Time For A Compliance Review! - The SEC Enforcement Priorities Report

The SEC has released its report of its 2021 examination priorities. Brokers, Advisors and Financial professionals are well-advised to review the report, and their internal procedures. Find out now if you have issues that are on their list, and they will be sure to be asking about these items in an upcoming examination.

The report is 42 pages long, but here are the highlights. If you need assistance addressing any of these issues, contact Sallah Astarita & Cox, LLC, a national securities law firm comprised of former SEC Senior Enforcement Attorneys and Outside Counsel to dozens of RIAs and BDs. Call 212-509-6544 to schedule an appointment.

Regulation Best Interest 

Regulation Best Interest established a new standard of conduct for broker-dealers and associated persons of a broker-dealer. Regulation Best Interest requires broker-dealers and natural persons who are associated persons of a broker or dealer to act in the best interest of their retail customers when making a recommendation of any securities transaction or investment strategy involving securities without placing their financial or other interests ahead of the interests of the retail customer. This general obligation is satisfied only if a broker-dealer complies with four-component obligations: a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. The Division will prioritize examinations to assess compliance with Regulation Best Interest.18 Initial examinations previously undertaken focused on the processes broker-dealers relied on to implement Regulation Best Interest.

RIA Fiduciary Duty 

The Division will continue to examine RIAs to assess whether, as fiduciaries, they have fulfilled their duty of care and duty of loyalty. This will include assessing, among other things, whether RIAs provide advice, including whether account or program types continue to be, in the best interests of their clients, based on their clients’ objectives, and eliminate or make full and fair disclosure of all conflicts of interest which might incline RIAs—consciously or unconsciously—to render advice which is not disinterested such that their clients can provide informed consent to the conflict. The Division will continue to focus on risks associated with fees and expenses, complex products, best execution, and undisclosed or inadequately disclosed, compensation arrangements.

Fraud, Sales Practices, and Conflicts 

Examinations will focus on the appropriateness of recommendations and advice provided to retail investors, with a particular emphasis on: (1) seniors, including recommendations and advice made by entities and individuals targeting retirement communities; (2) teachers; (3) military personnel; and (4) individuals saving for retirement. Additionally, the Division will concentrate on recommendations regarding account type, conversions, and rollovers, as well as the sales practices used by firms for various product types, such as structured products, exchange-traded products, real estate investment trusts, private placements, annuities, digital assets, municipal and other fixed income securities, and microcap securities. In addition to the recommendation of complex products, the Division will examine broker-dealers to assess whether they are meeting their legal and compliance obligations when providing retail customers access to complex strategies, such as options trading, and complex products. The Division will also focus on how firms are complying with the recent changes to the definition of accredited investor when recommending and selling certain private offerings.

Retail-Targeted Investments 

The Division will continue to prioritize examinations of issues regarding  products that are important to retail investors, including Mutual Funds and Exchange-Traded Funds (ETFs), Municipal Securities and Other Fixed Income Securities and  Microcap Securities, 

Anti-Money Laundering

The Division will continue to prioritize examinations of broker-dealers and registered investment companies for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs. The goal of these examinations is to evaluate whether broker-dealers and registered investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money laundering activities.

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Sallah Astarita & Cox, LLC is a national securities law firm comprised of former SEC and Broker-dealer attorneys, representing firms and brokers in SEC Examinations and Investigations across the country. For more information contact the firm at 212-509-6544 or send an email to mja@sallahlaw.com

RIA Buyers and Sellers Gearing Up for A Busy 2016

According to this article in On Wall Street, 2016 is going to be a big year for RIAs - not just for their revenue, but for buying and selling the firms themselves.

Buyers and sellers are gearing up for a busy year for deals as private equity buyers come off the sidelines, attracted by the strong-growth business and “strong” valuations.

“Buyers are still attracted to wealth management,” said Elizabeth Nesvold, managing partner at Silver Lane Advisors, a prominent New York investment banking firm, speaking at the MarketCounsel Summit.

“They see the average RIA growing at 15% plus in a minimally capital intensive business, and baby boomer demographics driving the need for financial and estate planning advice.”

 Liquidity, low interest rates and pent-up M&A demand are also driving the market, Nesvold said.

Read the entire article, and call us if you are interested in creating, buying or selling an RIA firm. We have been representing financial professionals for decades - 212-509-6544.

Grab Your Wallet: RIA Buyers And Sellers Gearing Up for Busy 2016 | IAG Breaking News:

Undisclosed Kickbacks Lead to SEC Charges for Investment Advisor

The SEC's Enforcement Division alleges that Total Wealth Management and its owner and CEO Jacob Cooper entered into undisclosed revenue sharing agreements through which they paid themselves kickbacks or so-called "revenue sharing fees." They failed to disclose to clients the conflicts of interest created by these agreements as they recommended the underlying investments to clients and investors in the Altus family of funds. Total Wealth and Cooper also materially misrepresented the extent of the due diligence conducted on the investments they recommended. Total Wealth's CCO Nathan McNamee and investment adviser representative Douglas Shoemaker also breached their fiduciary duties and defrauded clients by failing to disclose conflicts of interest and concealing the kickbacks they received from the investments they recommended.

"Investment advisers owe a fiduciary duty of utmost good faith and full and fair disclosure to their clients," said Michele Wein Layne, director of the SEC's Los Angeles Regional Office. "Total Wealth violated that duty with its pervasive practice of placing clients in funds holding risky investments while concealing the revenue sharing fees they paid themselves."

In the order instituting administrative proceedings, the SEC's Enforcement Division alleges that Total Wealth and Cooper willfully violated the antifraud provisions of the federal securities laws, and McNamee and Shoemaker violated or aided and abetted violations of the antifraud provisions. They also are charged with violations of Form ADV disclosure rules and the custody rule. The SEC's order seeks return of allegedly ill-gotten gains plus interest, financial penalties, an accounting, and remedial relief.

SEC Charges San Diego-Based Investment Adviser

Related articles

• No Freedom of Information When It Comes to Money Managers
• Defending Kickbacks
• Personal Finance: What to Ask a Financial Adviser
• SEC Obtains Asset Freeze Against Massachusetts-Based Investment Adviser Stealing Money from Clients
• SEC Sues Investment Advisor for Failure to Disclose
• Advisors Beware - Expect More SEC Civil Actions

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.

RIA State Registration Deadline Approaches

This Thursday is the deadline for mid-sized RIAs who no longer meet the $90 million AUM number to register with their states rather than the SEC, and it appears that many have not done so. Financial-planning.com sys that hundreds of medium-size RIAs are procrastinating and have not made their state registrations.

Despite numerous messages from the SEC, it appears that many advisors have not made the registration filings, and there is no guarantee that the state will accept the filings, even if filed on time.

With roughly 2,500 RIAs affected by the change in registration requirements, there could be a signficant number who are going to be late, and who may face issues with not being registered with any regulator, a potential violation of state and federal law.

If you are one of the firms that has not made your state filings, contact us at info@seclaw.com and we will see if we can assist you with your registration, or help you find someone to help you with the process.

Financial-planning.com has more details at Procrastinating RIAs Could Face SEC De-Registration