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.

SEC to Hold National Compliance Event for Broker-Dealers

The SEC announced the opening of registration for its National Compliance Outreach Program for Broker-Dealers that will take place in Washington D.C. on April 9.

The event is sponsored by the SEC's Office of Compliance Inspections and Examinations in coordination with the SEC's Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA). It provides a forum for open discussions about effective compliance practices for broker-dealers and will focus on topics of interest to compliance, risk, and audit officers of large broker-dealers with multiple and complex business lines.

"To be effective, compliance and ethics programs cannot exist in silos. They need to be ingrained in the DNA of the organization and the decision-making framework of the organization. They need to be part of the way business is done," said Carlo di Florio, Director of the SEC's National Examination Program. "Compliance and risk management programs add tremendous business value. They protect the business. They enhance the brand. They ensure that reputation is protected. Our National Compliance Outreach Program is one of the ways that we try to support and enhance the compliance and risk management functions of firms."

FINRA Member Regulation EVP Susan Axelrod added, "FINRA is pleased to continue the partnership with the SEC to provide this opportunity for broker-dealer compliance professionals and regulators to foster two-way communication and work together to protect investors. Given the pace of change in the industry, face-to-face meetings of this kind are more valuable than ever."

For more information on the even, visit SEC to Hold National Compliance Event for Broker-Dealers

Do You Need to Register? Foreign Investment Firms Fined By SEC

If you are doing business in the United States, you need to follow the US securities laws, regardless of where you are located. While there are exemptions from registration and other exceptions that may be available, all firms need to examine the issue and doing business in the US is very broadly interpreted. The costs of failing to comply with the state and federal securities laws can be very costly, as four foreign financial services firms just learned.
The SEC announced charges against four financial services firms based in India for providing brokerage services to institutional investors in the United States without being registered with the SEC as required under the federal securities laws. The four firms agreed to pay more than $1.8 million combined to settle the SEC’s charges.
According to the SEC’s orders against the firms, they engaged with U.S. investors in some of the following ways despite being unregistered broker-dealers: Sponsored conferences in the U.S. Had employees travel regularly to the U.S. to meet with investors. Traded securities of India-based issuers on behalf of U.S. investors Participated in securities offerings from India-based issuers to U.S. investors.
Almost two million dollars in fines for failing to register, a process that can be costly, but certainly not two million dollars worth of costly. Now add to that the possibility that their clients may have claims against the firms because they were not registered  and this becomes a very costly oversight.
The full details are at the Commission's website - SEC Charges Four India-Based Brokerage Firms with Violating U.S. Registration Requirements; If you have questions about the registration status or requirements for any financial services firm, foreign or domestic, give us a call or email me at astarita@beamlaw.com. We have been representing financial firms across the country in compliance and registration matters for decades.

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