On November 4, the Securities and Exchange Commission announced that it voted to propose amendments to modernize the rules under the Investment Advisers Act of 1940 (Advisers Act) addressing investment adviser advertisements and payments to solicitors. According to the SEC, the “proposed amendments to the advertising rule (Rule 206(4)-1 under the Advisers Act) would replace the current rule’s broadly drawn limitations with principles-based provisions,” and would permit the use of testimonials, endorsements and third-party ratings, subject to certain conditions. The proposed rule also would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.
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On July 11, the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission issued a Risk Alert to provide investment advisers and other market participants with information concerning many of the most common deficiencies that OCIE staff has found in recent examinations of investment advisers’ compliance with their best execution obligations under the Investment Advisers Act of 1940 (the “Advisers Act”). The Advisers Act best execution obligation requires an investment adviser to execute securities transactions for clients in such a manner that the client’s total costs, or proceeds in each transaction, are the most favorable under the circumstances taking into consideration the full range and quality of a broker-dealer’s services including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the investment adviser. Furthermore, an investment adviser should periodically evaluate the execution quality of broker-dealers executing their clients’ transactions.
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On June 5, the Securities and Exchange Commission’s Division of Investment Management staff (Staff) updated its “Staff Responses to Questions About the Custody Rule” (Custody Rule FAQs). The Custody Rule FAQs address questions regarding Rule 206(4)-2 of the Investment Advisers Act of 1940, the “Custody Rule.” The update to the Custody Rule FAQs specifically addressed concerns regarding the Staff’s February 2017 Guidance Update titled: “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority” (Guidance Update). The Guidance Update indicated that investment advisers may inadvertently have custody (Inadvertent Custody) of client assets due to provisions in a separate custodial agreement entered into between its advisory client and a qualified custodian that allow the investment adviser to instruct the custodian to disburse, or transfer, client funds or securities.
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On June 1, the Securities and Exchange Commission announced settlements with 13 registered investment advisers who repeatedly failed to annually file or update reports on Form PF. Form PF is a confidential reporting form required for private fund investment advisers managing $150 million or more of assets. The SEC began requiring that applicable registered investment advisers file an annual Form PF in 2012 under Rule 204(b)-1 of the Investment Advisers Act of 1940. Form PF requests, among other things, information about private funds’: asset values, investment strategies, performance, and use of borrowed money and derivatives. The SEC uses Form PF data to monitor industry trends, inform rulemaking, identify compliance risks, and target examinations and enforcement investigations. The SEC also shares Form PF data with the Financial Stability Oversight Council (FSOC), which assists FSOC in evaluating systemic risks potentially caused by hedge funds and other private funds.
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On August 7, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert summarizing observations of its second round of cybersecurity focused examinations (Cybersecurity 2 Initiative) to assess financial services firms’ practices and legal and compliance issues related to cybersecurity preparedness. The Cybersecurity 2 Initiative is built upon OCIE’s

The staff of the Securities and Exchange Commission’s Division of Investment Management (Staff) has issued an Information Update regarding the SEC’s recently adopted amendments to Form ADV, which will go into effect on October 1. After this date, any adviser filing an initial Form ADV or an amendment to an existing Form ADV must provide

On June 12, the staff of the Securities and Exchange Commission’s Division of Investment Management updated its Frequently Asked Questions on Form ADV and IARD. Much of the additional guidance relates to amendments to Part 1A of Form ADV made by the SEC in 2016. Investment advisers will need to comply with these amendments beginning

On May 17, the Securities and Exchange Commission Office of Compliance Inspections and Examinations (OCIE), issued a Risk Alert in response to the widespread ransomware attack known as WannaCry, WCry, or Wanna Decryptor that started on May 12. The attack infected computers and servers of various organizations in more than 100 countries. The Risk Alert encourages broker-dealers and investment management firms (collectively, “Firms”) to review the May 12 alert published by the US Department of Homeland Security’s Computer Emergency Readiness Team and evaluate whether applicable patches for their operating systems are properly and timely installed.
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On January 18, the Securities and Exchange Commission’s Division of Investment Management updated its Form PF FAQs. Registered investment advisers managing private funds with at least $150 million in private fund assets under management are required to complete and file a Form PF. The new FAQs provide additional guidance on the form regarding both general

Section 205 under the Investment Advisers Act of 1940 generally prohibits a federally registered investment adviser (RIA) from receiving compensation based on a share of the capital gains on or appreciation of the assets of an advisory client (i.e., performance fees). Rule 205-3 under the Advisers Act provides an exemption from this prohibition for clients that meet the definition of “Qualified Client” found in the rule.
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