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News & Events

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Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Process?

in Communiques

July 20, 2018

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment Advisers Act of 1940 (the “Advisers Act”). The release reflects the results of over 1,500 adviser examinations.

In addition to the 30,000-foot items – inadequate policies and procedures, not performing reviews or otherwise failing to follow policies and procedures – OCIE reminds us of some of the underlying considerations of best execution assessment and brokerage practice disclosure. However, we do not see anything novel in this alert. It is not the first time the SEC has issued a risk alert that appears to contain just reminders without adding new content. For example, last September, the SEC issued an Advertising Risk Alert that was a repeat of old information.

Best Ex Refresher

OCIE reemphasized Advisers’ responsibility to seek best execution taking into consideration the circumstances of the particular transaction and the range and quality of the services provided by the broker-dealer. A key component of fulfilling this obligation is for Advisers to systematically assess the execution quality of broker-dealers used on behalf of their clients and that, while there are a range of potentially valid considerations, some consideration should be given to which factors may be more relevant to the particular trade. For example,

  • Execution efficiency – for clients with large orders, Advisers may focus on market impact and confidentiality;
  • Market access – for clients in niche strategies, Advisers may emphasize specialized inventory or handling; and/or
  • Other services –access to research, custody, trading systems, or other efficiencies may play an important role for Advisers in serving their clients.

Some of the areas of deficiency in this regard were found to be inadequate overall due diligence on broker-dealers, a failure to assess any qualitative factors whatsoever during best execution reviews, and failure to incorporate trader and portfolio manager inputs, their perspectives on how a broker-dealer best serves those clients, into the assessment. Another area of deficiency was a failure to seek comparisons from other broker-dealers, a consideration which is particularly important where firms rely predominantly on a single broker-dealer.

The release also emphasizes disclosure in terms of both brokerage practices and soft dollar arrangements. Where certain brokerage practices may present the appearance of a conflict of interest, adequate disclosure calls not only for a clear statement of the practice, but also the conflict introduced by the practice and the potential implications of the practice on clients. This is true whether the potential conflict of interest may be between the firm and its clients, as is the case with soft dollars, or between different groups of an Adviser’s clients, as is the case with a static trade order - where one group of clients systematically trades behind another group.

When OCIE issues risk alerts with new information or as a reminder, it as a warning to firms that this is a priority area for the SEC. Learn from peer deficiencies, take the warning, and re-confirm policies, process and documentation. SEC Compliance Consultants is available to assist you with reviewing your firm’s best execution processes.


Other resources:

OCIE Risk Alert: July 11, 2018
Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers
Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters
Commission Guidance Regarding Client Commission Practices under Section 28(e) of the Securities Exchange Act of 1934

 

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

in Communiques

July 12, 2018

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment Company Act, a.k.a. “the Liquidity Rule”, which was originally adopted in October of 2016 in an effort by the SEC to promote effective liquidity risk management and disclosure by open- end mutual funds. On June 28, the SEC adopted changes to the Liquidity Rule affecting periodic reporting on liquidity and the treatment of individual holdings across the liquidity buckets.

Replacing Reporting Requirements

The SEC is rescinding the requirement that funds publicly report aggregate liquidity classification information about their profiles in Form N-PORT. The amended rule will require funds to disclose through a narrative discussion the operation and effectiveness of their liquidity risk management program in their annual or semi-annual shareholder report. This is meant to make the disclosure more accessible and allow the discussion of liquidity risks in the broader context of the factors affecting a fund’s risks, returns, and performance. Under the proposal, this discussion of the operation and effectiveness of a fund’s liquidity risk management program will occupy a new section of the shareholder report following the discussion of board approval of advisory contracts. While the effective date of the rule is September 10, 2018, the SEC wanted to provide additional time so that funds have at least a full year of experience with the liquidity risk management program before including the new narrative disclosure in their shareholder report. The actual compliance date for Large Entities is June 1, 2019 with the first Form N-PORT due July 30, 2019 and the first N-1A due December 1, 2019. The compliance date for Small Entities is March 1, 2020 with the first Form N-Port due April 30, 2020 and the first N-1A due June 1, 2020.

Exemption denied

The Staff noted that several commentators requested an exemption for funds that primarily hold highly liquid investments and In-Kind ETFs due to their significantly lower liquidity risks, arguing that such funds could be exempted from including the proposed new disclosure about their liquidity programs in shareholder reports. However, the SEC was not persuaded, noting that while these highly liquid funds are exempt from certain requirements under the Liquidity Rule, they still must have a liquidity risk management program and that investors would still benefit from the discussion of its operation and effectiveness. The release did note, however, that just as the programs would be scaled to the liquidity risks faced by the fund, so too could the discussion be tailored where programs are less complex.

Satisfying the requirement

To satisfy the disclosure requirement, a fund generally may provide information that was provided to the board about the operation and effectiveness of the program, and insight into how the program functioned over the past year. The discussion should provide investors with enough detail to understand how a fund manages its liquidity risk. Elements suggested in the release include

  • A discussion of particular liquidity issues that the fund faced during the year (such as a period of high redemptions or illiquidity in particular holdings) and explain how those risks were addressed.
  • Where a fund faced significant liquidity challenges, a discussion of how those challenges affected the fund.

Additionally, funds may, but are not required to, include

  • A discussion of the role of the classification process, the 15% illiquid investment limit, or the highly liquid investments in the fund’s liquidity risk management process;
  • A contextual narrative about how liquidity risk is managed in relation to other investment risks of the fund; and
  • A discussion of other metrics (spreads, turnover or shareholder concentration issues, as applicable) and their effect on fund liquidity risk management.

The adoption also includes amendments to Form N-PORT designed to help the SEC monitor trends in cash and cash equivalents in the absence of the original aggregate reporting requirement.

Liquidity Buckets

In an effort to address certain difficulties that arise from the requirement to classify each holding into a single category, the Liquidity Rule will allow that each position in a portfolio may be eligible for consideration across multiple category “buckets” under three circumstances:

  • Where the nature of other positions (e.g., partial coverage by puts) has a potential impact on the liquidity of some portion of the holding;
  • Where sub-advisers report a common holding in different liquidity buckets; and
  • Where, for internal risk management purposes, funds classify holdings proportionally across buckets based on an assumed sale of the entire position.

The SEC also clarified that funds following the classification splitting approaches provided above for Form N-PORT may apply such splitting more generally in their classification processes across the requirements for Rule 22e-4. SEC Adopts Targeted Changes to Public Liquidity Risk Management Disclosure For the full text of the release, click here.

Other Resources

The adopting release for the investment company liquidity risk management program rules can be found on the SEC’s website at https://www.sec.gov/rules/final/2016/33-10233.pdf. An interim final rule release concerning the compliance dates for certain elements of rule 22e-4 and related reporting requirements can be found on the SEC’s website at https://www.sec.gov/rules/interim/2018/ic-33010.pdf. The proposing release for the rules can be found on the SEC’s website at https://www.sec.gov/rules/proposed/2015/33-9922.pdf.

 

More SEC Settlements - This Time Form PF Filing Deficiencies

in Communiques

June 04, 2018

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through 2016). Eleven of them became registered around the same time or after the initial Form PF filing deadline. One of the other two, although initially registered in 2008, never filed Form PF. The last, a firm initially registered in 1981, appears to have made only the initial filing.

These filings - important to the agency for monitoring industry trends, identifying risks, informing rulemaking, and targeting investigations - make for low-hanging fruit and a relatively easy violation to identify when syncing registrants Form PF filings with their private fund reporting on Schedule D, Section 7.B.(1) of Form ADV Part 1A. All 13 matters resulted in settlements with identical penalties of $75,000 regardless of the number of years missed or other varying fact patterns. For each, violations were cited under Advisers Act Rule 204(b)-1, reporting by investment advisers to private funds.

 

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

in Events

May 31, 2018

When: June 14, 2018
Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000

Schedule:

9:00-9:30am - Networking and Continental Breakfast
9:30-11:00am - Program

Thomas Westle and Janaya Moscony, along with industry experts, will discuss topics of interest to chief compliance officers.

Topics to be announced.

Click here to register

Space is limited. Due to the overwhelming interest in these events, we are inviting only chief compliance officers and their staff.

 

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Communiques

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment... read more »

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

2018 - Are you ready for your next SEC exam?

The pool of registered investment advisers that will be subject to an SEC exam in 2018 is at the highest level seen in years. The SEC projects it will examine... read more »

Navigating the Changes to Form ADV

On August 25, 2016, the U.S. Securities and Exchange Commission adopted numerous substantive and technical amendments to Form ADV. While the adopting release required advisers to begin complying with the... read more »

Events

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...

Chief Compliance Officer Roundtable: Breakfast Briefing

When: October 20, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Thomas Westle and Janaya...