Investment advisers are reminded to review their filing obligations under the TIC Form SHC as reporting on this 5-year benchmark survey is due on March 3, 2017. The instructions for Form SHC are available here, FAQ may be found here and key issues for reporters are available here.
SEC OCIE Alert on Adviser Exams: 5 Most Frequent Deficiencies
The SEC’s OCIE office released its 5 most frequent deficiencies identified in examinations of Investment Advisers. They include the Compliance Rule, Regulatory Filings, Custody Rule, Code of Ethics Rule, and Books and Records. According to the SEC staff, the Alert is based upon deficiencies cited from over 1,000 investment adviser exams over the past two years. The document is helpful to the adviser legal and compliance personnel, not necessarily because there are surprises in the deficiencies cited, but because there is good amount of detail as to each of the cited deficiencies and thereby serves as a roadmap to be incorporated into the adviser’s annual compliance review. View the Alert here: The Five Most Frequent Compliance T opics
Shortening the Settlement Cycle
In 2017, broker-dealers will be required to devote significant time and attention to preparing for a shortened settlement cycle. As a means of reducing credit risk, counterparty risk and overall systemic risk, the Securities and Exchange Commission (SEC) has moved forward with proposed rules that would amend Rule 15c6-1(a) in order to reduce the settlement cycle to two business days (T+2).
FINRA Investor Study
Recently, FINRA published a report regarding its investor survey (FINRA Investors in the US 2016). The report summarizes findings from an online survey addressing investor relationships with broker-dealers and advisers, investor understanding of fees charged for investment services and investor literacy. The survey finds that a very small percentage of investors own “complex securities,” such as REITs, options and structured notes, which have been a focus of regulatory attention. Most investors own principally individual stocks and mutual funds. More than half of those investors surveyed rely on the services of a broker or other professional adviser for some of their investment decisions, with the percentage being somewhat higher for investors aged 55 and higher. Approximately 16% of those surveyed use robo-advisers. In making investment decisions, 49% expressed a preference for paper deliver of documents. An overwhelming percentage of investors (68%) rely on information from the company in which they are investing in order to make their investment decisions. The investor literacy component of the survey questions revealed that many investors do not have a complete understanding of concepts like short selling and buying stocks on margin, which suggests that broker-dealers and investment advisers have continued work ahead of them in terms of investor education.
FINRA Enhanced Pricing Disclosure Rule
In November 2016, the Securities and Exchange Commission approved FINRA’s proposed rules amending Rule 2232, which will require FINRA members to provide additional pricing information on retail customer confirmations for non-municipal fixed income transactions. The additional requirements have proven quite controversial and over the years FINRA had proposed and re-proposed various similar amendments. The Municipal Securities Rulemaking Board, or MSRB, has adopted corresponding rule amendments.
The amended rule requires that if a FINRA member trades as principal with a non-institutional customer in a corporate debt or agent debt security, the member would, subject to certain exceptions, be required to disclose the member’s mark-up or mark-down from the prevailing market price for the security on the customer confirmation. Rule 10b-10 under the Exchange Act already requires that FINRA members provide customers with limited pricing information (e.g., transaction cost information) in connection with transactions in equity securities where the member acts as principal; however, no such requirement had existed for transactions in fixed income securities.
Requirements
The disclosure requirements would apply where: