Category Archives: Standard of Care

Compliance, Regulatory, Standard of Care

California and New Jersey setting the pace in nationwide race to write the rules for crypto

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Last week, California and New Jersey both upped the ante in the nationwide race to write the rules for the crypto industry:

  • The California Department of Financial Protection and Innovation published an Invitation for Comments related to issues impacting blockchain and crypto businesses.
  • The New Jersey State Assembly Financial Institutions and Insurance Committee approved bills that would require licenses for digital assets businesses and establish a crypto regulatory scheme.
  • Players in the blockchain and digital asset industry should take advantage of opportunities to help shape the evolving regulatory landscape, such as by responding to the Invitation for Comments.

Read more here. 

Compliance, Regulatory, Standard of Care

SEC proposes amendments to expand the reach of the fund “Names Rule,” with a specific focus on ESG

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On May 25, 2022, the US Securities and Exchange Commission (the SEC) proposed amendments (the Proposal) to Rule 35d-1 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act). The Proposal comes over 20 years after the original adoption of the Rule and seeks to greatly expand the scope of the Rule in the name of investor protection and modernization.  The Proposal includes the following primary amendments to the Rule:

  • Expansion of the 80% policy requirement to include funds with names that suggest the fund focuses on investments that have, or whose issuers have, “particular characteristics.”
  • A requirement that any unlisted closed-end funds or BDCs that are required to have an 80% policy under the Rule, adopt such policy as a fundamental policy.
  • Identification of particular circumstances under which a fund may depart from its 80% policy and specific time frames for getting back into compliance.
  • Establishment of the “notional amount” as the appropriate value for a derivative instrument used by a fund when calculating compliance with a fund’s 80% policy.
  • Clarification of what the SEC deems a materially deceptive and misleading use of environmental, social and governance (ESG) terminology.
  • A requirement that any terms used in a fund’s name that suggest an investment focus or a tax-exempt fund, must be consistent with those terms’ plain English meaning or established industry use.
  • Modernization of shareholder notice requirements.
  • Establishment of certain recordkeeping requirements related to a fund’s 80% policy.

Read more here.

Regulatory, Standard of Care

Electronic Signature Policies and Procedures for IAs

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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.

Compliance, Standard of Care

DBA’s: Knowing when to hold them and fold them . . .or at least use them

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From Richard Chen:

Far too often, I’ve encountered situations where advisors and other business owners do not fully understand their use of a DBA or “doing business as” trade name, and this can potentially lead to very serious legal risks.

Many advisers utilize a DBA to facilitate their branding, whether they own their own firm or work as an investment adviser representative for another firm. Yet, many advisers fail to understand that a DBA is not a formal legal entity, such as a limited liability company, and the holder of a DBA does not enjoy the same rights as the owner of a formal legal entity (such as limited liability protection) if it is not used properly.

Read more here.

 

Compliance, Standard of Care

Tackle Operational and Client Risks Now for Smooth Selling Later

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While investment advisers looking to sell, merge, or acquire an advisory business typically focus most on pricing multiples, price adjustments, and earnouts, often overlook are key considerations that can easily sink a deal – namely, operational and compliance-related risks.

Once a term sheet is signed, selling advisers are often shocked to discover how much due diligence is involved when an acquiror asks pointed and very detailed questions about the operations, compliance program, and personnel of a firm. These questions are not only designed to determine if the transaction represents a good fit for the purchaser, but also whether the target firm’s operations and compliance program present regulatory or legal risks that are unacceptable to the purchaser.

Read more here.