All posts by Richard Chen

SEC/CFTC Jointly Proposed Rule Regarding Form PF and Digital Assets

Signaling its increasing scrutiny on investment advisers managing crypto assets, the SEC and CFTC recently jointly proposed a rule that would require private fund managers who are required to file Form PF to report information on digital asset investments held by their private funds.

The release defines a “digital asset” as an asset that is issued or transferred using distributed ledger or blockchain technology including, but not limited to, virtual currencies, coins, and tokens.

Among other things, reporting managers would need to provide a good faith estimate of the percentage of the reporting fund’s net asset value invested in digital assets as well as the dollar value of long and short positions in digital assets.

Read more here.

Fiduciary Duty of Care for Investment Advisers

I often get asked what and how much information an investment adviser must gather from clients in order to ensure that it can satisfy its fiduciary duty of care to make suitable recommendations in the best interest of its clients.

By way of background, the duty of care requires an SEC-registered adviser to establish a reasonable understanding of the client’s objectives. How an adviser establishes this reasonable understanding can vary based on nature of the client, the scope of the adviser-client relationship, and the nature and complexity of the anticipated investment advice

For retail investors, the SEC has explained that this duty requires, at a minimum, that the adviser make a reasonable inquiry into the client’s financial situation, level of financial sophistication, investment experience, and financial goals. Yet, depending on the circumstances, more information may be required. For example, an adviser undertaking to formulate a comprehensive financial plan for a retail client would generally need to obtain a range of personal and financial information about the client, such as current income, investments, assets and debts, marital status, tax status, insurance policies, and financial goals.

Advisers should review the information they are collecting from clients to ensure that they are satisfying their fiduciary duty of care.

Read more here.

IAR Compliance

One of the most challenging and yet important things for investment advisory firms with investment adviser representatives (IARs) operating from multiple locations to do is to ensure that such IARs are being reasonably supervised to prevent their violation of securities laws.

The SEC is keenly focused on this topic, as demonstrated by an enforcement action announced last week where an investment adviser was fined $400,000 for failing to supervise an IAR that engaged in improper allocation of trades that resulted in preferred treatment for the IAR and his family members, at the expense of the IAR’s clients.

This risk is particularly acute for investment advisers who retain IARs to “tuck in” under the adviser’s umbrella, and yet such IARs essentially continue to run their own practices under such umbrella. This risk has also been exacerbated since the pandemic where advisers allow employees to work remotely for significant periods of time.

Advisory firms should not leave it to IARs to ensure their own compliance with the firm’s compliance policies and procedures. Advisers must ensure that there are appropriate touchpoints with such IARs to ensure that the IARs are complying with the firm’s policies and procedures.

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Best practices for Mitigating Regulatory and Legal Risks of Electronic Signatures

Recently the SEC indicated that advisory firms should have policies and procedures in place to ensure that electronic signatures are not being exploited to perpetrate fraud that could harm advisory clients.

To that end there are various methods that can be employed to ensure that the person receiving the request for electronic signature is the intended recipient/signer. Among other things, the recipient can be required to authenticate their identity before reviewing/signing the document through various methods including

  • the sending of a code via text to a mobile number that the sender already has on file prompting the recipient to enter the validation code to confirm its identity
  • requiring the recipient to answer questions about the recipient’s identity/background to validate that the recipient is the intended signer.

Advisers should utilize only those electronic signature services that have a validation method, such as the above, to authenticate that the person signing the document is the intended recipient/signer.

Read more here.

Electronic Signature Policies and Procedures for IAs

The SEC has begun examining investment advisers to evaluate their practices around the use and authentication of electronic signatures.  The focus is on ensuring that advisory firms have policies and procedures designed to ensure that electronic signatures are not being exploited to perpetrate fraud that could harm advisory clients.

 

Among other things, the staff has requested information pertaining to (a) the types of documents that firms allow to be electronically signed; (b) a firm’s procedures for authenticating changes to clients’ contact information (including email addresses); and (c) a firm’s controls  addressing how a client is authenticated for electronic signatures and how the firm prevents unauthorized changes to this information.

 

Advisers utilizing electronic signatures should ensure that their policies and procedures address such issues to minimize the likelihood of identity theft and fraud.

Read more here.