11 also addressed amendments to NASD Rules 1013 and 1017 that describe new NMA and CMA fee refunds. Specifically, if firms withdraw their NMA or CMA applications within 30 days of submitting them to FINRA, their application fee will be refunded less a $500 processing fee.
For more information, please contact your ACA consultant or Dee Stafford at (310) 322-8840.
Category: Compliance Alerts
ACA Compliance Group Expands into Asia – March 21, 2013
The leading global regulatory compliance consultancy for the financial services industry opens new Hong Kong office
New York, March 21, 2013 – ACA Compliance Group, the largest independent financial services compliance consultancy in the world, announced today the opening of its newest office in Hong Kong. The opening of ACA Compliance Group (Asia) Limited on 13 March 2013 is a continuation of ACA’s efforts to address the needs of its global clientele, all of whom face multi-jurisdiction supervision initiatives. ACA’s Hong Kong office further extends ACA’s ability to provide efficient, cost-effective solutions for global financial service organizations.
ACA will offer both U.S. related (e.g., SEC, CFTC, FINRA) and Asia related (e.g, SFC, MAS) regulatory compliance consulting out of the Hong Kong office.
“We are very pleased to have expanded our existing consulting services to Hong Kong at a time when our clients are increasingly looking for global reach and multi-jurisdiction capability. The Hong Kong office complements our U.S. and Europe based offices, providing an unrivalled depth of resources,” said ACA Managing Partner, Robert Stype.
ACA Partner Gina Galang has been appointed to head up ACA’s Hong Kong office. “I am excited to open our Hong Kong office and look forward to bringing ACA’s exceptional services to the Asian markets,” said Galang.
ACA Compliance Group is the world’s largest independent regulatory compliance consulting practice in the financial services industry, with 13 offices across the U.S., Europe, and Asia, and a combined team of over 100 compliance and GIPS verification professionals, including more than 40 former regulators. The team offers the largest concentration of former SEC, FINRA, NFA and FSA regulators and senior compliance professionals in the industry. The firm provides services to over 600 clients, including a variety of hedge funds, traditional asset managers, private equity managers, broker-dealers, and other wholesale and retail investment and finance companies.
Please do not hesitate to contact us with any additional question or comments.
Contact
Gina P. Galang
Partner
ACA Compliance Group (Asia) Limited
Two International Finance Centre L19
8 Finance Street Central, Hong Kong
Office +852.2251.8371
ggalang@acacompliancegroup.com
www.acacompliancegroup.com
SEC INVESTIGATION RESPONSE FOR HEDGE FUND MANAGERS: HOW TO PREPARE AND MISTAKES TO AVOID – May 2, 2013
Name of Event: SEC INVESTIGATION RESPONSE FOR HEDGE FUND MANAGERS: HOW TO PREPARE AND MISTAKES TO AVOID
Date: March 6, 2013
Sponsor: Herbert L. Jamison LLC, K & L Gates, and ACA Compliance Services, LLC
Location: Offices of K&L Gates
Speaker: Kristina Staples
Category: 2013 Speaking Engagements, Speaking Engagements
ACAMS Roundtable – April 23, 2013
Name of Event: Addressing Challenges and Creating Value in a Changing Environment
Date: March 6, 2013
Sponsor: ACAMS
Location: Miami, FL
Speaker: Francois Cooke
Category: 2013 Speaking Engagements
Addressing Challenges and Creating Value in a Changing Environment – March 6, 2013
Name of Event: Addressing Challenges and Creating Value in a Changing Environment
Date: March 6, 2013
Topic: Venture Capital and Private Equity Legal and Regulatory Environment
Sponsor: MIT Enterprise Forum of NYC
Location: New York, NY
Speaker: Erik Olsen
Category: 2013 Speaking Engagements
NSCP 2013 New England Regional Meeting + Labs – March 5, 2013
Name of Event: NSCP 2013 New England Regional Meeting + Labs
Date: March 5, 2013
Topic: IA/PF LAB 2: Advertising/Marketing/Social Media.
Sponsor: NSCP
Location: Boston, MA
Speaker: Mark Lawler
Category: 2013 Speaking Engagements
Third Party Marketers Conference – April 4, 2013
Name of Event: Third Party Marketers Conference
Date: April 3-4 (I will be speaking on the 4th)
Topic: 3PM Investment Adviser Compliance & New FINRA Regulations
Sponsor: Third Party Marketers Association
Location: Boston, MA
Speaker: Bob Cornish-Dillworth Paxson & Travis Dragomani-ACA
Category: 2013 Speaking Engagements
ALPS Client Forum and CCO Workshop – March 6-7, 2013
Name of Event: ALPS CLIENT FORUM AND CCO WORKSHOP
Date: MARCH 6TH & 7TH
Topic: COMPLIANCE
Sponsor: ALPS
Location: COPPER MOUNTAIN, CO
Speaker: TED MCGRATH
Category: 2013 Speaking Engagements
Morgan Stanley Latin America Investment Conference – February 26, 2013
Name of Event: Morgan Stanley Latin America Investment Conference
Date: February 26, 2013
Topic: Overview of Elements of US Regulation, Registration and Foreign Account Tax Compliance Act
Sponsor: Morgan Stanley
Location: Rio de Janeiro, Brazil
Speaker: Luke Wilson
Category: 2013 Speaking Engagements
Denver CCO Roundtable – January 23, 2013
Name of Event: DENVER CCO ROUNDTABLE
Date: 1/23/13
Topic: VALUATION AND REGULATORY COMPLIANCE
Sponsor: DAVIS GRAHAM & STUBBS LAW FIRM
Location: DENVER, CO
Speaker: TED MCGRATH
Category: 2013 Speaking Engagements
San Francisco CCO Roundtable – March 20, 2013
Title: San Francisco CCO Compliance Roundtable
Time: 8:30 a.m. – 11:00 a.m.
Date: March 20, 2013
Co-sponsored by: ACA Compliance Group and Simpson Thatcher
Location: The Fairmont Hotel, 950 Mason Street, San Francisco, CA
Speakers:
- Kenneth Schneider, Assistant Regional Director, San Francisco Office, U.S. Securities & Exchange Commission
- Lisa Klar, Counsel, Simpson Thacher & Bartlett LLP
- Gwen Reinke, General Counsel and Chief Compliance Officer, Blum Capital Partners
- Dan Smith, Partner, ACA Compliance Group
- Thomas Wuchenich, Partner, Simpson Thacher & Bartlett LLP
RSVP: Click here to RSVP
This event will feature a talk by Kenneth Schneider, Assistant Regional Director in the San Francisco office of the U.S. Securities & Exchange Commission and former ACA Consultant, who will address the SEC’s current Presence Examination initiative targeting newly registered firms. This will be followed by a Q&A session and then a panel presentation regarding recent experiences with SEC Presence Examinations, the issues the SEC has focused on in recent examinations, and marketing considerations for SEC-registered private fund firms.
Category: 2013 Speaking Engagements
ACA Expands Consulting Team in San Francisco – February 15, 2013
ACA Compliance Group (“ACA”) is pleased to announce that Jorge A. Rodriguez will be transferring from ACA’s Los Angeles office to work in San Francisco. Jorge has been with ACA since August 2011. In San Francisco he will continue to lead compliance examinations and advise investment advisers and private fund managers on various compliance matters.
Prior to joining ACA, Jorge served as Compliance Officer at Trust Company of the West and as an Examiner in the Pacific Regional Office of the U.S. Securities and Exchange Commission (“SEC”). While at the SEC, Jorge trained new examiners to conduct inspections and participated in “sweep” examinations involving market timing and late trading. Jorge has taken part in over 70 actual or mock inspections of investment advisers, private funds, and investment companies.
“The expansion of our ACA footprint in San Francisco is a major goal for the firm in 2013 and we are excited to have Jorge join our team covering the Bay Area,” Partner Jeff Morton said. “As the SEC ramps up to begin conducting widespread presence examinations of private equity and hedge fund firms, his combination of industry and regulatory experience will greatly benefit our clients here.”
Jorge earned a B.S. in Business Administration from the UC Berkeley Haas School of Business, a J.D. from the UCLA School of Law, and an MBA from the UCLA Anderson School of Management.
Category: Compliance Alerts
Annual Reminders for Exempt Reporting Advisers and Foreign Private Advisers – February 12, 2013
Exempt Reporting Advisers (“ERAs”) must update their SEC registration exemption filings annually within 90 days of their fiscal year end. As such, many ERAs must update their filings by April 1, 2013 due to the holiday weekend and should consider submitting their filings by March 28, 2013.
In addition, ERAs that now manage more than $150 million on behalf of private funds from a U.S. office and that cannot rely on another exemption must register with the SEC. ERAs that have complied with their SEC reporting obligations have up to 90 days after filing their annual updating amendment to apply for SEC registration. As such, ERAs that must transition to SEC registration should submit their applications by June 28, 2013 due to the fact that June 29, 2013 is a Saturday.
ERAs and unregistered foreign private advisers should review their advisory activities for changes that could trigger registration requirements. For example, an ERA that no longer qualifies for an exemption because it raised a new fund that is not a venture capital fund and that cannot rely on another exemption must register. The term “venture capital fund” is narrowly defined by the SEC, and an ERA raising new funds must consider whether it will remain exempt from registration. Similarly, an ERA that has a U.S. office and begins managing a separate account for a U.S. client must register prior to serving as investment adviser to such account. In addition, foreign private advisers that have a place of business in the U.S., 15 or more clients and private fund investors in the U.S., or more than $25 million under management on behalf of clients and private fund investors in the U.S., or that publicly advertise their investment advisory services in the U.S. may have to register.
As a final reminder, regardless of registration status, all investment advisers should consider formalizing their compliance policies and procedures as a matter of best practice. This can help advisers prevent inadvertent violations of federal securities laws and meet institutional investors’ ever-increasing expectations. All investment advisers should consider maintaining written policies and procedures to prevent violations of insider trading, pay-to-play, and anti-bribery laws, as well as to address personal account dealing. An SEC-registered investment adviser must maintain comprehensive, written policies and procedures tailored to its business activities and compliance risks. Also, as discussed in our November 28, 2012 alert, foreign registered investment advisers should take steps to ensure they are prepared for an SEC examination.
ACA employs the largest team of former SEC examiners and in-house compliance professionals around the globe to assist firms in meeting SEC registration and reporting obligations. ACA is headquartered in New York City and has offices throughout the United States. In addition, ACA has former SEC examiners based in its London and soon-to-open Hong Kong offices to serve ERAs and SEC-registered investment advisers across Europe and Asia.
For more information on ACA’s services, please email:
In the Americas: Luke Wilson
In Europe: Ron Weekes
In Asia: Gina Galang
Assessing Manager Performance: The Institutional Investor’s Perspective – February 12, 2013
Name of Event: Assessing Manager Performance: The Institutional Investor’s Perspective
Date: February 12, 2013
Topic: Performance Reporting Trends and Best Practices
Sponsor: ACA Beacon Verification
Location: ACA Webinar
Speaker: Erik Olsen, Justin Guthrie
Category: 2013 Speaking Engagements
Update on FINRA Rule 3310(c) regarding two-year independent AML testing – February 7, 2013
Many broker-dealers have taken the view that they fall under the two-year, rather than one-year, cycle for independent anti-money laundering (“AML”) testing. In light of recent FINRA staff comments about the applicability of the two-year cycle for AML testing, ACA recommends that such firms review their business activities to determine whether annual testing is actually required.
By way of background, FINRA Rule 3310(c) requires broker-dealers to conduct independent AML testing either annually or on a two-year cycle. Per the rule, annual testing is required unless the broker-dealer:
- does not execute transactions for customers,
- does not otherwise hold customer accounts, and
- does not act as an introducing broker with respect to customer accounts.
While some broker-dealers that do not conduct retail brokerage operations may take the view that they do not execute transactions for “customers,” the rule further clarifies that the two-year cycle applies only to a broker-dealer that engages “solely in proprietary trading or conducts business only with other broker-dealers.”
During recent conversations with FINRA staff, ACA was informed that FINRA adheres to a “strict interpretation” of this provision. The staff emphasized that only broker-dealers that transact solely with other dealer-dealers qualify for the two-year cycle. The staff clarified that broker-dealers with the following business activities, which are not conducted “only with other broker-dealers,” would generally not be eligible for the two-year testing cycle:
- Mergers and acquisitions
- Private placements
- Investment banking
- Mutual fund distribution or wholesaling
- Fairness opinions
The FINRA staff advised ACA that a broker-dealer conducting the above-mentioned activities is executing transactions for a customer. FINRA Rule 0160 defines “customer” as anyone who is not a broker-dealer.
If you have questions about the AML testing rule, or would like more information, please contact Dee Stafford at (310) 322-8840.
Category: Compliance Alerts
FINRA Exam Priorities for 2013 – January 29, 2013
On January 11, FINRA released its annual regulatory and examination priorities for 2013. FINRA publishes this letter each year to help member firms understand what areas are of concern and where it will enhance scrutiny. Broker-dealers should assess whether their internal controls, supervisory systems, and risk management practices properly address the issues highlighted by FINRA.
Described below are some key examination priorities for 2013. FINRA intends to focus on these areas broadly across its membership and during targeted reviews.
- Business Conduct and Sales Practices – The new Suitability Rule (FINRA Rule 2111) and Know Your Customer Rule (FINRA Rule 2090) became effective on July 9, 2012. FINRA will concentrate on determining whether member firms and their registered representatives understand the products they offer and their associated risks. FINRA continues to have concerns about the representatives’ ability to fully explain these products and risks to customers. Products FINRA intends to spotlight this year include Business Development Companies, Leverage Loan Products, Commercial Mortgage-Backed Securities, High-Yield Debt Instruments, Variable Annuities, Structured Products, Closed-End Funds, Non-Traded REITs, and Private Placements.
- Private Placement Securities – The new Private Placements of Securities Rule (FINRA Rule 5123), which pertains to filing offering documents, became effective December 3, 2012. FINRA will use the information produced from the new filing requirement to enhance its risk-based supervision of private placements and to better identify and assess higher-risk transactions.
- Anti-Money Laundering – Broker-dealers that offer complex products and have higher-risk business models will be an area of heightened attention for FINRA this year. In particular, for U.S. broker-dealers associated with foreign affiliates, FINRA remains concerned about the level of due diligence performed on foreign transactions.
- Insider Trading – FINRA will be evaluating whether member firms have policies and procedures in place for periodic, risk-based testing of information safeguarding and handling of material nonpublic information.
- Cyber-Security and Data Integrity – An ongoing concern for FINRA is the industry’s vulnerability to disruptions of and unauthorized access to customer account information.
- Market Regulation Priorities – FINRA will dedicate additional time to review the development, surveillance, accuracy, and supervisory oversight of firm trading systems. Particular emphasis will be placed on firms that operate an Alternative Trading System (“ATS”) and those firms affiliated with them.
- Fixed Income – In 2013, FINRA will continue to concentrate on trading issues such as fair pricing, best execution, and interpositioning. A specific focus will be fair pricing of collateralized mortgage obligations and mortgage-backed securities.
For more complete information on FINRA exam priorities for 2013, broker-dealers should review the 2013 Regulatory and Examination Priorities Letter.
Please email Dee Stafford or call her at (310) 332-8840 with any questions.
Category: Compliance Alerts
AIFMD Seminar Series – February 12, 2013
Topic: AIFMD Seminar Series – Impact of this New Regulation on Non-European Private Fund Managers
Sponsor: ACA Compliance Group
Location: Fairmont Hotel, 950 Mason Street, San Francisco, CA
Speaker: Ron Weekes
AIFMD Seminar Series – February 19, 2013
Topic: AIFMD Seminar Series – Impact of this New Regulation on Non-European Private Fund Managers
Sponsor: ACA Compliance Group
Location: Hilton New York, 1335 Avenue of the Americas, New York, NY
Speaker: Ron Weekes
Boston Roundtables – 2 Focused Seminars – April 16, 2013
Time: 8:30 a.m. – 3:30 p.m.
Date: April 16, 2013
Co-sponsored by: ACA Compliance Group and K&L Gates
Location: Offices of K&L Gates, State Street Financial Center, One Lincoln Street, Boston
On April 16, 2013, ACA will offer two focused seminars for Chief Compliance Officers:
- a morning session for mutual fund distributors, and
- an afternoon session for investment advisers to private funds.
In each, expert panelists from K&L Gates, ACA, and the industry will discuss topics relevant to the regulatory requirements unique to the target group.
Each session will take place at K&L Gates’ office in Boston and the morning session for mutual fund distributors will also be available via webinar. Please see the details below to learn more about these two events.
Roundtable and Webinar for Mutual Fund Distributors
- Schedule 8:30 a.m. to 9:00 a.m. – Registration and Refreshments
9:00 a.m. to 11:00 a.m. – Interactive Session and Discussion - Potential Topics
- Recent FINRA Actions
- Recent OCIE Initiatives
- State Issues
- FINRA Initiatives
Roundtable for Investment Advisers to Private Funds or Hedge Funds
- Schedule
1:00 p.m. to 1:30 p.m. – Registration and refreshments
1:30 p.m. to 3:30 p.m. – Interactive Session and Discussion - Potential Topics
- Update on SEC investment adviser examinations
- 2013 regulatory priorities and focus areas
- Discussion on compliance best practices, including:
- Pricing and valuation
- Marketing and advertising
- Insider trading and personal account dealing
- Allocation of investment opportunities and fund expenses
Note that, if desired, discussion questions for each roundtable may be submitted anonymously prior to the meetings.
There is no charge for this event.
Please contact Sue Parsons at sparsons@acacompliancegroup.com for more information.
Category: Uncategorized
GIPS Hot Topics – February 26, 2013
Date: February 26, 2013
Topic: GIPS Compliance
Sponsor: ACA
Location: San Francisco
Speaker: Justin Guthrie
General Assembly for the California Association of Public Retirement Systems (CALAPRS) – March 4, 2013
Topic: Effective Compliance Programs for Investment Advisers
Sponsor: California Association of Public Retirement Systems (CALAPRS)
Location: Intercontinental San Francisco, 888 Howard Street, San Francisco, CA 94103
Speaker: Dan Smith, Jorge A. Rodriguez
ACA Hong Kong Roundtable – March 12, 2013
Date: March 12, 2013
Topic: SEC updates, CFTC/NFA updates, and AIFMD
Sponsor: ACA Compliance Group
Location: Conrad-Hong Kong
Speaker: Jeff Morton, Partner, ACA Compliance Group, Ron Weekes, Partner ACA Compliance Group, Europe, Gina Galang, Partner, ACA Compliance Group, Rick Geissman, Principal Consultant, ACA Compliance Group
2013 SEI Conference – March 12, 2013
Date: March 12, 2013
Topic: Operational Risks and Best Practices
Sponsor: SEI
Location: Phoenix, AZ
Speaker: Justin Guthrie
New York City CCO Compliance Roundtable – March 20, 2013
Title: New York City CCO Compliance Roundtable
Time: 8:30 a.m. – 11:00 a.m.
Date: March 20, 2013
Co-sponsored by: ACA Compliance Group and Lowenstein Sandler
Location: Offices of Lowenstein Sandler, 1251 Avenue of the Americas 17th Floor, New York, NY 10020
Speakers: James C. Gange, Chief Compliance Officer at Davidson Kempner Capital Management LLC and Theodore E. Eichenlaub, Partner at ACA Compliance Group
RSVP: Natalie Sheynman
Please join us for a seminar designed to assist CCOs and other compliance professionals in addressing today’s evolving regulatory challenges.
Our panels of experts from Lowenstein Sandler LLP, ACA Compliance Group and CCOs from leading investment firms will discuss real-time developments in the area of investment management.
TOPICS INCLUDE:
- Last Minute Form PF Questions
- Ongoing CFTC/NFA Compliance
- New SWAPS and Derivatives Regulations
- Enforcement, Regulatory and Examination Updates
- JOBS Act
We encourage you to submit questions in advance of the program so that we are able to address them during the event.
Category: Uncategorized
Upcoming Deadline: Annual Compliance Program Reviews for Newly-Registered Investment Advisers – January 29, 2013
“…all registered advisers should periodically undertake a comprehensive review of their operations to identify any gaps in their compliance policies and procedures, make sure that their policies are tailored to the organization, and update them if there have been changes in the firm’s activities or products.”
Bruce Karpati
Chief, Asset Management Unit, SEC Enforcement Division,
December 18, 2012
Have you planned your firm’s annual compliance program review yet?
By law, registered investment advisers must review their compliance programs “no less frequently than annually.” Investment advisers that registered with the SEC on or prior to March 30, 2012, as a result of the Dodd-Frank Act, should be planning their annual reviews now.
As noted by the SEC in adopting Rule 206(4)-7, these reviews should consider, among other things, changes to adviser and affiliate business activities, changes to applicable regulations, and the import of any compliance matters that arose in the previous year. The reviews also should be designed to determine the adequacy of the adviser’s compliance policies and procedures and the effectiveness of their implementation.
Let the experts at ACA Compliance Group conduct your firm’s annual compliance program review. ACA’s team of former SEC examiners and in-house compliance professionals performs hundreds of these reviews each year. These engagements include
- extensive interviewing of key employees;
- comprehensive books and records reviews;
- walk-throughs of critical systems;
- detailed forensic testing;
- thorough scrutiny of compliance policies, procedures, and processes; and
- written reporting of findings and recommendations.
Now is also the time to ensure your firm’s readiness for an SEC examination. In particular, as discussed in our October 10, 2012 alert, newly-registered investment advisers should be taking steps to confirm their preparedness for an SEC presence exam.
Do not wait until it is too late – schedule your annual compliance program review or mock SEC presence exam now. For more information on ACA’s services, please email Luke Wilson or call (312) 505-0307.
Category: Compliance Alerts
AIFMD Seminar Series – March 12, 2013
Topic: AIFMD Seminar Series – Impact of this New Regulation on Non-European Private Fund Managers
Sponsor: ACA Compliance Group
Location: Hong Kong (Part of the ACA Regulatory Seminar)
Speaker: Ron Weekes
Critical Business Events: Preparing to Communicate Effectively with Clients, Regulators and the Media – February 20, 2013
Title: Critical Business Events: Preparing to Communicate Effectively with Clients, Regulators and the Media.
Time: 4:00 p.m. – 5:30 p.m.
Date: February 20, 2013
Co-sponsored by: ACA Compliance Group and Hirschler Fleischer
Location: Offices of Hirschler Fleischer, 2100 East Cary Street Richmond, VA 23223
A significant business event—change in ownership, key person departure or regulatory inquiry—often occurs quickly, leaving little time to prepare how, when and to whom the event should be communicated. Conveying accurate, timely and appropriate information to clients and other constituent groups can protect reputation, revenue and employee morale. Please register to attend a unique event that will explore how to develop an effective communication plan that will be ready if such an event occurs.
Opening Remarks:
Jay Poole, former Vice President, Corporate Communications, Altria Group
Panel:
Tammy DeRosier , Executive Vice President, Dorsey Wright & Associates
Brian Farmer, Shareholder, Hirschler Fleischer
Steve Kneeley, CEO, Spider Management Company (formerly with Ardmore Partners/ Turner Investment Partners)
Gary Watkins, Partner, ACA Compliance Group
Following the panel discussion, there will be an open roundtable session where participants can discuss current regulatory topics and issues of interest.
There is no charge for this event.
If you have any questions or would like to register, please contact Sue Parsons at sparsons@acacompliancegroup.com.
Category: Uncategorized
AIFMD Seminar Series – April 10, 2013
Topic: AIFMD Seminar Series – Impact of this New Regulation on Non-European Private Fund Managers
Sponsor: ACA Compliance Group
Location: Opryland Conference Center, Nashville, TN
Speaker: Ron Weekes
Now’s the Time to Reflect on the Valuation Process – January 25, 2013
If you are involved with mutual fund boards of directors, you probably are aware of recent Securities and Exchange Commission (“SEC”) enforcement proceedings against boards and/or their investment advisers that allege incorrect valuing of portfolio securities or an apparent failure to oversee the process. While the latter is still open for interpretation and discussion, as the accused directors in the matter have vowed to fight the SEC charges, it still deserves attention, especially since it appears that a board must take an active role in the valuation process rather than relying too heavily on delegating day-to-day valuation decisions to the investment adviser and valuation committee.
But is reliance on delegating the valuation process the real issue? Does the SEC really expect the board to determine the daily value of portfolio securities, or should the real concern be that some boards might take such delegation to mean they can “bury their heads in the sand” and take no further responsibility for exercising appropriate oversight over the process? In accordance with SEC guidance, boards may delegate the day-to-day responsibility for the valuation process to others, starting with a subset of members: the valuation committee. However, implicit to delegation is oversight responsibility. It is on this that the board and valuation committee should reflect. The board needs to conduct periodic and regular due diligence of the valuation process to meet its legal obligation to fair value portfolio securities. The valuation committee, at the same time, needs to ensure that delegated parties carry out board-approved policies, which is crucial to satisfying the board’s oversight duty.
ACA has developed the following sample questions that boards and their valuation committees can use to help guide their review of fair-valuation policies, processes, and obligations. Additional questions will no doubt arise during the assessment process.
- Are the valuation committee’s scope of delegated authority and reporting obligations to the board clearly defined? Are the authority and obligations still relevant with respect to the types of funds overseen by the board?
- Has the board provided guidance to the valuation committee on how to fair value securities, including specific types of securities? Has the valuation committee communicated such guidance to fund management?
- Are reporting requirements being followed? Do the reports provide meaningful information to the board and valuation committee to allow them to (a) review the appropriateness of methods used to value securities, and (b) determine the basis for fair-value determinations or the reason certain methods were not used?
- How frequently does the valuation committee review and question individual fair values, fair-valuation methodologies, or fair-value issues raised by fund management? How does the committee document this action? Does fund management respond in a documented and timely manner?
- What is the escalation policy for fund management to bring fair-value situations to the valuation committee’s attention? What reporting is provided in support of established methodologies? Does the valuation committee receive fair-valuation memorandums at the time of a fair-value determination or at the next quarterly meeting? Do committee meeting minutes reflect all discussions of valuation? Do committee materials contain memorandums discussing valuation? Does the board ratify the fair-valuation determinations?
- Does the board or the valuation committee periodically request reports from fund management that discuss the full valuation process? What issues have been identified? How are they resolved?
- Are approved pricing vendors and their quality of prices regularly reviewed? Are primary vendor prices regularly compared against secondary vendor prices? Are price tolerances established that result in further price evaluation if breached?
- When employing a third party to value non-U.S. securities, are reports being requested that compare the fair values versus the next-day open price? Have the established “event trigger” and vendor been reviewed since initial implementation?
- Are prices on newly established positions or new offerings compared against the cost of the positions to ensure reasonableness of the vendor price?
- Are fair values compared against observed sale prices or against vendor prices or broker prices once deemed reliable again?
- What ongoing monitoring of market and other events does the valuation committee use to determine the continued validity of prices? When presented with issues similar to the 2008/2009 credit crisis, does the valuation committee reevaluate procedures for determining prices for securities that have been deemed illiquid or have experienced deteriorating credit quality?
- Does the valuation committee receive reports on stale prices, price challenges made by investment managers, or items that resulted in price overrides of vendor prices?
- Are identified NAV errors that do not meet the 1/2 of 1% threshold being escalated to the valuation committee?
We encourage boards and valuation committees to thoroughly, deliberately, and objectively review and discuss their fair-valuation policies, processes, and obligations. While the answers to some of the questions above may seem obvious and some questions may seem to take you backwards, we still encourage you to ask them. The answers to these and other questions will help ensure the fair-valuation process is “owned” by the board rather than simply delegated.
ACA Compliance Group assists mutual funds and their sponsors in reviewing their adopted valuation policies and procedures and can perform independent regulatory assessments of the valuation and board-reporting process.
For more information on our consulting services described above or to learn more about our Investment Company Services Division, please email
- Nick Prokos at nprokos@acacompliancegroup.com, or
- Shannon Behara at sbehara@acacompliancegroup.com.
Institutional Investor Institute Senior Delegate – January 24, 2013
Name of Event: Institutional Investor Institute Senior Delegate Roundtable
Date: 1/24
Topic: Navigating the Regulator Forest
Sponsor: Institutional Investor
Location: Ritz Carlton Bachelor Gulch, Avon, Colorado
Speaker: Dan Smith
Category: 2013 Speaking Engagements
Upcoming Form PF Filing Deadlines – January 23, 2013
Upcoming Form PF Filing Deadlines
If your firm serves as the investment adviser to one or more private funds, you are undoubtedly aware of the requirement to file new Form PF with the U.S. Securities and Exchange Commission (“SEC”). ACA would like to remind you of the upcoming filing deadlines for various classifications of private fund advisers. These deadlines are applicable to firms with a December 31st fiscal year-end:
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Filing Deadline
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Firms Subject to this Deadline
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March 1, 2013
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April 30, 2013
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1The initial quarterly Form PF filing is due within 60 days of quarter-end if an adviser’s hedge fund RAUM exceeds $1.5 billion as of any month-end during the previous calendar quarter.
As a reminder, please ensure that your firm funds its IARD daily account with $150 in advance of its Form PF filing date. Your firm will not be able to submit its Form PF if the account is not funded.
Allocating Resources to Meet Your Filing Deadline
Given the amount of time and effort that is necessary to complete the Form PF, we hope that most firms have already begun the planning process. If not, we strongly urge firms that will be making their first filing in March or April 2013 to start planning now. As a first step, firms should consider the following:
- Determine which sections of Form PF will need to be filed, and review each question in those sections to discuss any interpretive issues.
- Develop an internal Form PF working group comprised of representatives from various functional areas within the firm to assist in the completion of the applicable required sections.
- Determine whether the firm will utilize a third-party service provider to assist with the filing process.
- Complete one or more Form PF test filings using September 30, 2012 or December 31, 2012 data, if available.
Availability of ACA Resources
Online Form PF Forum
In discussing Form PF with our clients, ACA has found that many firms are seeking perspective from, and comparison to, their peers. Because many questions on the Form PF can be interpreted in different ways, firms appear concerned that their particular interpretation of a question will be flagged by the SEC or Financial Stability Oversight Council as an “outlier.”
To address these concerns, ACA has developed an online Form PF Forum in order to provide our clients and other SEC-registered advisers with efficient access to the views and perspectives of a variety of industry participants. You may visit the ACA Form PF Forum here. You should have received a username/password via an ACA alert in August 2012 or during the onboarding process if you are a new ACA client. Structured similarly to an online message board, the Form PF Forum allows ACA clients and other individuals associated with SEC-registered investment advisers to post specific questions regarding Form PF, and to review responses posted by other firms and ACA consultants. If you do not have a username or password, please contact Amanda DeVito at adevito@acacompliancegroup.com.
Focused Form PF Reasonableness Reviews
In addition to the online Form PF Forum, ACA is offering clients a focused reasonableness review of Form PF. Specifically, we are available to perform the following:
- Review assumptions used in Form PF for reasonableness.
- Confirm that required sections of the Form PF are completed.
- Confirm that all questions include a response.
- Assess any “N/A” responses where a numerical response would be expected.
- Review information provided in responses against marketing materials, investor communications, and Form ADV for consistency.
Relationships with Vendors Offering Form PF Filing Solutions
Finally, as a reminder, ACA has entered into client discount arrangements with certain service providers that offer Form PF filing solutions. These arrangements provide our clients with discounts off of the service providers’ standard rates. We would be pleased to describe these service providers to you and provide you with their contact information.
If you have any questions regarding ACA’s Form PF Forum, Form PF referral arrangements, or Form PF requirements, please contact your ACA Consultant or formpf@acacompliancegroup.com.
Category: Compliance Alerts
ACA Compliance Group Offers Mock Corrective Action Reviews – January 22, 2013
Would your broker-dealer be ready for an SEC Corrective Action Review?
The SEC staff recently announced plans to conduct follow-up reviews of certain examinations. These reviews will determine whether firms have corrected deficiencies as they indicated to the staff in response to Examination Findings letters. Through these reviews, SEC examiners seek to identify instances of recidivism, which have been the basis for past enforcement referrals. ACA has also observed examiners placing significant emphasis on the corrective action broker-dealers take in response to deficiencies identified through internal audits and Rule 3012 testing.
Given this development, now more than ever it is important for broker-dealers to address identified deficiencies. Both the SEC and FINRA staff expect firms to demonstrate effectively that they have remediated the gaps and weaknesses in their compliance and supervisory programs. Regulators have also in the past indicated their intent to give firms credit when they proactively find and remediate a problem (see, for example Securities Exchange Act Release No. 44969 and FINRA Regulatory Notice 08-70).
To aid your broker-dealers in confirming the successful remediation of previously identified deficiencies, ACA now performs mock Corrective Action Reviews. This review evaluates the corrective actions taken by your firm in response to deficiencies detected internally and by regulators. Testing covers all areas of your compliance program, including
- risk management,
- supervisory practices,
- written supervisory procedures manual design,
- registered individual oversight,
- compliance program surveillance techniques and tools,
- trading and operational controls, and
- books and records retention.
At the end of our reviews, we provide a Corrective Action Confirmation Matrix that will assure your firm’s management and regulators that corrective action has been appropriately applied and that your compliance program will reasonably prevent future deficiencies.
ACA Compliance Group, the nation’s leading regulatory and compliance consulting firm, offers tailored compliance solutions to broker-dealers, registered investment advisers, private funds, and, investment companies. The ACA consulting team is comprised of former SEC, FINRA, CFTC, NFA, and state regulators as well as senior compliance managers from global financial institutions. By partnering with ACA, our clients gain confidence from knowing that their compliance programs are supported by leading regulatory experts.
For more information on our Mock Corrective Action Reviews or any of ACA’s services, please contact Dee Stafford at (310) 322-8840 or dstafford@acacompliancegroup.com.
Category: Compliance Alerts
Legal Entity Identifiers (“LEI”) – January 18, 2013
The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Office of Financial Research (“OFR”), which supports the Financial Stability Oversight Council (“FSOC”). These agencies were brought into being to improve the financial data available to regulators and other market participants and to enable financial system analyses of greater depth. As part of their responsibilities, the FSOC and OFR are working on a global identification program to categorize firms involved in financial transactions within the U.S. and abroad. When the project is complete, these firms will be provided with a single universal identifier known as the Legal Entity Identifier (“LEI”). Among other things, the LEI will help firms measure and manage counterparty exposure more efficiently. The LEI will also be useful to regulators in identifying potential financial market risks.
On July 24, 2012, the U.S. Commodity Futures Trading Commission (“CFTC”) became the first regulatory agency to authorize use of a universal identifier. On that date, it issued an order designating the Depository Trust & Clearing Corporation and SWIFT (“DTCC-SWIFT”) as the provider of LEIs for an interim period of two years. Registered entities and swap counterparties will use these LEIs to comply with the CFTC’s swap data reporting regulations. The DTCC-SWIFT LEIs will be known as CFTC Compliant Interim Identifiers (“CICIs”) until the industry transitions to a global LEI system. CFTC Rule 17 CFR Part 45, “Swap Data Recordkeeping and Reporting Requirements,” requires swap dealers (“SDs”), major swap participants (“MSPs”), and certain other market participants that execute over-the-counter (“OTC”) derivatives trades to report the CFTC-regulated transactions to a swap data repository. The reporting party must use CICIs to identify itself, its counterparties, and any underlying entities. Registered SDs and MSPs have had to use the new identifiers since October 12, 2012, for the reporting and recordkeeping of OTC derivatives transactions in credit default swaps and interest rate swaps. This requirement will be extended to include OTC foreign exchange, commodity, and equity derivatives beginning on January 10, 2013.
According to CFTC guidance, by April 10, 2013, all counterparties, including SDs, MSPs, and non-SD/MSPs, that execute OTC derivatives transactions subject to CFTC oversight must self-register for a CICI or “certify” the pre-populated reference data in the CICI utility database. While the non-SD/MSPs may not be the reporting counterparty, each participant involved in the transaction must have a CICI. In addition, CICIs can be requested for all parties in financial transactions, including but not limited to registered companies, municipal corporate entities, private funds, fund managers, government departments, partnerships, and charities. (Please note that individuals are specifically excluded from the LEI or CICI requirement and that branch offices or operating divisions should use their parent company’s CICI rather than requesting one of their own.)
How do LEIs apply to you? If your firm must file or has already filed Form PF, you may be aware of certain questions on the form pertaining to the LEI. Recently, the Securities & Exchange Commission (“SEC”) updated its Form PF FAQs to inform filers that the CICI may be used in response to questions that request the LEI. Also, if your firm executes OTC derivatives transactions, you may have received a request from your ISDA counterparties to complete a questionnaire designed to collect certain information required by the CFTC. To complete the questionnaire, you will need a CICI.
CICIs are assigned and maintained through DTCC-SWIFT’s portal, which can be accessed via this link: https://www.ciciutility.org. The registration/certification fee is US$200 per legal entity and must be paid directly via the web portal by credit card. After the first year, an annual maintenance fee of US$100 will also be charged to each legal entity.
Before applying for a CICI, we suggest you review the information available at the DTCC-SWIFT portal to see if your firm has been pre-populated in the CICI utility database. You can search the DTCC-SWIFT database free of charge for this purpose. If your entity has been pre-populated, you should “self-certify” your records. If it has not been pre-populated, you must create an online account to self-register your entity for a CICI.
If you have any questions regarding CICIs or CFTC Rule 17 CFR Part 45, please contact Scott Brindley or Rick Geissman in our New York office at (212) 868-5940.
If you have any questions regarding Form PF, please contact ACA’s Filing Team at (973) 631-1085 or formpf@acacompliancegroup.com.
Category: Compliance Alerts
2013 Hedge Fund Institutional Forum (HFIF) Senior Delegates Roundtable – February 3, 2013
Topic: Between the Waves: Absorbing Recent Regulations and Anticipating New Ones
Sponsor: Institutional Investor
Location: Ritz-Carlton Beach Resort in Naples, FL
Speaker: Barry
Category: 2013 Speaking Engagements
ACA Spring 2013 Conference – Managing Compliance in Sub-Advisory Relationships – April 12, 2013
Name of Event: ACA Spring 2013 Conference
Date: April 12, 2013
Topic: Managing Compliance in Sub-Advisory Relationships
Sponsor: ACA Compliance Group
Location: Nashville, TN
Speaker: Erik Olsen
Category: 2013 Speaking Engagements
SEC Examining Foreign Registered Investment Advisers, November 28, 2012
Dear Clients and Friends,
ACA has observed an uptick in SEC examinations of registered investment advisers operating from a principal place of business outside the United States.
The Commission is targeting such advisers across the globe as part of its risk-focused exam strategy. It announces these inspections via telephone and follows the call with a formal letter and initial information request list. Firms based as far away as Hong Kong and as close as Canada have received SEC inspection notices.
The initial information request lists typically ask advisers to provide some or all of the following materials:
- Client lists
- Organization charts
- Marketing materials
- Financial records
The SEC inspections typically take place off-site and advisers are being asked to provide requested documentation electronically. Notably, the requests focus largely on activities linked to existing and prospective U.S. clients and investors. (Click here for an initial information request list from the SEC’s Office of Compliance Inspections and Examinations in Washington, D.C.)
Registered investment advisers operating from a principal place of business outside the U.S. must be ready to undergo an SEC correspondence exam. Firms that can respond to the initial information request list in a timely and accurate manner and that can effectively demonstrate maintenance of high-quality compliance programs are less likely to receive heightened scrutiny. Registered investment advisers can accomplish this by, among other things, maintaining up-to-date compliance policies and procedures tailored to their advisory activities, “plain-English” disclosure documents, and marketing materials free of misleading information.
ACA specializes in preparing domestic and foreign-based registered investment advisers for SEC inspections. In fact, ACA’s team of former SEC examiners and in-house compliance professionals conducts hundreds of mock SEC inspections each year. ACA’s compliance experts operate from offices throughout the U.S. and U.K. In addition, ACA is expecting to formally open its first office in Asia in early 2013.
For more information on ACA’s Mock SEC Inspection services, please email:
In the Americas: Luke Wilson
In Europe: Ron Weekes
In Asia: Gina Galang.
Best regards,
ACA Compliance Group
Category: Compliance Alerts, Compliance Alerts 2012
New York City Compliance Officer Roundtable – Attorney Advertising, January 24, 2013
Title: New York City Compliance Officer Roundtable Series – Winter 2013
Time: 8:00 a.m. – 11:30 a.m.
Date: January 24, 2013
Co-sponsored by: ACA Compliance Group and Sidley Austin LLP
Location: Offices of Sidley Austin, 787 Seventh Avenue, New York, NY 10019
Our panel will focus on regulatory, compliance and enforcement hot topics for investment advisers. We are pleased to feature Andrew Bowden, Deputy Director of the SEC’s Office of Compliance, Inspections and Examinations and Andrew Calamari, Director of the SEC’s New York Regional Office. Our panel will cover:
- Update on OCIE’s investment adviser examination program: insights into best practices and common mistakes
- Update on investment adviser enforcement proceedings: staying out of the penalty box
- SEC regulatory agenda: what’s new and what’s on the horizon.
The meeting will start with coffee then move into a presentation by the SEC speakers and end with the Roundtable discussion.
There is no charge for this event.
If you have any questions or would like to register, please contact Sue Parsons at sparsons@acacompliancegroup.com.
Category: Uncategorized
Best Practices for Launching & Managing a BDC – January 31, 2013
Date: January 31, 2013
Topic: Complying With Regulations – Navigating the Details of BDC/RIC Compliance & Valuation
Sponsor: Capital Roundtable
Location: New York City
Speaker: Nick Prokos, Partner
California Joins Several Other States in Enacting Social Media Privacy Laws – November 9, 2012
On September 27, 2012, California Governor Jerry Brown signed Senate Bill No. 1844 that will, in his words, “protect Californians from unwarranted invasions of their social media accounts.” Effective January 1, 2013, employers and colleges will be prohibited from requiring prospective applicants to provide access to their social media sites.
Specifically, the new law prohibits employers and colleges from asking prospective candidates
- to disclose usernames or passwords used to access personal social media,
- to access their personal social media in the employer’s presence, or
- to reveal any personal social media information.
In addition, the new law bans employers from penalizing, discharging, threatening to discharge or discipline, or otherwise retaliating against employees or applicants that do not comply with employer requests or demands that violate the statute.
The law also provides limited exceptions to these restrictions. For example, the law does not apply to electronic devices issued by employers or in cases where the employer seeks such information related to a misconduct investigation.
It has been noted that other states have been enacting and/ or contemplating similar statutes. Maryland was the first state to enact social privacy legislation in May 2012. In all, fourteen states introduced or passed legislation in 2012 that would restrict employers from requesting access to social networking usernames and passwords of applicants or employees, according to the National Conference of State Legislatures. Federal legislation regarding social medial privacy has also been introduced under the Password Protection Act of 2012.
Even though these social media laws attempt to protect the privacy of applicants and employees of financial services firms, they pose significant difficulties for broker-dealers seeking to supervise the social media activities of their associated persons. ACA recommends that firms that have not already done so update their written policies to reflect the restrictions on requesting access to social media sites. Broker-dealers should also ensure that supervisors and those who interview employees have received adequate training on their firm’s social media policy.
For more information on this issue or to learn more about the conflicts between state privacy provisions and broker-dealer regulation, please contact your ACA Consultant or Dee Stafford at (561) 988-3310 or via dstafford@acacompliance.com.
Category: Compliance Alerts
Social Media Roundtable – November 8, 2012
Name of Event: Social Media Roundtable
Date: November 8, 2012
Topic: Compliance concerns and new business development possibilities for investment advisers implementing a social media strategy.
Sponsor: Fidelity Institutional Wealth Services
Location: Houston, TX
Speaker: Luke Wilson
Category: 2012 Speaking Engagements
NCREIF Fall Conference 2012 – November 8, 2012
Name of Event: NCREIF Fall Conference 2012
Date: 11/8/12
Topic: Benchmarks for Real Estate Managers
Location: Orlando
Speaker: Charlie Stout
Category: 2012 Speaking Engagements
CPO/CTA Registration Deadline Approaching – November 8, 2012
The December 31 CPO/CTA registration deadline is rapidly approaching. As a reminder, December 31 is the current deadline for actual registration (not application). The process for registering with the CFTC and becoming an NFA member is time-consuming. It involves various stages such as drafting and filing applications, preparing for and passing individual proficiency examinations (e.g., the Series 3 examination), conducting fingerprinting and background checks, and then awaiting NFA’s approval. In addition, to be compliant on January 1, new registrants must have a CFTC/NFA-specific compliance program in place, including written policies and procedures. There is little time to delay if you or your firm has these obligations.
Many firms are engaging us to assist them with CPO/CTA registration. Our expert team of former NFA staff members is working diligently to prepare these clients and meet all registration and regulatory requirements. However, given the resource constraints regulators face, firms risk not receiving timely approval if they fail to submit their applications by mid-November. Therefore, if you are considering ACA to assist with CPO/CTA registration, please contact us promptly.
Additional information on CPO/CTA registration requirements and exemptions can be found in our Compliance Alert.
We would welcome the opportunity to work with you and your firm. For information about our NFA Member registration and regulatory support services, please contact Scott Brindley or Rick Geissman in our New York office at (212) 868-5940.
Category: Compliance Alerts 2012
Upcoming Form PF Filing Deadlines – November 8, 2012
If your firm serves as the investment adviser to one or more private funds, you are undoubtedly aware of the requirement to file new Form PF with the U.S. Securities and Exchange Commission (“SEC”). ACA would like to remind you of the upcoming filing deadlines for various classifications of private fund advisers. These deadlines are applicable to firms with a December 31, 2012 fiscal year-end:
|
Filing Deadline
|
Firms Subject to this Deadline
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| March 1, 2013 |
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| April 30, 2013 |
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1The initial quarterly Form PF filing is due within 60 days of quarter-end if an adviser’s hedge fund RAUM exceeds $1.5 billion as of the previous quarter-end.
In addition, large hedge fund advisers that have completed their first Form PF filing in August 2012 (firms with greater than $5 billion in RAUM attributable to hedge funds as of March 31, 2012) are required to file their first quarterly update for the 3rd quarter of 2012 by November 29, 2012.
Allocating Resources to Meet Your Filing Deadline
Given the amount of time and effort that is necessary to complete the Form PF, we urge firms that will be making their first filing in March or April 2013 to start planning now. As a first step, firms should consider the following:
- Determine which sections of Form PF will need to be filed, and review each question in those sections to discuss any interpretive issues.
- Develop an internal Form PF working group comprised of representatives from various functional areas within the firm to assist in the completion of the applicable required sections.
- Determine whether the firm will utilize a third-party service provider to assist with the filing process.
- Complete one or more Form PF test filings using September 30, 2012 or other quarter-end data.
Availability of ACA Resources
Online Form PF Forum
In discussing Form PF with our clients, ACA has found that many firms are seeking perspective from, and comparison to, their peers. Because many questions on the Form PF can be interpreted in different ways, firms appear concerned that their particular interpretation of a question will be flagged by the SEC or Financial Stability Oversight Council as an “outlier.”
To address these concerns, ACA has developed an online Form PF Forum in order to provide our clients and other SEC-registered advisers with efficient access to the views and perspectives of a variety of industry participants. You may visit the ACA Form PF Forum here. You should have received a username/password via an ACA alert in August 2012 or during the onboarding process if you are a new ACA client. Structured similarly to an online message board, the Form PF Forum allows ACA clients and other individuals associated with SEC-registered investment advisers to post specific questions regarding Form PF, and to review responses posted by other firms and ACA consultants. If you do not have a username or password, please contact Amanda DeVito at adevito@acacompliancegroup.com.
Various questions and responses have been posted on the ACA Form PF Forum. ACA consultants have responded to questions on the online Form PF Forum regarding the treatment of fund-of-funds and filing deadlines. Additionally, certain questions seek guidance on how other firms are calculating trading volume and treating tri-party repos for purposes of responding to question 24, how firms are calculating unencumbered cash, and whether or not firms are charging expenses related to Form PF filings to their private funds.
Focused Form PF Reasonableness Reviews
In addition to the online Form PF Forum, beginning in January 2013 ACA will be offering to clients a focused reasonableness review of Form PF. Specifically, we are available to perform the following:
- Review assumptions used in Form PF for reasonableness.
- Confirm that required sections of the Form PF are completed.
- Confirm that all questions include a response.
- Assess any “N/A” responses where a numerical response would be expected.
- Review information provided in responses against marketing materials, investor communications, and Form ADV for consistency.
Relationships with Vendors Offering Form PF Filing Solutions
Finally, as a reminder, ACA has entered into client discount arrangements with certain service providers that offer Form PF filing solutions. These arrangements provide our clients with discounts off of the service provider’s standard rates. We would be please to describe these service providers to you and provide you with their contact information.
If you have any questions regarding ACA’s Form PF Forum, Form PF referral arrangements, or Form PF requirements, please contact your ACA Consultant or acaformpf@acacompliancegroup.com.
Category: Compliance Alerts 2012
Learnings From the First Filings – November 7, 2012
Name of Event: Form PF Webinar: Learnings From the First Filings
Date: 11/7/2012
Topic: Form PF
Sponsor: Indus Valley Partners
Location: Webinar
Speaker: Jack Rader
Third-Party Marketer Annual Conference – November 8, 2012
Name of Event: Third-Party Marketer Annual Conference
Date: November 8
Topic: 2012 FINRA Regulatory Updates
Sponsor: Third Party Marketers Association
Location: Boston
Speaker: Travis Dragomani
Category: 2012 Speaking Engagements
Investment Advisor Compliance – Wednesday, November 7, 2012
Name of Event:
Date: Wednesday, November 7, 2012
Topic: Investment Advisor Compliance
Sponsor: Association of Public Pension Fund Auditors
Location: Portofino Hotel, Redondo Beach, CA
Speaker: Dan Smith, Partner, ACA Compliance Group andJorge Rodriguez,Consultnat, ACA Compliance Group
Social Media Roundtable – October 23, 2012
Name of Event: Social Media Roundtable
Date: October 23, 2012
Topic: Social Media (reviewed the regulatory and compliance concerns associated with investment adviser’s use of social media)
Sponsor: Fidelity Institutional Wealth Services
Location: Washington, D.C.
Speaker: Erik Olsen
Category: 2012 Speaking Engagements
Electronic Communication Reviews: Making the Most of Compliance Resources-October 17, 2012
Name of Event: Electronic Communication Reviews: Making the Most of Compliance Resources
Date: 10/17/12
Topic: Structuring electronic communication reviews
Sponsor: ACA Compliance Group
Location: San Diego, CA
Speaker: Joshua Broaded
ACA’s Support for Auditors Conducting Broker-Dealer Financial Audits – October 15, 2012
| Dear Clients and Friends,
The Public Company Accounting Oversight Board (“PCAOB”) recently released an interim report of its observations from inspections of auditors of broker-dealers. The PCAOB’s inspections found that a number of the audits failed to utilize sufficient audit procedures and that, in some instances, the auditors failed to perform tests of the broker-dealers’ net capital computations. The PCAOB’s report indicated that auditors were not “properly fulfilling their responsibilities to provide an independent check on brokers’ and dealers’ financial reporting and compliance with SEC rules.” Although the number of auditors and audits reviewed at this point is small, the PCAOB anticipates that it will inspect approximately 100 auditors and 170 audits by the end of 2013. These interim program results will be the foundation for the permanent inspection program that will be adopted by the PCAOB.1 To assist public accountants in performing audits acceptable to the PCAOB, ACA’s broker-dealer regulatory experts provide the following services:
ACA Compliance Group, the nation’s leading regulatory compliance consulting firm, provides customized compliance solutions to registered investment advisers. Our former SEC, FINRA, NFA, FSA, and state inspectors support investment advisers, private fund managers, municipal advisors, broker-dealers, and mutual fund complexes with comprehensive and customized compliance solutions. If you would like more information on how ACA can assist you, please email Dee Stafford or call 561-988-3310. Best regards, ACA Compliance Group |
NRS 27th Annual Fall Conference – October 12, 2012
Name of Event: NRS 27th Annual Fall Conference
Date: October 12, 2012
Topic: Tools from My Workbench: Seasoned Compliance Professionals Share Their Proven Methods for Getting the Job Done (discussed how to make the most of limited resources, how to get management’s buy-in for compliance, making sure compliance isn’t the last to know, and how to enforce procedures up the org chart)
Sponsor: National Regulatory Services (NRS)
Location: San Diego, CA
Speaker: Erik Olsen (co-panelist with 2 other non-ACA speakers)
Category: 2012 Speaking Engagements
ConvergEx’s Eze Castle Software 2012 Client Conference – October 12, 2012
Name of Event: ConvergEx’s Eze Castle Software 2012 Client Conference
Date: 10/12/2012
Topic: Form PF
Sponsor: ConvergEx’s Eze Castle Software
Location:Boston, MA
Speaker: Jack Rader
Category: 2012 Speaking Engagements
SEC Initiates “Presence Exams” for Newly-Registered Private Fund Managers – October 10, 2012
Private fund managers that registered with the SEC as a result of Dodd-Frank must ensure that they are fully prepared for a visit from the SEC in the next 12 – 24 months.
The U.S. Securities and Exchange Commission (“SEC” or “Commission”) has just announced a new initiative to conduct “Presence Exams” of newly-registered managers to private funds. The announcement, “Letter to Industry Regarding Presence Exams” (October 9, 2012), was emailed to Chief Compliance Officers, posted on the SEC website, and postal mailed to firms’ senior executives and principals.
Please note that receipt of this letter does not indicate selection for an actual examination. SEC staff will be contacting firms chosen for Presence Exams separately.
The initiative was launched by the SEC’s National Exam Program, which is administered by the SEC’s Office of Compliance Inspections and Examinations. The National Exam Program is comprised of examination staff from the SEC’s 11 regional offices and the Washington, D.C. home office.
According to the announcement letter, the Presence Exams initiative will consist of three phases:
Engagement ‒ This phase involves a nationwide outreach to educate new registrants on their obligations under the Advisers Act. As part of this outreach, the exam staff has compiled and posted reference resources on the SEC website, emphasized the agency’s existing Compliance Outreach Program, and highlighted key speeches and documents within the October 9 letter.
Examination ‒ During this phase, which is expected to begin shortly and take place over the next two years, examiners will select certain new registrants to receive a focused, risk-based exam. During these Presence Exams, examiners will review one or more of the following five “higher risk” areas:
- Marketing
- Portfolio Management
- Conflicts of Interest
- Safety of Client Assets
- Valuation
The letter provides details on each of these focus areas. Of particular interest for private fund managers: the staff stated that examiners will review how advisers solicit investors for their private funds, including the use of placement agents. The letter also noted that the staff will review payments made by private funds to advisers and related persons, as well as private funds’ expense allocation practices.
Reporting ‒ At the end of the two-year Examination phase, the National Exam Program staff will report their observations to the Commission and the public. These reports may cover topics such as common practices identified in the higher-risk areas, industry trends, and significant issues.
It is imperative that registered investment advisers stand ready to undergo an SEC Presence Exam. We believe a firm that can effectively demonstrate that it maintains a strong compliance program is less likely to face a lengthy, more comprehensive on site examination. ACA specializes in preparing registered investment advisers for regulatory examinations. ACA’s team of former SEC examiners and in-house compliance professionals conduct hundreds of on site compliance program reviews each year.
For more information on Presence Exams or ACA’s SEC Examination Preparation services, please contact your consultant or Damon Zappacosta at (212) 868-5940.
Category: Compliance Alerts 2012
NAIPFA 2012 Annual Conference – October 4, 2012
Name of Event: NAIPFA 2012 Annual Conference
Date: October 4, 2012
Topic: Regulation Requirements for Municipal Advisors
Sponsor:
Location: Alexandria, VA
Speaker: Dan Campbell
Category: 2012 Speaking Engagements
Dodd Frank Conference – October 3, 2012
Name of Event: Dodd Frank Conference
Date: October 3, 2012
Topic: “Impact on Investment Firms” panel
Sponsor: CFA Society of Washington DC
Location: Patton Boggs, LLP, 2550 M Street, NW, Washington, DC 20037
Speaker: Victoria P. Hulick
Category: 2012 Speaking Engagements
CFTC Compliance Obligations Looming ‒ October 2, 2012
Dear Clients and Friends,
In approximately 90 days, rules adopted by the Commodity Futures Trading Commission (“CFTC”) will require many private fund managers to be registered as commodity pool operators (“CPOs”) and/or commodity trading advisors (“CTAs”). This includes fund-of-funds managers. In addition to CFTC registration, private fund managers must become Members of the National Futures Association (“NFA”). Even those private fund managers that can avoid registration and membership may face new annual exemption filing requirements for their funds.
There is little time to delay. December 31 is the deadline for registration (not simply for applying for registration). Before then, private fund managers must obtain access to the NFA filing system, complete their registration applications, update their pool exemption filings, and adopt new internal policies and procedures. In addition, certain employees must be designated as principals and associated persons and their fingerprints must be submitted to the NFA. Finally, in many cases, associated persons have to pass the Series 3 proficiency examination.
Fortunately, ACA has solutions to ease the burden of registration and ongoing compliance with CFTC and NFA regulations. To help meet increased demand in these areas, we have also added three experts to our NFA Division in New York:
• Rick Geissman, Principal Consultant ‒ Prior to joining ACA, Rick was a Senior Associate with a Big Four accounting firm’s regulatory consulting practice. In this role, Rick worked on projects related to NFA and CFTC regulatory compliance, including swap dealer registration under the Dodd-Frank Act. Rick began his career at the NFA, where he applied his comprehensive knowledge of NFA and CFTC rules and regulations during inspections and investigations of Member firms across all registration categories.
• Peter Comes, Consultant ‒ Before coming to ACA, Peter spent over three years as an Auditor and Field Supervisor in the NFA’s Chicago office. While there, he led audits and investigations of Member firms in all registration categories, including CPOs and CTAs.
• Dylan Fodel, Senior Analyst ‒ Prior to joining ACA, Dylan served as a Compliance Auditor in the NFA’s New York office. During his tenure there, he planned and conducted audits of Member firms, reviewed Member financial statements to ensure compliance, and advised NFA Members regarding NFA and CFTC regulations.
For more information, please contact Damon Zappacosta in our New York office at (212) 868-5940 or Nick Batinich in our Chicago office at (312) 201-9620.
Sincerely,
ACA Compliance Group
PROVIDING ASSURANCE THROUGH EXPERIENCE
Category: Compliance Alerts 2012
The Chicago CCO Group – September 25, 2012
Name of Event: The Chicago CCO Group
Date: September 25, 2012
Topic: CFTC Part 4 Changes and Recent Developments for CPOs and CTAs
Sponsor: ACA
Location: Chicago, IL
Speaker: Scott Brindley
Association of Public Pension Fund Auditors, Inc. (APPFA) Conference – November 7, 2012
Name of Event: Association of Public Pension Fund Auditors, Inc. (APPFA) Conference
Date: 11/7/12
Topic: Effective Compliance Programs for Registered Investment Advisers
Sponsor: APPFA
Location: Redondo Beach, CA
Speaker: Jorge A. Rodriguez, Dan Smith
Southeastern Hedge Fund Association – September 6, 2012
Name of Event: Southeastern Hedge Fund Association
Date: 9/6/12
Topic: Current Regulatory Topics for SEC-Registered Hedge Fund Managers
Sponsor: ACA and Partnership Financial Consulting, LLC
Location: Atlanta
Speaker: Dan Campbell
Recurring Denver CCO Roundtable Breakfast Series – September 6, 2012
Name of Event: Recurring Denver CCO Roundtable Breakfast Series
Date: 9/6/12
Topic: What to expect before, during, and after an SEC examination
Sponsor: Davis Graham & Stubbs LLP
Location: Downtown Denver
Speaker: Ted McGrath and attorneys from the sponsor.
GIPS Standards Annual Conference – September 20, 2012
Name of Event: Date: September 20-21, 2012
Topic: RFPs, Consultant Questionnaires, and Market Demand
Sponsor: CFA Institute
Location: Boston, MA
Speaker: Justin Guthrie
Social Media Roundtable – September 5, 2012
Name of Event: Social Media Roundtable
Date: 9/5/2012
Topic: Social Media
Sponsor: Fidelity
Location: New York, NY
Speaker: Jack Rader and Maribeth Kuzmeski (Red Zone Marketing)
Social Media – Risks and Regulations Webinar – August 7, 2012
Name of Event: Social Media – Risks and Regulations Webinar
Date: 8/7/2012
Topic: Social Media
Sponsor: Fidelity
Location: Webinar
Speaker: Jack Rader
SEC Releases the Proposed Rules Implementing the JOBS Act – August 31, 2012
Dear Clients and Friends,
On August 29, 2012, the SEC finally proposed the long-awaited rules to eliminate the prohibition against general solicitation and general advertising for securities issued under Rule 506 of Regulation D of the Securities Act (“Regulation D”) and Rule 144A of the Securities Act (“Rule 144A”). Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies, including investment advisers to pooled investment vehicles, will be exempt from the prohibitions contained in Section 502(d) of Regulation D for any fund offering, provided that:
- all purchasers of the securities are accredited investors and
- the issuer takes reasonable steps to verify that the purchasers are accredited investors.
An attendee of the open meeting would have notice the push and pull on the SEC in proposing the rule changes. While Commissioner Gallagher’s statement indicated that he was well in favor of the proposed rules, he was incensed that the Commission was considering proposed rules and not an interim final rule. (http://www.sec.gov/news/speech/2012/spch082912dgm.htm) However, Commissioner Aguilar made no bones about his opinion that the proposed rules did not go far enough in protecting investors from unscrupulous issuers and fund managers. (http://www.sec.gov/news/speech/2012/spch082912laa.htm)
The proposed rules give the appearance of attempting to appease both sides. While it may seem like nothing more than expected in the removal of the general solicitation and public offering prohibitions, there are a few caveats of which any fund manager should be aware and which will affect a manager’s ability to take advantage of the proposed rules should they be finalized in current form.
No relief to Section 4(2) offerings
Of particular interest is the SEC’s specific statement in the release that the proposed changes to the general solicitation mandate do not apply to offerings made under Section 4(2) of the Securities Act. For those in the know, there has long been a legal argument in the industry about whether or not private fund pools were required to file a Form D for their offerings. Some legal advice in the industry leaned toward a “yes” answer, (as an aside, so did the SEC examination teams), but a slice of the industry’s legal counsels said “no” and indicated the fund’s reliance on solely Section 4(2) and not the safe harbor of Regulation D, which is legally permissible, but does not require a filing of any kind. So, what does this mean for managers? If your fund documents indicate solely reliance on section 4(2) and a Form D has not been filed, you will not be eligible to receive the relief granted under the proposed rules, if finalized in their current form.
Changes to Form D
An interesting by-product of the failure to apply the changes broadly across Section 4(2) will also result in managers who wish to take advantage of the exemption to be required to have a Form D on file, which must be updated annually. In addition, the SEC has also required a change to the Form to include a “check box” for the adviser to indicate whether or not the offering is being undertaken through a general solicitation, so the information will be readily to hand for the examination teams, should an adviser determine to take advantage of the change in the rules.
Verification of “Accredited Investor Status”
Under the proposed changes to the rules, fund managers would need to consider a number of factors when determining what steps are “reasonable” to verify that a purchaser is an accredited investor. The staff also recommends that managers take a risk based approach to identifying the reasonableness” of the steps taken, e.g. prospective investors solicited via an incoming communication from a website, versus and investor introduced through a placement agent. Interestingly, the SEC specific indicated that for new investors without any connection to the adviser or an intermediary, it would “not believe that an issuer would have taken reasonable steps to verify accredited investor status if it required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”
For more information on the proposed rules, please see the Proposing Release at http://www.sec.gov/rules/proposed/2012/33-9354.pdf.
In addition, comments on the proposed rules can be submitted here http://www.sec.gov/cgi-bin/ruling-comments?ruling=s7..Offerings.
As always, if you have any questions regarding this alert or ACA’s services, please contact your consultant or Damon Zappacosta at (212) 868-5940.
Category: Compliance Alerts 2012
CFTC Response to CPO and CPA FAQs – August 24, 2012
Dear Clients and Friends,
On August 14, 2012, the Commodity Futures Trading Commission (“CFTC” or “Commission”) issued responses to frequently asked questions (“FAQs”) regarding Commodity Pool Operator (“CPO”) and Commodity Trading Advisor (“CTA”) compliance obligations. The release clarifies issues of particular importance to registered entities and those considering registration. We highlight several key points below.
CPO Delegation
Where a commodity pool’s general partner, managing member, or board of directors is legally permitted to delegate rights and responsibilities as CPO to another person, delegation is permitted provided that person is qualified to serve as CPO, is registered as a CPO, and agrees to assume the obligations of compliance with the Commodity Exchange Act (“CEA”) and CFTC regulations. In addition, the delegating entity must agree to remain jointly and severally liable with respect to any CEA violations.
This clarity is especially important for enterprises that have multiple CPOs relying on exemptions such as 4.13(a)(4) that will expire December 31, 2012. Delegation presents an opportunity to limit the registered entities in such an enterprise.
Fund of Funds
Fund-of-fund CPOs may continue to rely on Appendix A (of the original 2003 Federal Register release on CFTC Regulation 4.13) until the CFTC adopts revised guidance. The Commission eliminated Appendix A in its February 2012 Final Rules amending CPO and CTA compliance obligations.
Fund-of-fund managers that can no longer rely on the 4.13(a)(4) exemption can now more confidently assess a potential 4.13(a)(3) exemption.
Transition to 4.7
Many CPOs relying on 4.13(a)(4) exemptions will register and operate pursuant to a 4.7 exemption. This provides relief for certain reporting and other compliance obligations because their pool participants are “qualified eligible participants.” The CFTC clarified several points regarding such entities:
• Although the interests of the 4.13(a)(4) pool were offered and sold prior to filing the required notice under 4.7(d), the CPO may claim exemption under Regulation 4.7 because the interests were offered and sold under the then-effective Part 4 provisions.
• CPOs do not have to reaffirm that all existing participants meet the qualified eligible participant definition to claim the 4.7 exemption. They must, however, ensure that any new participants meet the definition at the time of investment.
• The Commission is working with National Futures Association (“NFA”) staff to permit CPOs to file an exemption under 4.7 prior to December 31, 2012, with an effective date of January 1, 2013.
Forms CPO-PQR and CTA-PR
Given that many CPOs and all CTAs do not have to make initial filings until 2013, the Commission has deferred releasing guidance on Forms CPO-PQR and CTA-PR until all filers have had a chance to review and comment on programmatic or other issues related to these forms. Meanwhile, firms are allowed to make reasonable assumptions consistent with a good faith effort in executing their compliance obligations.
Regulation 4.13 and Swaps
New funds that will rely on a 4.13(a)(3) exemption because they anticipate their “commodity interest” exposure remaining below de minimis thresholds may need to enter into swaps for risk management purposes before putting on their first deal. At that particular moment, the fund would, of course, exceed the de minimis threshold. The CFTC acknowledges that, following the deal completion, the derivatives exposure level would fall below the de minimis threshold. It also notes that firms should have a reasonable time to comply with required trading thresholds, although “reasonable time” is not defined and will vary according to the facts and circumstances of each case.
These are just a few highlights from this much-anticipated guidance. For more information, please contact your ACA compliance consultant or Scott Brindley, Rick Geissman, or Damon Zappacosta in our New York office at (212) 868-5940.
As a reminder, Scott and Rick will present a free webcast on “How to Survive CFTC/NFA Registration” on Tuesday, August 28, at 1 p.m. EDT. Please click this link to register for the event.
Best regards,
ACA Compliance Group
ACA Offers Assistance to Due Diligence Reviewers of Investment Advisory Firms – August 14, 2012
Dear Clients and Friends,
When a company acquires an investment advisory firm, it acquires more than the firm’s client base, goodwill, and reputation — it also inherits the firm’s compliance and operational risks. Taking on such risks can invite intense SEC scrutiny of the acquiring parent company. It also can turn what appears to be a beneficial business relationship into a loss situation.
A comprehensive pre-purchase evaluation of a target’s compliance program can be critical to avoiding unidentified, unmitigated, and unwanted risks post-close.
ACA’s reviews can provide important findings that better inform the due diligence process. ACA specializes in identifying regulatory risk areas and “gaps” by conducting comprehensive reviews of investment adviser compliance programs. Our on-site and off-site review services, conducted by highly experienced industry consultants, feature
• compliance and operational risk inventory reviews,
• internal control process analyses,
• written policies and procedures evaluations,
• key process owner interviews,
• internal and external compliance audit report assessments, and
• regulatory examination results inspections.
ACA is one of the largest employers of former SEC, FINRA, NFA, FSA, and state inspectors in the world. We provide compliance advice and assistance internationally to some of the most respected and well-known investment advisers, private fund managers, municipal advisors, broker-dealers, and mutual fund complexes. Our regulatory expertise can help keep your firm from acquiring unwanted regulatory exposure in its next transaction.
For more information on ACA’s Investment Adviser services, please email Luke Wilson or call 312-505-0307.
Best regards,
ACA Compliance Group
Conflicts of Interest – FINRA Sweep – August 10, 2012
Dear Clients and Friends,
Periodically, regulators such as the Financial Industry Regulatory Authority (“FINRA”) collect information on and conduct investigations of specific areas of growing concern. FINRA chooses the firms subject to these investigations, known as “sweeps,” based on business activities, complaint histories, previous examination findings, and other factors. The agency notifies firms by letter in advance of these targeted examinations.
The recently released July 2012 targeted examination notice denotes FINRA’s concern regarding conflicts of interest. FINRA has designed its first sweep of the current calendar year to examine how well a broker-dealers’ policies, procedures, and practices make sure customer interests are held above those of the firm. The letter notes that these inquiries do not indicate a FINRA determination of rules or regulations being violated. The goal, rather, is for the agency to “better understand industry practices and determine whether firms are taking reasonable steps to properly identify and manage conflicts that could affect their clients or the marketplace.”
The FINRA letter details the information to be submitted by firms under examination as follows:
• A summary of the significant conflicts they are managing
• The names of the departments and persons responsible for conducting conflict reviews
• A summary of the types of documentation used to evidence conclusions drawn from conflict reviews
• The names of the departments and persons that receive final summaries of conflict reviews
• The fourth-quarter 2012 dates and times executive management can meet with FINRA staff for approximately three hours to discuss how they address conflicts of interest
FINRA asks that this information be submitted no later than September 14, 2012.
For more information on this alert or any of ACA’s Broker-Dealer services, please email Dee Stafford or call her at (561) 988-3310.
Best regards,
ACA Compliance Group
ACA Form PF Forum – August 8, 2012
Dear Client or Friend of ACA,
If your firm serves as the investment adviser to one or more private funds, you are undoubtedly aware of the requirement to file new Form PF with the U.S. Securities and Exchange Commission (“SEC”). In discussing this new form with our clients, ACA has found that many firms are seeking perspective from, and comparison to, their peers. Because many questions on the Form PF can be interpreted in different ways, firms are concerned that their particular interpretation of a question will be flagged by the SEC or Financial Stability Oversight Council as an “outlier.”
In order to provide our clients and other SEC-registered advisers with efficient access to the views and perspectives of a variety of industry participants, ACA would like to invite you to participate in its online Form PF Forum. You may visit the ACA Form PF Forum via this link. Structured similarly to an online message board, the Form PF Forum allows ACA clients and other individuals associated with SEC-registered investment advisers to post specific questions regarding Form PF, and to review responses posted by other firms and ACA consultants.
We understand that most industry participants will want to maintain complete anonymity on this forum. To that end, ACA has created and provided certain of its clients with non-descript and distinct usernames and passwords. Your username and password are provided below. This information may be used by any individual in your firm. You are not permitted to change your username or password, but if you lose this email please contact Amanda Devito at (973) 631-1085 and we will provide you with the information. We are restricting the ability of Forum participants to customize their username or password, in order to prevent usernames/passwords that identify specific firms or users. To maintain anonymity, when posting questions and responses, you should avoid including any information that might link your username to your firm, such as the name of your firm, any firm employees, or any fund, or any other identifying, confidential, or proprietary information.
Questions should be posted on the forum according to topic. For example, a question regarding the definition of “unencumbered cash” should be posted in the “Instructions and Definitions” forum, while a question on Item 27 should be posted in the “Part 2a and 2b” forum. There is a search function for each subject, as well as for the entire Form PF Forum, which can be used to search for key words.
We welcome any feedback on ACA’s Form PF Forum. Our aim is to provide ACA clients and other SEC-registered advisers with a valuable source of information on Form PF. Of course, information conveyed by users and ACA employees on the ACA Form PF forum does not constitute and should not be relied upon as consulting, legal, or accounting advice applicable to any particular situation. In addition, the opinions expressed by forum users, including users who are ACA employees, are not necessarily those of ACA Compliance Group. Prior to logging in to the forum, please review our “Disclosure Statement” here for additional important information. The Disclosure Statement also is available via a link at the bottom of each page of the forum.
If you have any questions regarding ACA’s Form PF Forum, your username and password, or Form PF requirements, please contact Amanda Devito, Jack Rader, or Jessica Huelbig at (973) 631-1085.
Sincerely,
ACA Compliance Group
PROVIDING ASSURANCE THROUGH EXPERIENCE
Category: Compliance Alerts 2012
Schwab Advisor Services Knowledge Forum, Regulatory Update – July 12, 2012
Name of Event: Schwab Advisor Services Knowledge Forum, Regulatory Update
Date: July 12, 2012
Topics: Electronic Communications, Form ADV, Custody, Trading, Compliance Training for Employees
Sponsor: Schwab Advisor Services
Location: Cincinnati, OH
Speaker: Josh Broaded, Senior Principal Consultant, ACA Compliance Group
ACA Releases “Zero Deficiencies” White Paper to Help Broker-Dealers Close Regulatory Gaps – July 30, 2012
ACA is pleased to provide you with Managing Director Francois Cooke’s white paper “Zero Deficiencies ‒ Closing the Regulatory Gap.” In the paper, Cooke describes how firms can design and implement a structured framework to reduce or eliminate the risk of being cited for deficiencies during regulatory examinations.
Download your complimentary copy of “Zero Deficiencies.”
Why read the white paper?
- To understand the importance of setting zero deficiencies as your compliance and supervisory program’s primary objective
- To learn the best-practice approach to pursuing zero deficiencies
- To learn how to identify, create, and implement critical compliance program components.
Questions about the white paper? Contact Francois Cooke.
Category: Compliance Alerts 2012
Hot Topics for Investment Managers – July 17, 2012
Name of Event: Hot Topics for Investmenet Managers
Date: July 17, 2012
Topic: Compliance & Technology Directives for 2012
Sponsor: Eze Castle Integration, Inc.
Location: webinar
Speaker: Josh Broaded, Senior Principal Consultant, ACA Compliance Group
New Application Fee for Filing Continuing Membership Application – July 13, 2012
Dear Clients and Friends,NASD Rule 1017 defines the types of material changes in a member’s ownership, control, and/or business operations that require a firm to file a Continuing Membership Application (“CMA”). These changes include
FINRA indicated in Regulatory Notice 12-32 that it incurs substantial costs while reviewing CMA applications. To defray some of these costs, as of July 23, 2012, FINRA will charge new fees for CMA filings. To be specific, FINRA will amend Schedule A to require applicants submitting CMAs to pay application fees based on the number of their registered persons and the type of ownership, control, or business operation change being contemplated. In general, the effort required to review a CMA depends on the facts and circumstances involved. More complex changes and larger applicants require additional resources. FINRA believes its new fee structure, as outlined below, will be effective in determining an appropriate charge for each firm.
To illustrate the fees, if a member firm submits a CMA and has one to 10 registered persons, FINRA would assess a fee of $7,500. If an applicant’s request for approval of an ownership, control, or business operation change involves more than one type of change requiring a CMA, the fee owed will be the highest of the applicable fees charged for those types of changes. In addition, FINRA has changed CMA fees to conform to NASD Rules 1012 and 1017 and imposed a new $500 processing fee for CMAs deemed to be incomplete. The implementation date for the conforming amendments to the NASD rules is also July 23, 2012. ACA Compliance Group, the nation’s leading regulatory compliance consulting firm, provides customized compliance solutions to registered investment advisers. Our former SEC, FINRA, NFA, FSA, and state inspectors support investment advisers, private fund managers, municipal advisors, broker-dealers, and mutual fund complexes with comprehensive and customized compliance solutions. For more information on ACA’s Broker-Dealer services, please email Dee Stafford or call (561) 988-3310. Best regards, ACA Compliance Group |
ACA Compliance (Europe) Alert – UK’s transition to a new regulatory system – July 4, 2012
Dear Clients and Friends,
The FSA’s self-titled ‘Journey to the Financial Conduct Authority’ tour of the UK has commenced and we caught one of the early dates at their home venue. We are delighted to now share some highlights here for those unable to make one of the events…
In terms of the new supervision structure, the FSA were very clear that the ‘Twin Peaks’ model introduces two very different statutory bodies, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (CPA) as a direct response to the UK Government’s expectations.
Twin Peaks introduces a concept of two UK regulators; most firms will sit under one or the other, with a small number of firms being dual-regulated. This latter group will need to accept that they may be asked the same set of questions twice by two regulators and will pay two sets of fees! There will be just one handbook – but with two sets of rules and regulated firms will be able to blank out rules of the PRA and FCA that do not apply. Currently a project is underway at the FSA to go through the current handbook and determine which rules are ‘prudential’ and which are ‘conduct’ based.
Under the regulators’ revised risk-based profiling, firms will fit into one of four groups, currently called C1, C2, C3 and C4. C1 will have a small set of approximately seven to ten firms, C2 a hundred or so and the remainder of the 25,000 universe will sit in categories C3 and C4. Whilst the FSA staff admit they would like to officially move to this model now; it is not possible until the handover date due to the FSA’s continuing need to fulfil its statutory duties under the Financial Services & Markets Act 2000.
ACA’s clients will be categorised across the C1-4 range. Most of our alternative fund managers will be categorised C4, indicating a four-yearly cycle of routine FCA assessment (or as the FSA currently term it ‘touch point’) which will likely be undertaken by the FCA on-line, by post or by telephone (not necessarily an on-site visit). Thematic on-site visits will not form part of the routine cycle and could be undertaken at anytime. The regulator’s new Policy, Risk and Research division will focus on collecting market data, which will in part, inform the thematic reviews.
The regulators’ future supervisory resources will be targeted at risk-based thematic work; often with a wider market risk emphasis. FCA will take the lead in the UK’s representation with the European regulator, ESMA. C1 and C2 firms will be on a two year touch point cycle and will be subject to business model and strategic analysis – the results of which will determine what the FCA will first focus on during an assessment.
Looking at other divisions, ‘Enforcement’ will continue as before, although they will endeavour to be involved at an earlier stage, attempting to address an issue before it becomes a problem. The ‘Permissions’ division may impose an additional Threshold Condition of Authorisation focused on consumer protection.
There of course remains some detail to follow and further consideration of how these changes may impact on your specific business. Feel free to contact Adam Palmer in our London office by email or on +44 (020) 7042 0500 or your regular ACA contact to discuss further.
Best regards
ACA Group
Category: Compliance Alerts 2012
FinCEN Reports Going Paperless – June 29, 2012
Please be reminded that effective July 1, 2012, the Financial Crimes Enforcement Network (“FinCEN”) will require all financial institutions subject to the Bank Secrecy Act (“BSA”) to file certain reports electronically. Almost all FinCEN reports fall within the electronic filing requirement. The agency’s primary focus for this initiative, however, is on Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”). Some financial institutions will not be able to meet the July 1 deadline. Note that FinCEN understands this and will make certain extensions and exceptions available to qualified firms.
Since October 2002, FinCEN has given financial institutions the option to file BSA reports electronically through its BSA E-Filing System. In August 2011, FinCEN expanded the system to support filing the Report of Foreign Bank and Financial Accounts (“FBARs”). The deadline for mandatory FBAR E-Filing is now June 30, 2013.
The BSA E-Filing System is a secure, web-based electronic system that should minimize filing errors and provide enhanced feedback to institutions and individuals. BSA E-Filing also offers certain features not available to paper filers:
• Electronic notification of submission stats, as well as any errors, warnings, or alerts
• Batch validation
• Acknowledgement of receipt for batch-filed CTRs and SARs
• Feedback reports
• Faster acknowledgement to money services businesses of receipt of registration
• Ability to transmit secure messages
• Use of Adobe-format forms to create templates that reduce data entry and to print hard copies for internal review and approval
• Ability for supervisory users to assign system roles to staff
• Access to training materials
On February 24, 2012, FinCEN published a notice regarding the availability of limited exemptions to the July 1 e-filing deadline. These exemptions would involve circumstances such as
• money services business and small credit unions lacking Internet connectivity, or
• firms needing to facilitate major system conversions to enable batch and computer-to-computer CTR filing. (FinCEN understands that certain financial institutions may have the technical capacity to register for BSA E-Filing and to file reports using Adobe-based forms. However, FinCEN notes that some of these financial institutions are utilizing systems that are currently incompatible with the BSA E-Filing System’s batch and computer-to-computer reporting capabilities.)
FinCEN will also consider requests for temporary hardship exemptions based on other extraordinary circumstances but does not expect to grant a significant number of such exemptions.
ACA Compliance Group, the nation’s leading regulatory compliance consulting firm, provides customized compliance solutions to registered investment advisers. Our former SEC, FINRA, NFA, FSA, and state inspectors support investment advisers, private fund managers, municipal advisors, broker-dealers, and mutual fund complexes with comprehensive and customized compliance solutions.
For more information on this alert or any of ACA’s Broker-Dealer services, please email Dee Stafford or call her at (561) 988-3310.
JOBS Act Implementation Delayed – June 29, 2012
Dear Clients and Friends,
Hedge fund advisers eager to market private investment funds more openly will be disappointed by the latest news from the U.S. Securities and Exchange Commission (“SEC”). In prepared testimony before the House Oversight and Government Reform Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs on Thursday, June 28, 2012, SEC Chairman Mary Schapiro informed Congress that implementing the JOBS Act (“Act”) within the required time frames would not be possible.
As part of her testimony, the Chairman updated Congress on implementation efforts for each of the Act’s sections. With regard to progress on implementing Title II, which requires revisions to Rule 506 under Regulation D and Rule 144A to allow the general solicitation and public offering of securities under these provisions, Chairman Schapiro offered this statement:
The rulemakings to revise Rule 506 and Rule 144A are both required to be completed within 90 days of enactment of the JOBS Act. As I stated to Congress prior to the passage of the Act, time limits imposed by the JOBS Act are not achievable. Here, the 90 day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input. Although we will not meet this deadline, the staff has made significant progress on a recommendation and economic analysis, and it is my belief that the Commission will be in a position to act on a staff proposal in the very near future. [emphasis added]
The delay’s announcement seems both “out of nowhere” and totally expected. As recently as June 11, 2012, Lori Shock, Director of the SEC’s Office of Investor Education and Advocacy, told attendees of the InvestEd 2012 conference in Charlotte, North Carolina, that “the SEC is required under the JOBS Act to have rules in place by around the Fourth of July. Once the rules are in place, our office intends to put out a bulletin that generally informs you about some of these private offerings.” However, anyone familiar with SEC rulemaking and administrative law knows better. Given the required notice and comment periods and notification processes that attend any US government agency rulemaking and that the SEC had not yet proposed rules implementing Title II of the JOBS Act as of June 1, it was highly unlikely that the 90-day deadline set by Congress would be met.
While Schapiro noted that the proposed rules can be expected in the “very near future,” the “very near future” in SEC terms remains undefined. As a result, hedge fund managers and other private fund managers will have to wait a little longer for the promised relief and the removal of prohibitions limiting private investment fund marketing and advertising.
If you have questions on this issue or would like more information, please email Damon Zappacosta or call him at (212) 868-5940.
Category: Compliance Alerts 2012
ACA Compliance (Europe) Alert – SEC Examinations for New Registrants – June 26, 2012
Dear Clients and Friends,
It’s officially “Game On” for investment advisers that have recently registered with the U.S. Securities and Exchange Commission. Over the last few weeks, the SEC examination staff has begun notifying newly-registered advisers of pending on-site examinations. The notices seem to be arriving about one week before the examiners’ visit.
ACA has reviewed copies of the SEC examiners’ initial document request letters. Of particular note, the letters request documents that predate the Dodd-Frank registration dates, in some cases by as much as a year. Under Section 204 of the Investment Advisers Act of 1940 (“Advisers Act”), SEC examiners are authorised to request and inspect all records held by registered advisers, even those that are not specified in the books and records rule (Rule 204-2). In addition, with respect to performance-related records, the SEC’s implementing release discussing the Advisers Act amendments under Dodd-Frank expressly states that while new registrants may not have been obligated to keep certain performance-related records for any period when they were not SEC-registered, after registration they must preserve such records to the same extent as they did prior to registration. Of course, the manner, methods, and organisation used by advisers to maintain these and other records prior to registration may differ substantially from the way they are required to maintain books and records created post registration. It remains to be seen how SEC examiners will view discrepancies in pre and post registration recordkeeping practices.
ACA recommends that recently-registered private equity, real estate, and hedge fund managers consider how they will respond to an SEC document request that covers pre-registration documents. Some firms may choose to produce all records requested, without seeking to negotiate the time frame or scope of the request. Other firms may want to first discuss with examination staff what records they have available, how long those records have been maintained, and the form in which those records appear. This discussion could be particularly useful if producing pre-registration records would require significant time or effort.
Newly-registered advisers should consider these and other examination-related issues now. Being prepared in advance to discuss documentation issues in a thoughtful manner with examiners will allow advisers to make a strong showing during their “first inning” of the SEC examination process.
To view a summary of the initial document requests referred to herein, please use this link.
If you have questions on these issues or would like additional information on how ACA can assist in managing an SEC review, please email Kristina Staples in our London office or call her on +44 (0)207 042 0500, or email Gary Trehiou in our Jersey (C.I.) office or call him on +44 (0)1534 719191, or email Damon Zappacosta in our New York office or call him on (212) 868-5940.
Best regards,
ACA Compliance (Europe) Limited
Category: Compliance Alerts 2012
GIPS® Guidance Statement on Alternative Strategies and Structures Approved – June 13, 2012
Dear Clients and Friends,
On May 18, 2012, the GIPS Executive Committee approved the “Guidance Statement on Alternative Investment Strategies and Structures.” The hedge fund community in particular has anxiously anticipated this guidance as it includes specific direction on issues such as return streams, side pockets, and master-feeder structures.
In this post-Madoff era, alternative investment managers are adopting the GIPS standards to provide greater transparency to prospective investors, consultants, and current clients. Adherence to these principles has long been a de facto obligation for traditional asset managers in the United States and United Kingdom marketplaces. ACA believes the finalization of this guidance will increase the number of institutional investors requiring hedge fund managers to be GIPS compliant.
One critical underpinning of the new guidance is it applies to all firms claiming GIPS compliance regardless of underlying asset class. This means all GIPS-compliant firms must meet the guidance requirements by the October 1, 2012 effective date. To aid in these efforts, we highlight several significant guidance items in this alert.
Valuation
Valuations When Investments Are Not Fully Liquid
The guidance clarifies a common question related to valuing illiquid securities:
It is possible that in accordance with a firm’s GIPS fair valuation policy, specific illiquid investments may be carried at their last available historical market value provided that the firm considers such historical market value as the best estimate of the current fair value of the investment.
Portfolio Valuation Frequency
Perhaps the most significant departure from the existing GIPS standards relates to valuation frequency. Specifically, the requirement to value all portfolios monthly and at all large cash flows has been relaxed:
If the underlying investments of a fund do not lend themselves to monthly valuations and the fund itself is open to client cash flows only on a less frequent (e.g., quarterly) basis, it may be appropriate that valuations are performed on a less frequent than monthly basis.
The guidance also explains that a fund’s subscription and redemption cycle should drive the valuation and performance measurement periodicity. If a firm decides to opt out of the monthly valuation frequency, it must disclose that the composite’s three-year annualized ex-post standard deviation is not presented because monthly returns do not exist.
Estimated Versus Final Values
Some alternative investments, particularly fund-of-hedge funds, may not receive final valuations of underlying investments until weeks or months after a period ends. Consequently, managers may receive an estimated value provided by the underlying fund or investment. In these situations, the GIPS standards provide firms with three alternatives:
Use the estimated values of the underlying funds to determine fair value.
Use the last available historical final values of the underlying funds to determine fair value.
Only publish compliant presentations after final valuations have been received.
If a firm chooses Option 1 or 2, it must assess the difference between the value used and the final value on composite assets, firm assets, and performance. If the difference is significant enough to require adjustments, then the change must be viewed through the lens of the firm’s error correction policy.
The GIPS standards also explain that when estimated values are used to determine the NAV for a pooled fund, “the NAV becomes an effective tradable market price and, therefore, satisfies the requirements regarding fair valuation.”
Calculation Methodology: Investment Management Fees
The guidance reiterates the inclusion of performance-based fees in the investment management fee definition and that net performance must be net of any performance-based fees.
In a fund-of-funds strategy, gross and net composite performance must be “net of all the underlying funds’ fees and expenses.” This will typically be achieved using the underlying funds’ NAVs, which include the impact of their fees and expenses.
Historically, the GIPS standards have allowed net performance to be calculated by netting down performance by actual fees paid by portfolios or by the highest fee charged to any portfolio in the composite. This guidance (which, it is worth reiterating, applies to all asset classes and all firms) now provides a third method for netting down. This method is specifically for scenarios where it is impossible to determine which actual fee is the highest among portfolios. In such scenarios,
it is acceptable to use the highest model fee applicable to the specific prospective client or the intended recipient of the compliant presentation as long as doing so results in net-of-fees returns that are no higher than those that would have been calculated if actual fees had been used.
If this method is chosen, “the firm must be able to document and substantiate the method used.”
Composite Construction
Master-Feeder Structures
The guidance provides some considerations when determining whether the master or the feeder funds should be included in the composite. Specifically, the guidance asserts, “In most cases, the level at which prospective clients can effectively invest would be included in the composite.” That is, most commonly, the feeder funds would be included in the composite.
Side Pockets
The guidance provides some much-needed specific direction on side pockets, distinguishing in particular between discretionary and nondiscretionary.
Discretionary side pockets contain investments made at the firm’s discretion.
Funds that include discretionary side pockets must present performance inclusive of the side-pocketed assets. If the fund is a single account composite, then performance must be calculated inclusive and exclusive of the side pocket.
Nondiscretionary side pockets contain assets that are not part of a fund’s strategy. These could be assets “frozen” when a prime broker went through bankruptcy. They could also be assets expressly purchased at a client’s request. Note that the guidance provides four criteria that must be met for a side pocket to be classified as nondiscretionary.
Funds that include nondiscretionary side pockets must not include side pocket performance in their overall performance.
Questions and Answers: Composite Construction
This Guidance Statement contains over a dozen Q&A’s, most of which give guidance for specific situations. While they are all interesting and welcome, we focus here on the question that will have the widest impact.
Q&A 4.4.1 provides some appreciated clarification regarding what net performance to present when a fund contains multiple share classes. In such a circumstance, the guidance allows the following methods:
Calculate gross-of-fees returns and deduct the highest investment management fee rate of any individual share class in the fund to arrive at the net-of-fees return.
Calculate net-of-fees returns using all actual net-of-fees returns from all share classes and series.
The Q&A affirms the notion that the return stream for the most applicable share class can be presented. In the question, share class A was the most applicable share class for a prospective client. As the guidance explains,
firms may calculate gross-of-fees returns and apply the most applicable investment management fee to the prospective client, which in this instance, is the investment management fee from share class A (i.e., the net-of-fees return of share class A will effectively be presented).
The guidance also clarifies that, in cases of multiple series (created to facilitate the timing of new investors into a share class), the return of the particular share class should be the weighted net return of all series in the share class or the net return of the oldest or initial series in the share class.
This overview covers the most pertinent and widely applicable direction in the Guidance Statement. We encourage you to read the document in its entirety. If you have questions on or would like to discuss the guidance, please contact your verification team or Christie Dillard at (866) 279-0750.
Category: Compliance Alerts 2012
GIPS® Guidance Statement on Alternative Strategies and Structures Approved – June 13, 2012
On May 18, 2012, the GIPS Executive Committee approved the “Guidance Statement on Alternative Investment Strategies and Structures.” The hedge fund community in particular has anxiously anticipated this guidance as it includes specific direction on issues such as return streams, side pockets, and master-feeder structures.
In this post-Madoff era, alternative investment managers are adopting the GIPS standards to provide greater transparency to prospective investors, consultants, and current clients. Adherence to these principles has long been a de facto obligation for traditional asset managers in the United States and United Kingdom marketplaces. ACA believes the finalization of this guidance will increase the number of institutional investors requiring hedge fund managers to be GIPS compliant.
One critical underpinning of the new guidance is it applies to all firms claiming GIPS compliance regardless of underlying asset class. This means all GIPS-compliant firms must meet the guidance requirements by the October 1, 2012 effective date. To aid in these efforts, we highlight several significant guidance items in this alert.
Valuation
Valuations When Investments Are Not Fully Liquid
The guidance clarifies a common question related to valuing illiquid securities:
It is possible that in accordance with a firm’s GIPS fair valuation policy, specific illiquid investments may be carried at their last available historical market value provided that the firm considers such historical market value as the best estimate of the current fair value of the investment.
Portfolio Valuation Frequency
Perhaps the most significant departure from the existing GIPS standards relates to valuation frequency. Specifically, the requirement to value all portfolios monthly and at all large cash flows has been relaxed:
If the underlying investments of a fund do not lend themselves to monthly valuations and the fund itself is open to client cash flows only on a less frequent (e.g., quarterly) basis, it may be appropriate that valuations are performed on a less frequent than monthly basis.
The guidance also explains that a fund’s subscription and redemption cycle should drive the valuation and performance measurement periodicity. If a firm decides to opt out of the monthly valuation frequency, it must disclose that the composite’s three-year annualized ex-post standard deviation is not presented because monthly returns do not exist.
Estimated Versus Final Values
Some alternative investments, particularly fund-of-hedge funds, may not receive final valuations of underlying investments until weeks or months after a period ends. Consequently, managers may receive an estimated value provided by the underlying fund or investment. In these situations, the GIPS standards provide firms with three alternatives:
Use the estimated values of the underlying funds to determine fair value.
Use the last available historical final values of the underlying funds to determine fair value.
Only publish compliant presentations after final valuations have been received.
If a firm chooses Option 1 or 2, it must assess the difference between the value used and the final value on composite assets, firm assets, and performance. If the difference is significant enough to require adjustments, then the change must be viewed through the lens of the firm’s error correction policy.
The GIPS standards also explain that when estimated values are used to determine the NAV for a pooled fund, “the NAV becomes an effective tradable market price and, therefore, satisfies the requirements regarding fair valuation.”
Calculation Methodology: Investment Management Fees
The guidance reiterates the inclusion of performance-based fees in the investment management fee definition and that net performance must be net of any performance-based fees.
In a fund-of-funds strategy, gross and net composite performance must be “net of all the underlying funds’ fees and expenses.” This will typically be achieved using the underlying funds’ NAVs, which include the impact of their fees and expenses.
Historically, the GIPS standards have allowed net performance to be calculated by netting down performance by actual fees paid by portfolios or by the highest fee charged to any portfolio in the composite. This guidance (which, it is worth reiterating, applies to all asset classes and all firms) now provides a third method for netting down. This method is specifically for scenarios where it is impossible to determine which actual fee is the highest among portfolios. In such scenarios,
it is acceptable to use the highest model fee applicable to the specific prospective client or the intended recipient of the compliant presentation as long as doing so results in net-of-fees returns that are no higher than those that would have been calculated if actual fees had been used.
If this method is chosen, “the firm must be able to document and substantiate the method used.”
Composite Construction
Master-Feeder Structures
The guidance provides some considerations when determining whether the master or the feeder funds should be included in the composite. Specifically, the guidance asserts, “In most cases, the level at which prospective clients can effectively invest would be included in the composite.” That is, most commonly, the feeder funds would be included in the composite.
Side Pockets
The guidance provides some much-needed specific direction on side pockets, distinguishing in particular between discretionary and nondiscretionary.
Discretionary side pockets contain investments made at the firm’s discretion.
Funds that include discretionary side pockets must present performance inclusive of the side-pocketed assets. If the fund is a single account composite, then performance must be calculated inclusive and exclusive of the side pocket.
Nondiscretionary side pockets contain assets that are not part of a fund’s strategy. These could be assets “frozen” when a prime broker went through bankruptcy. They could also be assets expressly purchased at a client’s request. Note that the guidance provides four criteria that must be met for a side pocket to be classified as nondiscretionary.
Funds that include nondiscretionary side pockets must not include side pocket performance in their overall performance.
Questions and Answers: Composite Construction
This Guidance Statement contains over a dozen Q&A’s, most of which give guidance for specific situations. While they are all interesting and welcome, we focus here on the question that will have the widest impact.
Q&A 4.4.1 provides some appreciated clarification regarding what net performance to present when a fund contains multiple share classes. In such a circumstance, the guidance allows the following methods:
Calculate gross-of-fees returns and deduct the highest investment management fee rate of any individual share class in the fund to arrive at the net-of-fees return.
Calculate net-of-fees returns using all actual net-of-fees returns from all share classes and series.
The Q&A affirms the notion that the return stream for the most applicable share class can be presented. In the question, share class A was the most applicable share class for a prospective client. As the guidance explains,
firms may calculate gross-of-fees returns and apply the most applicable investment management fee to the prospective client, which in this instance, is the investment management fee from share class A (i.e., the net-of-fees return of share class A will effectively be presented).
The guidance also clarifies that, in cases of multiple series (created to facilitate the timing of new investors into a share class), the return of the particular share class should be the weighted net return of all series in the share class or the net return of the oldest or initial series in the share class.
This overview covers the most pertinent and widely applicable direction in the Guidance Statement. We encourage you to read the document in its entirety. If you have questions on or would like to discuss the guidance, please contact your verification team or Christie Dillard at (866) 279-0750.
Best regards,
ACA Compliance Group
Category: Compliance Alerts 2012
ACA Provides Additional Guidance on FINRA’s New Suitability Requirements – June 7, 2012
Dear Clients and Friends:
On May 18, 2012, the Financial Industry Regulatory Authority (“FINRA”) published Regulatory Notice 12-25 (“RN 12-25″). The notice provides additional guidance on FINRA Rule 2111. It also responds to questions that FINRA has received from broker-dealers on the new rule.
FINRA Rule 2111 replaces NASD Rule 2310 while retaining many of its core requirements. The rule requires that broker-dealers and associated persons
…have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.
The new rule expands on the definitions of the three main components of NASD Rule 2310: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. In addition, it expands the list of customer-specific information that broker-dealers, in general, must evaluate when making recommendations to customers.
The new suitability requirements include additional information for customer investment profiles, specifically the customer’s age, investment experience, time horizon, liquidity needs, and risk tolerance. Previously, NASD Rule 2310 required information on the customer’s other investments, financial situation and needs, tax status, and investment objectives. The new requirements also impose broader obligations on broker-dealers and associated persons regarding recommendations of investment strategies.
RN 12-25 expands previous notice guidance on Rule 2111 and answers specific industry questions concerning the new suitability requirements.1 Some of the issues addressed in the notice appear below.
- Definition of “Recommendation”
FINRA does not specifically define the term “recommendation.” However, it noted that it has offered guiding principles that broker-dealers should consider when determining if a particular communication can be deemed a recommendation.2 Notably, as Regulatory Notice 11-02 indicated, “The determination of the existence of a recommendation has always been based on the facts and circumstances of the particular case.” In a footnote in that notice, FINRA states, “Defining the term ‘recommendation’ is unnecessary and would raise many complex issues in the absence of specific facts of a particular case.” - Explanation of “Investment Strategies”
FINRA has interpreted the term “investment strategy” broadly. By way of example, the notice references the “Dogs of the Dow” strategy and recommendation of such a strategy would be akin to the recommendation of specific securities. However, Rule 2111 contains a safe harbor for various types of communications that are educational in nature even though they could be considered investment strategies involving securities. A general allocation strategy, for example, would not be considered a recommendation unless it becomes narrower and recommended particular securities. - Clarification on “Hold” Recommendations
A broker-dealer’s explicit recommendations to hold a security or securities or continue an investment strategy would also be considered a recommendation. The notice stresses that the recommendation must be explicit. Therefore, if a broker is silent regarding a security position in a customer’s account, the implicit hold recommendation would not be covered by Rule 2111.The notice also indicates that firms should focus on documenting “hold” recommendations that are risky or have a periodic reset. Although not prescribed, the notice suggests the documentation can be a “hold” ticket or a notation on existing tickets. In addition, emails and memos can be used to document hold recommendations and supervisory reviews. The notice also mentions that creating data fields in the automated supervisory systems can be used to document hold recommendations. - Definition of a “Customer” for the Suitability Rule
FINRA explains that the term “customer” applies to anyone who is not a “broker or dealer.”3 FINRA further indicates that a customer may be an individual or entity with whom a broker-dealer has even an informal business relationship related to brokerage services, as long as that individual or entity is not a broker or dealer itself. A broker-customer relationship would arise and the suitability rule would apply, for example, when a broker recommends a security to a potential investor, even if that potential investor does not have an account at the firm. - Collection of Customer-Specific Information
FINRA explains that broker-dealers do not need to obtain all customer-specific information if they have documented their reasonable basis for believing the information is not relevant. Rule 2111 generally requires broker-dealers to obtain and analyze customer-specific factors before making recommendations to customers. The degree of information needed requires a facts and circumstances inquiry. - Refusal to Provide Certain Customer-Specific Information
FINRA understands that some customers may be unwilling to provide certain information to broker-dealers. FINRA Rule 2111 generally requires broker dealers to use reasonable diligence in seeking to obtain the customer-specific information listed in the rule. Note that broker-dealers are not allowed to make assumptions about customer-specific information if a customer declines to provide it. - Using a Portfolio Approach to Suitability Determinations
The notice indicates that firms can take an overall portfolio approach to determine suitability. However, to do so, broker-dealers must evidence the customer’s approval of a “portfolio-based analysis.” The firm cannot use this approach when- the customer wants each recommendation to be consistent with his or her investment profile or particular factors within that profile;
- the broker is unaware of the customer’s overall portfolio; or
- “red flags” exist that indicate the broker’s information about the customer’s other holdings may be inaccurate.
- Discussion on “Institutional Suitability” Requirements
FINRA explains that it understands that some third-party vendors have created and aggressively marketed proprietary “Institutional Suitability Certificates” to facilitate compliance with the new institutional-customer exemption in Rule 2111. However, FINRA has not approved or endorsed any third-party certificate nor has it contracted with any third-party vendor to create these certificates on its behalf. The notice also indicates that, if circumstances require, a firm can document conversations with institutional customers as evidence of their affirmation that they intend to exercise independent judgment.
RN 12-25 addresses 26 questions specific to the new suitability rule and includes 12 pages of important footnotes. ACA recommends that firms carefully consider the FINRA guidance in updating their written supervisory procedures, surveillance activities, and recordkeeping processes.
Please contact your ACA compliance consultant or Dee Stafford in the Boca Raton office at (561) 988-3310, with any questions on this issue.
Best regards,
ACA Compliance Group
Category: Compliance Alerts 2012
GIPS® 101 Executive Workshop – June 12, 2012
Name of Event: GIPS® 101 Executive Workshop
Date: June 12, 2012
Topic: GIPS Basics
Sponsor: ACA Compliance Group
Location: Harvard Club of New York
Speaker: Alicia Hyde, CIPM
Category: 2012 Speaking Engagements
AmbroseConnects 2012 – June 14, 2012
Name of Event: AmbroseConnects 2012
Date: June 14, 2012
Topic: Hear From Financial Services Industry Experts on How to Best Utilize Your Vendors
Sponsor: Ambrose Group
Location: New York
Speaker: Barry Schwartz
Category: 2012 Speaking Engagements← Older posts