Category Archives: Regulatory

Attracting and Retaining Talent

May 16, 2022 Richard Chen Leave a comment

In the increasingly challenging race to attract and retain top talent, investment advisers should consider all of the tools at their disposal. One of the most helpful and flexible options are profits interests.

Profits interests can be structured to provide an employee with the right to participate in a share of the ongoing net income earned by the firm and/or the proceeds from the sale of the firm down the road. Profits interests can also be structured to “vest” over time, meaning that an employee can only receive them after certain conditions have been satisfied (e.g., the employee remains with the firm for a period of time and remains in good standing), which provides employees with an incentive to remain loyal to the firm.

SEC Scrutinizing Advisers transitioning from BD model to IA model

April 11, 2022 Richard Chen Leave a comment

Advisers transitioning from wirehouses and independent broker-dealers must heed a warning from the SEC contained in its 2022 Examination Priorities that is pertinent to their transition. The SEC noted that it will be scrutinizing whether advisors migrating from the broker-dealer model to the investment adviser model have evaluated their existing client accounts to determine whether it is in the client’s best interest to move from a brokerage account to an advisory account. As such, it will be important for transitioning advisors to evaluate the type and frequency of services and investments currently offered and to be offered for each client and to document why, if applicable, it is advisable for the client to move from a brokerage account to an advisory account. Of course, client preferences should be solicited and documented in such analysis. The failure to demonstrate that an adviser conducted such an evaluation could lead to allegations that the adviser breached its fiduciary duty of care to its clients.

SEC Examination Priorities for 2022 – Key Takeaways

April 4, 2022 Richard Chen Leave a comment

On March 30, 2022, the SEC’s Division of Inspections and Examinations (“staff”) published its examination priorities for 2022 (“Examination Priorities”). The central theme of the priorities for investment advisers seems to focus on the increasingly complex nature of the investment advisory industry, and the priorities focus principally on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

For a summary of the priorities and guidance for mitigating regulatory risk in the coming year, read more here.

Compliance, Enforcement, Regulatory, Standard of Care

How NSCP CCO Framework Could Have Altered FINRA Charges

March 1, 2022 Clifford E. Kirsch, Editor Leave a comment

Every year, FINRA brings hundreds of cases, many alleging that firms have inadequate policies and procedures. In the overwhelming majority of those cases, the Chief Compliance Officer (CCO), who FINRA considers to be “a primary advisor to the member on its overall compliance scheme and the particularized rules, policies and procedures that the member adopts,” is not charged. With regard to Anti-Money Laundering (AML) cases, AML compliance officers (AMLCOs) are also infrequently charged. Questions that always follow such cases include the following: When are violations “firm issues” and when should the compliance officer get charged?

Despite the relatively small percentage of cases brought against compliance officers, they are (unsurprisingly) concerned about being in the cross hairs of regulators, and being subject to personal liability. Compliance officers are usually the firm’s central point of communications with regulators, responsible for responding to regulatory inquiries, producing documents, and answering questions. In many investigations, they must provide on-the-record testimony, even if the case does not directly involve their core functions.

Due to these concerns, on January 10, 2022, the National Society of Compliance Professionals (NSCP) proposed a “Firm and CCO Liability Framework” (NSCP Framework) to “provide guidance to regulators, chief compliance officers (CCOs), and firms regarding perceived or actual CCO liability.” The NSCP Framework developed nine questions to be “considered by regulators where a compliance failure may have occurred,” to evaluate CCO liability.

SEC Proposes New Rules for Private Fund Advisers

February 28, 2022 Richard Chen Leave a comment

The SEC recently proposed new rules that would impose additional practice and disclosure requirements on private fund advisers which, if adopted in their current form, could collectively have severe consequences for such advisers. Among other things, the proposed rules would require SEC-registered advisers to:

provide quarterly reporting to fund investors including detailed and standardized disclosures about fund expenses and performance; and
obtain and deliver audited financial statements for each advised private fund annually and upon liquidation.

Importantly, the proposed rules would prohibit all private fund advisers (including exempt reporting advisers) from:

entering into side letter arrangements granting preferential redemption rights or certain portfolio information rights if such rights would have a material adverse effect on fund investors;
requiring reimbursement from investors for the adviser’s breach of its fiduciary duties including situations involving simple negligence;
Charging private funds for certain fees and expenses;
deducting taxes owed from any clawback they must provide to investors; and
Borrowing funds or securities from a fund or receiving an extension of credit from a fund.

Very importantly, the proposed rules do not have a grandfathering provision, and, therefore, if the rules are adopted as proposed, advisers would need to assess whether existing private fund documents must be amended, which can be challenging given that the adviser and fund investors negotiated fund terms based on circumstances prior to the existence of the new requirements.

Read more here.