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.
Determining if delivery of Form ADV is required for each client or prospective client that contains all information required by Part 2 of Form ADV and what must be included in the Firm’s ADV is a complex topic. An RIA should consult an attorney or compliance consultant to ensure their brochure contains the necessary information.
Advisers have a fiduciary obligation to recommend a share class that will provide their clients with the lowest overall expenses, based on anticipated transaction costs and holding periods. Moreover, if the Firm recommends mutual funds that carry 12b-1 fees when lower share class options exist, the Firm must make full and fair disclosure, including conflicts associated with making investment decisions in light of the receipt of 12b-1 fees; and selecting the more expensive 12b-1 fee paying share class when a lower-cost share class is available for the same fund. Share class selection is a regulatory priority. The SEC has indicated that examiners will conduct focused, risk-based examinations to assess whether investment advisers are meeting their obligations to
- Seek best execution;
- Disclose material conflicts of interest; and
- Maintain an effective compliance program.
Investment adviser should determine its approach for meeting these three obligations and train its personnel to comply with any policies, procedures, and guidelines governing share class selection.
Also, State registered advisers should review and verify compliance with state regulatory requirements governing the business of investment advisers. The regulation of investment advisers can vary significantly from one state to the other. Attempts to unify the patchwork of state requirements have fallen short, and the only sure way to determine the specific requirements of a state is to refer directly to the state’s securities laws and regulations, which many states make available online. Due to the practical difficulty of identifying and keeping current on the requirements of each state in which an investment adviser conducts business, it is often advantageous for an investment adviser to adopt a policy that requires it to comply with all state requirements.
Provided below is a non-exhaustive list of common regulatory requirements that states impose on investment advisers. Any investment adviser that does not comply with a particular requirement should thoroughly document its basis for believing that the requirement does not apply in the states in which it conducts business.
For information on investment adviser registration in each state, check out NASAA’s State Investment Adviser Registration Information.
Investment advisers should review, no less frequently than annually, the adequacy of its written compliance policies and procedures and the effectiveness of their implementation. The states expect annual reviews to take into consideration any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Investment Advisers Act or related rules that may impact the adviser’s policies and procedures. In addition, the state expects that an investment adviser will review its compliance policies and procedures on an interim basis in response to significant compliance issues, changes in business activities, and new regulation. In accordance with state rules, this memorandum summarizes the key components of annual reviews for the adviser.
Outside Business Activities (“OBAs”) of individuals can create potential conflicts of interests with the registered investment advisers that employ them. Advisors are responsible for providing written notice before they act as an employee, independent contractor, sole proprietor, officer, director or partner of another person; or receive compensation or have the expectation of compensation from any other person as a result of any business activity outside the scope of the relationship with their registered investment adviser.
Additionally, this includes situations where compensation is to be paid or if there is a reasonable expectation of compensation as a result of any business activity outside the scope of the relationship with his or her firm. Passive investments are exempted from this requirement. To ensure all individuals are compliant with OBA requirements, make sure your firm reviews the following.