Regulation BI Compliance Due by June 30

Compliance with Regulation Best Interest, including the filing of Form CRS is due on June 30, 2020 for all registered broker-dealers and investment advisers.

See Introduction to Regulation Best Interest

More Filings and Regulations on the Way for Investment Advisers and Investment Companies

 The SEC is proposing to increase the reporting and disclosure requirements for Registered Investment Advisers and Investment companies.

The investment company proposals would increase data reporting for mutual funds, ETFs and other registered investment companies.  The proposals would require a new monthly portfolio reporting form and a new annual reporting form that would require census-type information.  The information would be reported in a structured data format, which would allow the Commission and, in theory, the public, to better analyze the information.  The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.

The proposed amendments to the investment adviser registration and reporting form (Form ADV) would require investment advisers to provide additional information for the Commission and investors to better understand the risk profile of individual advisers and the industry. The proposed amendments to Investment Advisers Act Rule 204-2 would require advisers to maintain records of performance calculations and communications related to performance.

 The proposals will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed rules will be 60 days after publication in the Federal Register.

The press release detailing the proposal, with links to the comment section is available at the SEC web site: SEC Proposes Rules to Modernize and Enhance Information Reported by Investment Companies and Investment Advisers


Related Articles

Regulation and Registration of Investment Advisers

Introduction to the Federal Securities Laws

Advisors Have Leverage In Employment Agreements

Executive Recruiter Mindy Diamond finds that compliant advisors, with $100 million in assets under management, are in the driver's seat in the recruiting scene.

We represent advisors across the country, insuring that they are in fact compliant, and working on the best possible deal to get out of their current firm, and into the new firm.

Thinking of a move? Give us a call - 221-509-6544.

For more information - Why Advisors Have Leverage | Financial Planning

--- The attorneys at Sallah Astarita & Cox  have experience in all aspect of broker-dealer compliance, employment and litigation. Our clients include individual financial professionals, and firms of all sizes, nationwide. For more information call 212-509-6544 or send an email.

SEC Continues to Permit Reps to Sell their Company's Stock to Clients

Dually registered investment advisory and broker-dealer firms will be able to continue selling stock from their own accounts to some clients, the Securities and Exchange Commission said.

The SEC has announced it plans to extend by another two years, until December 31, 2016, this ability for dually registered firms with fee-based accounts, a posting on the regulator’s Division of Investment Management web site Monday revealed.

The permission only applies to accounts where the clients have the ability to accept or reject proposed sales and only under some situations.

This is the fourth time the regulator has moved to extend the permission since it was granted in 2007.

More details are available at SEC To Allow Dually Registered Firms To Continue Stock-Sale Practice.
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The attorneys at Sallah Astarita & Cox, LLC include former SEC Enforcement attorneys and prosecutors and decades of experience representing all participants in the securities markets. To see if we can help you with your securities issue, call 212-509-6544.

Merrill Loses $800 Million in Assets to Independent Firm

After adding a $400 million independent firm in Seattle, Wash., last month, the firm said Monday it had picked up three former Merrill Lynch advisers who previously managed some $800 million in assets. The three, which operated as part of separate teams at Merrill Lynch, will now operate as a single practice under the name HighTower Fort Myers. .

For more information, HighTower picks up Merrill advisers with $800 million

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Compensation Cuts Leads to Broker Transitions
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Considering a move? The attorneys at Sallah Astarita & Cox have spent decades representing advisers moving to and from the wirehouses, and independent firms. To see if we can help you, call Mark Astarita at 212-509-6544 or email us.

Report: Wealthiest Clients Want to Consolidate Advisors

Here is an interesting report - the World Health Report 2013 found that the majority of wealth managers are keeping their richest clients happy. More than 60% of high-net-worth clients expressed a high degree of trust in both their wealth managers and their firms.

More good news - 52.6% of high-net-worth clients prefer to work with a single firm to “manage all of their financial needs,” according to the report.

World Wealth Report: Wealthiest Clients Want to Consolidate Advisors

Reviewing Advisor Custody Issues

The SEC has just released a Risk Alert calling attention to the results of its recent examinations of investment advisor firms. Incredibly, the SEC found that 1/3 of the firms that were reviewed had significant issues with custody of their customers' securities.

The SEC found that a significant number of firms did not even realize that they had "custody" of a client's funds or securities within the meaning of the custody rule (Rule 206(4)-2 under the Advisers Act). According to the Alert, the SEC found advisors failing to comply with the custody rule in the following circumstances:

• The Role of Employees or Related Persons:The adviser’s personnel or a “related person” serve as trustee or have been granted power of attorney for client accounts.

• Bill Paying Services: The adviser provides bill-paying services for clients and, therefore, is authorized to withdraw funds or securities from the client’s account

• Online Access to Client Accounts: The adviser manages portfolios by directly accessing online accounts using clients’ personal usernames and passwords without restrictions and, therefore, has the ability to withdraw funds and securities from the clients’ accounts

• Adviser Acts as a General Partner: The adviser serves as the general partner of a limited partnership or holds a comparable position for a different type of pooled investment vehicle.

• Physical Possession of Assets: The adviser has physical possession of client assets, such as securities certificates.

• Check Writing Authority: The adviser or a related person has signatory and check writing authority for client accounts.

• Receipt of Checks Made to Clients: The adviser received checks made out to clients and failed to return them promptly to the sender

Advisors who have actual, physical custody of securities, as well as advisors in these situations, must comply with the custody rules. Failing to do so can have significant ramifications for the advisors, and places customer funds at risk.

If you have any questions or concerns regarding compliance with the custody rule, or any other rule or regulation under the Investment Advisers, send us an email. Our attorneys have decades of experience in securities regulation and compliance and include former in-house attorneys and former SEC enforcement attorneys. Email us at astarita@beamlaw.com with your questions or concerns.

The Secrets Behind Becoming an Elite Advisor

Great article for advisors, but it leaves out one important point - before leaving your firm, joining a new one, or starting an RIA, consult a securities attorney who knows the business. Too many advisors come to us after the fact, when a couple of bucks in the beginning could have avoided or minimized the problem.

The Secrets Behind Becoming (and Remaining) an Elite Advisor

SEC Raises Dollar Limits For Performance Fees

The SEC issued an order that raises, to adjust for inflation, two of the thresholds that determine whether an investment adviser can charge its clients performance fees. The order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 205-3 under the Investment Advisers Act allows an investment adviser to charge a client performance fees if the client meets certain criteria, including two tests that have dollar amount thresholds. The SEC has now rasied the dollar amounts and now an investment adviser will be able to charge performance fees if the client has at least $1 million under the management of the adviser, or if the client has a net worth of more than $2 million. Either of these tests must be met at the time of entering into the advisory contract. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.

The Dodd-Frank Act requires that the Commission issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011 and every five years thereafter. The Commission published a notice of its intent to issue the order on May 10, 2011. The Commission also proposed amendments to rule 205-3, which are currently under consideration.

The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.

No Fund for States to Oversee Advisers?

If the legislation that is currently moving through Congress passes, state regulators will take responsibility for the oversight of all investment advisers who manage less than $100 million dollars, a change from the current benchmark of $30 million dollars.

While the state regulators have been pushing hard to increase their power through this piece of legislation, there is one small problem - they don't have the funds to regulate all of these additional advisers.

State Advisor Regulation Strains Budgets

Bad Advice -Ignore FINRA Social Media Guidance

Securities regulation is a big deal for those in the industry. The mix of rules, regulations and regulators is a dangerous web of potential violations, fines and suspensions. But those who are in the industry know that the regulators are serious, that they are looking for violations, and will bring actions for those violations.

Maybe it is a sign of the Madoff times, but I can't help but shutter when I read comments from supposedly educated and experienced people who comment on rules and regulations. We all know that FINRA has released its social media guidelines. And we know that like most topics, there can be more than one opinion on the impact of new pronouncements.

Some think that the guidelines are too vague, and therefore meaningless. The vagueness that they are referring to is a desire to meet two goals - first to insure that new rules and regulations address a wide range of situations, and second, to allow firms to create their own supervisory system to meet the challenges of their particular mix of issues. For the inexperienced, bright line tests are better because they are easier. The experienced prefer principle-based regulation - tell me what you want to accomplish, and I will figure out the best way for me and my firm to get there.

But that claim of vagueness has led to another unfortunate, and potentially dangerous conclusion. From a legal blog today, talking about FINRA's social media guidelines:

Investing blogs seem to be eyeing the rules with a wary eye, but the consensus seems to be something a long the lines of "it's impossible for them to enforce this, and they're probably not going to be too aggressive anyway."

I hope that any financial professional who is guided by that statement has my business card on his desk. He is going to need it shortly.

FINRA is taking this seriously, and is already requesting documents regarding the use of Facebook, LinkedIn and Twitter. It is not impossible for them to monitor the use of social media, they will do so, and will seek sanctions for misuse.

Compensation Cuts Leads to Broker Transitions

In my practice I have seen a huge increase in the number of wirehouse brokers who are changing firms, as those firms consolidate and attempt to increase their profits.

Unfortunately for some, the wirehouses are ramping up profits at the expense of their brokers, and ultimately, their customers. In all of the years that I have been representing wirehouse brokers, I have never seen such a large number of brokers who are being terminated on the basis of trumped up charges. I certainly understand the need and desire to run a compliant firm, and to weed out brokers who have difficulty following the rules. And I am aware that brokers, like everyone else, tend to downplay their own culpability in such matters. But really, some of these terminations are simply beyond the pale, and nothing more than an asset grab.

I have been saying for almost a decade that the wirehouses want to get rid of brokers and move their business model to salaried employees. See my column from the January 1998 issue of Research Magazine - Death of a Salesman. But now there is a new attack - lower payouts.

It started with the small producers - who can forget Bank of America's decision to cut payouts for brokers on the banking side by 50%, causing a exodus of brokers from the firm, and a mess of promissory note arbitrations.

Citigroup, never the friend to its brokers, apparently has plans to force its brokers into a fee based model, regardless of what the customers want, or need. In an article titled "FAs Disgruntled over New Comp Plan at Citi Personal Wealth Management", David Geracioti, the editor-in-chief of Registered Rep magazine, details the information he has received regarding this forced transition from broker to investment adviser.

As Mr. Gercioti points out, brokers are upset; and leaving. Just take a look at the discussion at the Advisor Forum at Registered Rep titled "Citi PWM Exodus" for a peek at what some brokers are facing, and thinking.

Certainly, in many instances, the fee based model works for customers, and brokers. In many cases, it aligns the interests of the broker with the interests of the customer, and both do well if the assets increase in value, without any selling pressure on the broker or the customer.

But it doesn't work well for everyone. Customers with fixed income accounts, customers who adjust their portfolios once a year, and a host of others, will pay lower fees with a commission based account. Unless of course you lower the management fee to less than a percent.

Citigroup would obviously love to get rid of brokers, and the payouts, and it just may get its wish. Brokers are leaving. If a broker wants to be an RIA, he certainly can do so without the heavy hand of a wirehouse.

Setting up an investment advisory firm, using the platform of a major broker-dealer like Fidelity, is not expensive, nor is it difficult. For the enterprising professional, it is an excellent business model. For an overview of what is involved, take a look at my article, Registration and Regulation of Investment Advisers at SECLaw.com and our update of the SEC publication, Guide to Broker-Dealer Registration.

Or, becoming an independent, and associating with an independent broker-dealer. Doing so lets brokers do exactly what they and their customers need - the flexibility to use a commission based model when appropriate, or a fee based model for those customers who need that model.

Some brokers are reluctant to go into business on their own, and certainly some customers will be reluctant to leave a "big" name like Citigroup. Brokers who stay may find their compensation continually reduced, being forced into teams, and their smaller accounts sent to a call center. Ultimately, the firms will keep the assets, and continue to have less overhead, and more profit, all to the detriment of the financial professionals who cultivated those relationships and serviced those clients.

Does the big name make a difference? I am sure it does. But given the recent financial crisis, are customers still impressed with those "big" name wirehouses? Do customers really believe that those firm offer better advice than an independent? Are they in better financial shape than their competitors? Aren't customers really relying on the relationship with their financial adviser?

Time will tell, but like the brokers in the Registered Rep forums and those who are calling my office, the outlook is not good.

Naturally, any move needs the assistance of professionals, including an experienced securities attorney. Creating an investment advisory firm is not difficult, but requires guidance through the regulatory maze. But all of that can be achieved with effort, and the cost is going to be less than the loss that you will incur over the course of a single month.

My firm offers free consultations to financial professionals who are seeking to change firms, join independents or to start their own RIAs or broker-dealers. Feel free to email me at astarita@beamlaw.com, or to call 212-509-6544 to discuss the possibilities.

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Nationwide Financial Tells Advisors To Find New BDs

Nationwide Financial has advised its independent financial advisers to find new broker-dealer relationships before April 30, according to Investment News.

The article states that the move is intended by Nationwide to focus its efforts on its proprietary sales force and to expand its insurance business.

Independent brokers have a number of choices for new affiliations, as there are any number of independent firms that are available, depending on the needs of the adviser and his clients. I would like to remind brokers that these agreements should be reviewed by an attorney prior to moving to a new firm, as there are a number of clauses which could cause difficulties down the road. While many brokers believe that employment agreements, promissory notes and related contracts are not negotiable, many are, depending on the circumstances. Additional consulting an attorney before entering into any type of agreement involving your career and clients is money well spent, if for no reason other than to prevent surprises down the road.
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Congress to Give FINRA Authority over RIAs

According to InvestmentNews.com, there has been an amendment to the Investor Protection Act which gives FINRA authority over the advisory activity of any broker-dealer that it regulates.

The bill would affect anyone who is dually registered as an investment adviser and a broker, and would greatly expand FINRA's authority over the financial markets.

On one level the proposal makes sense. In recent years we have seen the distinctions between brokers and advisers blurr, and in the retail area, there often is no substantive difference between the two. At least not to the investor, who often does not know, nor does he care, whether his financial adviser is a stock broker or an investment adviser.

The most notorious example is Madoff, who, although presenting himself and his firm as a brokerage firm, was actually acting, or purporting to act, as an investment adviser. In that example, a distinction without a difference, and giving FINRA authority over the RIA side of the BDs business might have made a difference.

That is not to say that FINRA should have authority over all RIAs. There are thousands of investment advisers who are not brokers and who do not work for broker-dealers. Those adviser are now regulated by the states, or by the SEC, depending on how much money they manage.


The committee is scheduled to vote on the Investor Protection Act Nov. 4. According to InvestmentNews.com, it is likely to approve the bill. More>>>

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Hedge Funds On Wall Street Talent Hunt

From Financial Planning.com - Less than a year after the credit crisis forced the closure of some 1,000 hedge funds, these firms are back out looking for capital and hiring professionals from Wall Street firms. In addition to poaching from investment banks, the funds are bringing in professionals from endowments, foundations, and traditional asset managers, according to a recent report More>>>

SEC Charges Broker for Manipulation Using Internet

Once again, the SEC is moving quickly. It is a welcome change, as they have always been known for closing the barn door after the horse has bolted.

Only three weeks after an alleged fraud began, the SEC charged a securities broker with securities fraud for repeatedly creating and then distributing fake press releases to manipulate the stock prices of multiple publicly traded companies.

The SEC alleges that the broker created press releases, including one that claimed that Google was buying the target company. He then  posed as an investor on Internet message boards, touting the announcements he had fabricated. In one instance, his scheme caused the stock price to increase by nearly 80 percent within a few hours of the issuance of his phony press release.

Moving a stock 80% on an Internet posting is pretty amazing, and raises another question. Just how greedy, and gullible, are some investors? Someone posts news in an Internet forum, linking to a press release, and they buy the stock?

Investing is not that easy. There is due diligence that needs to be performed, and analysis that needs to be done. That is why investors use financial advisers, and not Internet investment forums, to make investment decisions.


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Morgan Stanley Plans to Double High Net Worth Advisors

Morgan Stanley Smith Barney announced the integration of Smith Barney’s Citi Family Office into its own ultra-high-net-worth division, which will now be called Morgan Stanley Private Wealth Management. Unlike the old family office, the newly combined unit will exclusively serve clients with a minimum of $20 million in assets. Morgan said it plans to add more advisors to PWM through a combination of “organic growth and selective acquisitions.” More>>>

RIA Assets Fall But Their Numbers Grow

A recent report has confirmed what we suspected - brokers and groups of brokers are moving to the investment advisory side of the business, leaving FINRA and its regulatory nightmare behind them. FA Magazine is reporting that while total assets under management for advisers declined by more than 20%, which is no surprise, the total number of advisers has increased. More>>>

Advisors’ Job Attitude, Outlook Improves

A new survey reveals that independent RIAs have seen their level of job satisfaction rise 10% and the number with an optimistic outlook for the U.S. economy has climbed by 25% over the past three months, according to a survey released by TD Ameritrade Institutional. Half of the 500 RIAs surveyed gave a top rating (9 or 10) to their satisfaction with their job, up from about 40% three months ago. More>>>

Registration and Regulation of Investment Advisers

Increased regulation, and a push for more regulation by FINRA and the States is causing brokers and small firms to move the to investment advisory side of the business. While regulations are going to change here too, there are benefits to the adviser registration, rather than dealing with FINRA. More>>>