Tag Archives: IA compliance

New Jersey Investment Adviser Annual Exam

State Releases Web Version of Annual Written Examination for Registered Investment Advisers

Investment Advisers registered with the State of New Jersey will now be able to complete their Annual Written Examination online. In addition to answering the examination questions, advisers now have the ability to upload related documents online, negating the need to send paper mailings to the state.

A release issued by the New Jersey Bureau of Securities states that “the answers to [the examination] questions are used to determine the need for an on-site or desk examination, as well as to monitor the different approaches used to render the investment advice.”

The examination questions cover topics related to the adviser’s business model, including:

  • Clients and business activities
  • Policies and procedures that the adviser has in place
  • Personnel, associated persons and other business activities
  • Client complaints
  • Advertising and promotional activities
  • Custody and financial condition

Instructions and a link to the examination can be found here.  If you have questions or concerns about the new examination format or the questions contained in the examination, please do not hesitate to contact us.

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Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.

NASAA Examination of IA Compliance Deficiencies

Examination Reveals Compliance Focus Areas

NASAA, the lobbying body of the various state securities divisions, recently released a set of examination findings which describe the common compliance deficiency areas for IA firms registered with the state securities commissions.  The exams, which were completed by state administrators, showcase a number of compliance issues for both registered investment advisers and fund managers.  According to the NASAA press release:

Examinations of 825 investment advisers conducted between January 1, 2011 and June 30, 2011 uncovered 3,543 deficiencies in 13 compliance areas, compared to 1,887 deficiencies in 13 compliance areas identified in a similar 2009 coordinated examination of 458 investment advisers.

Below we have summarized the findings released in the NASAA 2011 Examinations Findings (.ppt).

Deficiency Categories

Below are the categories which were covered, along with the percentages of advisers with at least one deficiency in such category:

  • Registration (59.9%)
  • Books and Records (45%)
  • Unethical Business Practices (36.8%)
  • Supervisory/Compliance (30.2%)
  • Advertising (21.6%)
  • Privacy (21.2%)
  • Financials (19.8%)
  • Fees (19.4%)
  • Custody (12.6%)
  • Investment Activities (3.9%)
  • Solicitors
  • Pooled Investment Vehicles (Hedge Fund)
  • Performance Reporting

Discussion of Deficiencies

There are a number of slides devoted to providing more granular information on the various deficiencies.  Below are some of my thoughts when I read through these deficiencies:

  • Properly completing ADV, including proper descriptions (AUM, fees, business overview, disclosures) and making sure there are no inconsistencies; unregistered IAs were not a large part of the deficiencies.
  • Investment adviser books and records are what you would expect – a number of different items were not properly kept as required by regulations. Surprisingly, it seems that many IAs do not keep the suitability information on their clients as required.
  • Under unethical practices, it seems that many of the deficiencies were likely caused by careless drafting of contract documents. Non-contract unethical business practices revolved around advertising and conflicts of the IA.
  • One interesting note for Supervisory/Compliance is that a large number of IAs did not follow their own internal procedures. This might be worse than having inadequate procedures – if your compliance manual says you will do something, you should make sure it is being done.
  • Financials might be what you would expect – issues with respect to net worth of the IA, bond issues and inaccurate financials.
  • Advertising deficiencies focused on website issues. I would expect this to increase in the future as more IAs establish websites in the future. Additionally, social media deficiencies are likely to increase in the future as more firms use these tools to advertise their business. [Note: while the managed futures industry has different regulations, the concepts of social media regulation for the futures industry can be applied to securities compliance.]
  • Custody is probably the single most misunderstood concept for IA firms. Most people view custody to be having physical possession of a client’s cash or securities.  However, if you directly deduct a fee from a client account (even if this is done by the custodian, i.e. Schwab) then in most states the IA is deemed to have “custody” of the account and must adhere to the custody requirements of the state.
  • It is interesting to note that with respect to investment activities the following were some common deficiencies: preferential treatment (I assume, without disclosure), aggregate trades, and soft dollars.
  • Solicitors have become a more prevalent issue over the last few months as more fund managers (who are RIAs) offer separately managed account programs. [Note: we will have more articles forthcoming on this issue shortly.] For solicitor issues the big items were undisclosed solicitors and issues with disclosure. Also, the agreement between the IA and the solicitor was a common deficiency.
  • Hedge fund managers with no separately managed account business had many more deficiencies than IA only firms. Deficiencies with respect to hedge funds related to valuation, cross-trading and preferential treatment (again, we assume, without disclosure).

IA Compliance Best Practices

As a result of the report, the NASAA identified the following as best practices for IAs:

  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
  • Review and update all contracts.
  • Prepare and maintain all required records, including financial records.
  • Back-up electronic data and protect records.
  • Document all forwarded checks.
  • Prepare and maintain client profiles.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include business continuity plan.
  • Prepare and distribute a privacy policy initially and annually.
  • Keep accurate financials. File timely with the jurisdiction.
  • Maintain surety bond if required.
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Implement appropriate custody safeguards, if applicable.
  • Review solicitor agreements, disclosure, and delivery procedures.

Conclusion

It is clear that NASAA is trying to be more of an influence on how the state administrators conduct examinations and the focus areas of those examinations.  While it is helpful for NASAA to release investment adviser compliance best practices, it would be more useful if they released more robust compliance materials such as sample compliance manuals/ policies and clearer guidance on state interpretations of regulations.  As Congress and the SEC determine whether to establish an investment adviser SRO, we are likely to see NASAA take a larger thought leadership role.  In any event, investment advisers and hedge fund managers should begin to start thinking about registration and implementing robust compliance policies and procedures which address all parts of state or SEC IA registration regulations.

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Cole-Frieman & Mallon LLP provides legal advice to hedge fund start ups and well as established fund complexes.  Bart Mallon can be reached directly at 415-868-5345.

Compliance Update for California Hedge Funds – Presentation

As part of the Hedge Fund Networking Summit Webcast Series, Bart Mallon of Mallon P.C. led an hour long presentation on compliance matters for California based hedge fund managers.  The presentation covered the following topics:

  • New SEC and CA Hedge Fund Registration Requirements
  • Registration Overview & Major Issues
  • Compliance Overview
  • Discussion of Other Current Regulatory Issues

There were of number of questions asked by the audience regarding many of the new compliance requirements for registered managers.  We have had good experience with the following groups:

If you attended the event and have follow up generic propecia online pharmacy questions, please feel free to contact us and we will try to get back to you as soon as possible.  The full powerpoint can be downloaded here: CAHF Powerpoint (April 2011) Final

Many thanks to Ron Niemaszyk of Patke & Associates for moderating the event.

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Cole-Frieman & Mallon LLP provides investment adviser registration & compliance services to hedge fund managers.  For more information, please call Bart Mallon at 415-868-5345.

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IA Compliance Fall Conference 2009

Over the past few months I have written extensively about the new regulatory environment and the likelihood that many hedge fund managers will need to register with the SEC within the next year or so (assuming that Congress passes one of many proposed registration bills).  Anticipating this requirement, my team and I at Cole-Frieman & Mallon LLP have been preparing for registrations and as part of that preparation I am attending the IA Compliance Fall Conference today at the Loews Philadelphia Hotel.

The conferne is designed to provide lawyers and compliance professionals with more context on how firms need to deal with compliance issues in this hype-sensitive environment.  Today’s conference hosts a number of renowned speakers, including top SEC officials:

  • John Walsh – SEC’s Office of Compliance Inspectrions and Examinations
  • Gene Gohlke – OCIE’s Associate Director
  • Andrew Donohue – director of the SEC’s Division of Investment Management

There are a number of items on the adgenda which I am particularly excited to hear about and discuss with my colleagues including some of the hot-button issues and recent reports from SEC examinations.  I will be taking notes throughout the event and will be writing blog posts about the conference in the coming days.  I will also be providing more information on Mallon P.C.’s investment adviser registration and compliance services for hedge fund managers.

Other attendees include representatives from: The Carlyle Group; Westover Capital Advisors, LLC; Oppenheimer Funds, Inc; State Street; Penbrook Management, LLC; Trilogy Capital; Bridgewater Associates; AXA Investment Managers; Strategic Value Partners, LLC; Pershing Square Capital Management; Guggenheim Advisors, LLC; Lone Pine Capital; Parkway Advisors; Vicis Capital LLC; The Swathmore Group; Abbott Capital Management, LLC; Redwood Investments; Tocqueville Asset Management; RNK Capital LLC among others.

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.