Surviving the E-World: Compliance Suggestion for E-Mail Retention, Reg. SP and your Books & Records:
Rule 204A of the Investment Advisors Act of 1940 does not make email review an affirmative duty; advisors need to use common sense on what they review. Consider review of emails with brokers, traders, salespeople and access persons. Think about who is reviewing your emails. The reviewer should be someone within the compliance department, HR or other appropriate business leaders.
For firms with International locations-do these offices act independent, or do they rely upon the US operation of the firm? Retention requirements of emails may need to comply with the country rules, where office is located.
Policies and Procedures-key element is always what is right for the size and scope of your firm. Consider the technology of your firm and the location of your offices. Can you capture, retain and prevent all emails from being deleted in different offices?; or, do you need procedures for each office.
Among the Reg S-P requirements are that records be destroyed in a safe manner. Know what documents need to be kept and for how long.
Compliance Program Testing: Conflict Identification, Risk Assessment
SEC examinations are now more risk based. Consider creating a chart for all those areas where a conflict of interest may exist for your firm. Follow how the money flows in and out of your firm. Within the chart, as you review your firm’s risks, assess each risk with High/Medium/Low. For High and Medium risks, document what you are doing to mitigate those risks.
Areas of Risk Testing: Portfolio Guidelines, Trade Processes (soft dollar arrangements/performance fees), client files (questionnaires/agreements), Suitability, AML(OFAC reports), Custody, IT-computer systems, Proxy voting procedures, state of your firm-and any going concerns, email reviews, cross trading, IPO’s.
SEC examinations: Change is coming
SEC reviews an advisor’s ADV and assigns a risk score, using an algothrim, to the firm based upon responses to the ADV in the areas of AUM, types of business, disciplinary issues, etc. From that percentage, the SEC will review the top 10% of firms that they consider a higher risk. Firms with a lower score will be reviewed later.
Top deficiencies from exams:
- Policies & Procedures
- ADV Amendments and lack of disclosures
- Rule 204-6(1) Performance Ads & Marketing
- Risk Management for internal controls (i.e. broker execution)
- Risk Management for personal trading (Code of Ethics)
- Compliance Review 206-4(7) (B) and the completeness of the firm’s review.
Limited Scope and Business reviews are being done for newly registered advisors. The review typically lasts one day. It is intended to give an overview to the new advisor. It also helps the advisor know where they score on the risk profile. They are also called RAVE-Risk Assessment Value Reviews.
Deficiency letters have been revised and will be more uniform in their tone and tenor. The letter will be arranged in order of seriousness of the deficiencies. It will include a statement of law and facts and the third section will discuss how the statement of law and facts relates to the firm’s audit.
Performance Advertising and Marketing: Strike a Proper Balance
Advertising for advisors is governed by Rule 206-4(1) the Anti-Fraud Rule and no-action letters and enforcement actions. Firms should avoid:
- No testimonials (client lists may be used, but you can’t be selective in those clients that you include on the list in terms of whether their accounts performed better than other clients.)
- Do not give a list of past specific recommendations-unless you are going to give both good and bad recommendations that you have made.
- No false, misleading or untrue statement.
GIPS requirements are in place for performance advertising. Do not say you are GIPS compliant unless they have actually verified your performance, composition of portfolios, etc.
Compliance “Hot Topics” A Critical Look at What’s Coming Down the Pike
The presentation for this session was completed 6 weeks ago and in light of the recent turmoil in the financial markets the session was focused on general discussion of what has happened in the markets and speculation about outcomes for the SEC.
Post Conference discussion of Form ADV II and F proposed changes.
The SEC anticipates having the proposed changes finalized by the end of 2008. The ADV II and F will be divided into two parts; a Brochure and Supplement. There are still issues with the Supplement so discussion indicated this part of the changes may happen later. Overall the brochure is a narrative document versus the check the box format. It will encompass more information about a firm’s Code of Ethics, Conflicts of Interest and disciplinary issues. Much of what is currently disclosed on the Schedule F will remain with some additional questions in the areas mentioned above. The overall theme of the discussion was keep the language in ‘plain english’ and simple.
The supplement is a document that will include much the same information as Item 6 currently includes, with more information about disclosure issues for each of a firm’s Investment Advisor Representatives.
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