Cybersecurity Exam Observations and Effective Practices

Cybersecurity Exam Observations and Effective Practices

Cybersecurity remains one of the principal operational risks facing broker-dealers and Registered Investment Advisers. Accordingly, FINRA and the SEC’s examiners expect firms to have reasonably designed cybersecurity programs and controls consistent with the firm business model and scale of operations to ensure that sensitive data, including client information, is not lost or misused, or accessed by unauthorized users.

Examiners continue to inquire into the Firm’s controls regarding firewalls, vulnerability, penetration testing, and training during office examinations.

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Investment Adviser Marketing Rule

Investment Adviser Marketing Rule

Effective May 4, 2021, the SEC’s recently adopted amendment to rule 206(4)-1 of the Advisers Act went into effect.  The Advertising Rule, 206(4)-1, which addressed how advisers marketed their services to clients and investors, had not been updated with any substance since it was adopted in 1961.  The same is true for the “solicitation rule” adopted in 1979. The new investment adviser marketing rule amends the existing rule 206(4)-1, known as “the advertising rule,” and replaces rule 206(4)-3, the “solicitation rule.” The SEC believed it was appropriate to regulate both the investment adviser advertising and the solicitation activity of an adviser through a single rule: The Marketing Rule.

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Gifts and Gratuities

Gifts and Gratuities

Advisory representatives are prohibited from accepting anything of value that might influence their investment decisions or serve to reward them in connection with their investment advisory activities. Additionally, advisory representatives are expected to refrain from knowingly conducting advisory business with any individuals or entities that use gifts, gratuities, or other items of value to bribe or influence others.

The provision and receipt of gifts and business entertainment by investment advisers and their employees are subject to pervasive regulation. Firms are to supervise and document all gifts and gratuities given to or received from any clients and prospective clients. The rule protects against the improprieties that may arise when firms or their associated persons gives gifts or gratuities. Firms must take any action to identify or examine the nature, frequency, extent and dollar amount to determine if such gifts and/or gratuities are in compliance with the firm’s policies. RIA’s are to adopt a policy governing professional conduct and conflicts of interest. Such policy is to provide that all associated persons have high standards of performance, integrity, productivity and professionalism. The firm should monitor for any and all conflicts of interest that could result, including instances of preferential treatment over other clients.

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Schedule 13(d) and 13(g)

Schedule 13(d) and 13(g)

Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 require certain market participants to file reports with the SEC. The reporting obligations under sections 13(d) and 13(g) generally focus on the concept of “beneficial ownership” and depend upon numerous factors, including the class and amount of securities acquired, and the purpose and intent with which the particular position is held. Generally, any person (including any entity) who is the “beneficial owner” of more than 5% of any class of equity securities, as defined in Rule 13d-1(i) of the Exchange Act, is subject to the beneficial ownership reporting requirements of section 13(d) of the Exchange Act.

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Custody Requirements

Custody Requirements

Previously on our blog we discussed situations where advisers are deemed to have custody, Assessing Custody for Registered Investment Advisers. If your firm has deemed itself to have custody, you need to ensure your firm is compliant with the Custody Rule requirements. If this is the case, consider the following:

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Assessing Custody for Registered Investment Advisers

Assessing Custody for Registered Investment Advisers

One of the most critical rules under the Investment Advisers Act of 1940 (“Advisers Act”) is the custody rule, which is designed to protect advisory clients from the misuse or misappropriation of their funds and securities. With an adequate custody assessment, your firm should be able to recognize whether it has “custody” as defined under the custody rule and has appropriate controls to comply with the custody requirements. Your firm should also build appropriate controls and procedures to ensure future compliance with the custody rule, as applicable to the firm.

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