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As a new alert from the SEC Office of Compliance Inspections and Examinations makes clear, examiners are paying close attention to advisers and staff who text, send instant messages and use personal emails to communicate with clients.

More from Financial Advisor Online -https://www.fa-mag.com/news/the-sec-is-actively-monitoring-your-online-communications--are-you-42654.html

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


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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.

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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.