News regarding DOL Fiduciary Rule

Yesterday, March 15, 2018, the U.S. Court of Appeals for the 5th Circuit voted 2-1 to vacate the DOL Fiduciary Rule.  HOWEVER,  the effect of the decision only applies to the following three states within the 5th Circuit’s jurisdiction – Louisiana, Mississippi, and Texas.

The next question is whether any party will appeal this decision to the U.S. Supreme Court.

So don’t rush to stop your compliance with the Impartial Conduct Standards that have been in effect since June 9, 2017.

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Cybersecurity Training Options

Cybersecurity is once again on the SEC’s OCIE exam priorities list.  There are many things that a firm can do to counter the concerns of Cybersecurity.  One of the most difficult items to counter is an employee and their inadvertent opening of an email that could open up your firm data to the outside.

Several of my clients have started to work with a firm called KnowBe4.  They have a relatively inexpensive program that can handle several of your Cybersecurity concerns relative to employees:

  1. Cybersecurity Training
  2. Phishing

They maintain an online library of security awareness training that can assist with the Cybersecurity Training requirement.  These trainings can be automated and scheduled reminders sent to employees via email.  Which can be documented in the firm’s CRM.

They also have a  fully automated system that will send out simulated phishing attacks.  This will help you to know which of your employees may be susceptible to a phishing attack.  You receive the results of the “attacks” and can then train employees accordingly.

This is an easy, low-cost solution to a problem that isn’t going away.  Check out their demo at

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SEC Fines and Bars CCO for Ignoring Compliance Problems

from Cipperman Compliance Services

The SEC fined and barred an adviser’s Chief Compliance Officer from acting in a compliance or supervisory capacity because of his failures to remedy compliance deficiencies. The adviser hired an outside compliance consultant which recommended 59 compliance action items. The SEC alleges that the CCO failed to address many of the issues raised including failures to (i) ensure a surprise audit pursuant to the custody rule, (ii) retain emails and other electronic records, and (iii) implement policies to protect customer information. The SEC also charges the CCO with compliance program deficiencies including failures to update the compliance manual or conduct any meaningful annual review of the compliance program. The firm’s president/principal was also censured and fined.

OUR TAKE: The SEC doesn’t often prosecute standalone (i.e. not dual hat) CCOs without an underlying client loss, but it will if the CCO ignores obvious compliance deficiencies of which he has notice. This is what we call “compliance voodoo” i.e. an appearance of compliance infrastructure without an effective program. This CCO had a compliance manual, did some quarterly testing, and hired a third party consultant. But, neither the CCO nor the firm took any action to actually implement relevant procedures to address cited compliance deficiencies.


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Three Firms Fined for Marketing Hypothetical Third Party Performance

from Cipperman Compliance Services, LLC

The SEC censured and fined three more investment advisers in connection with marketing F-Squared’s misleading hypothetical performance information. One of the firms agreed to pay $8.75 Million in disgorgement, fines, interest and another agreed to pay over $700,000, while the third firm, which has ceased its business, agreed to pay a $200,000 fine. The SEC alleges that the firms incorporated misleading F-Squared-provided performance information into their marketing materials without conducting adequate due diligence into the performance claims, despite significant red flags such as hypothetical backtested performance, outlier returns, lack of actual performance history, and lack of data transparency. The SEC charged the firms with failing to implement adequate compliance policies and procedures to verify third party performance claims and maintain required records. The defunct firm, which also sponsored a registered mutual fund, was also charged with several Investment Company Act violations including violations of Section 15, which requires a shareholder-approved written agreement with all sub-advisers. The SEC has previously brought several cases related to incorporating misleading F-Squared performance (see

OUR TAKE: Investment advisers must adopt and implement procedures to test performance claims made by third parties, and firms can’t claim ignorance and innocence if the third party refuses to provide backup data. Also, we do not believe firms should ever use hypothetical backtested performance data, because the SEC usually alleges that such information is too misleading.

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Renewal Fees

Preliminary Renewal Statements are available on the IARD.  This statement includes the fees due to states for 2018.  These fees are due whether you are a state or an SEC advisor. Payment is due on or before December 18, 2017.  

It is imperative that fees are paid in a timely manner.  Many states will terminate your registration if you have not paid your fees.  This could require that you register all over again.  During this time you may no longer be considered “registered.”

The SEC can require you to repay fees to clients for the time that you were not in compliance (meaning you haven’t paid your fees).

So, if you haven’t done so already, head to the IARD and pay those fees.

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DOL Fiduciary Rule Delay is Official

The 18-month from the DOL is now official.  The Transition Period for the Fiduciary Rule’s Best Interest Contract Exemption and the Principal Transactions Exemption will move from January 1, 2018 to July 1, 2019.

During the extended period, fiduciary advisors “have an obligation to give advice that adheres to impartial conduct standards,” said the DOL.

Fred Reish, partner at Drinker Biddle & Reath in Los Angeles, told ThinkAdvisor Monday that while the delay was widely expected, and “gives relief from the most burdensome conditions of the exemptions, it should not be viewed as a delay of the fiduciary rule.”

That rule, Reish continued, “applied on June 9 of this year and will continue to apply during the extended transition period–until July 1, 2019 and probably thereafter. In addition, advisors must comply with the Impartial Conduct Standards during the transition period, which are: the best interest standard of care, no more than reasonable compensation and no materially misleading statements. The burden of proving compliance with those Standards is on the advisor and the advisor’s supervisory financial institution and therefore compliance should be documented.”

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ADV Part 1 Changes

As many of you are aware, the U.S. Securities and Exchange Commission (“SEC”) issued a final rule in August 2016, which significantly expands the information required in Form ADV Part 1. The compliance date for the rule is October 1, 2017, and all investment advisers making Form ADV filings on and after that date will need to include the additional information, as applicable. Below is a summary of the areas in the document that are materially affected.

I want to be sure that you are aware of these changes as this will require some work on your part to be ready to provide the information for Item 5 as part of your annual updating amendment in the first quarter. Please read the information below and work with your portfolio management application provider to determine how you can provide this information.  You may want to run the numbers as of 9/30/17 to be sure that you are prepared.

Item 1 – Identifying Information

Item 1F(5) – List the total number of offices, other than principal office (which is referenced Item 1F).  In Schedule D for Item 1F, you will be required to include the (i) address, phone and fax number for each location; (ii) number of employees at that location, (iii) other type of business activities performed at this location; and (iv) description of any investment-related business activities conducted from this location.

Item 1I – Check this box if the firm utilizes social media sites (e.g., LinkedIn, Facebook, etc.). In Schedule D for Item 1I, you will be required to list the address of all social media sites utilized by the firm.

Item 5 – Information about Your Advisory Business

Item 5C(1) – Provide the number of clients for whom you do NOT have regulatory assets under management, but provided investment advisory services during the most recent fiscal year.

Item 5D – Provide the number of clients AND the corresponding regulatory assets under management (“RAUM”) (no longer range of clients) for each client type listed below.  The type of clients listed are:

(a)     Individuals

(b)     High net worth individuals

(c)     Banking or thrift institutions

(d)     Investment companies

(e)     Business development companies

(f)      Pooled investment vehicles (other than investment companies and business development companies)

(g)     Pension and profit sharing plans (but not the plan participants or government pension plans

(h)     Charitable organizations

(i)       State or municipal government entities (including government pension plans)

(j)       Other investment advisers

(k)     Insurance companies

(l)       Sovereign wealth funds and foreign official institutions

(m)   Corporations or other businesses not listed above

(n)     Other

The total RAUM from Item 5D must be consistent with Item 5F where your RAUM are listed as either discretionary or non-discretionary.

Item 5F(3) – Provide the RAUM (reported in 5F(2)) attributable to client who are non-United States persons.

Item 5I(1) – If you participate in a wrap fee program, what is the amount of RAUM attributable to acting as:

(a)     sponsor to a wrap fee program

(b)     portfolio manager for a wrap fee program

(c)     sponsor to and portfolio manager for the same wrap fee program

In Schedule D for Item 5I(1) provide name of sponsor for each wrap program participated in by the firm, including the sponsor’s SEC and CRD numbers.

You are not required to enter anything in Item 5I if your involvement in a wrap fee program is limited to recommending wrap fee programs to your clients.

Item 5J(2) – Indicate whether the AUM reflected in Form ADV Part 2A is calculated differently than the RAUM reported in Form ADV Part 1.

Item 5K(1) – Indicate whether you have RAUM attributable to clients other than those listed in Item 5D(3)(d)-(f). (This should be a “yes” response.)

In Schedule D for Item 5K(1) complete the chart reflecting the percent of RAUM by asset type for separately managed accounts (SMA) (see definition of SMA below)*. Use the date used to calculate your RAUM for purposes of your annual updating amendment. Below is a list of Asset Types:

(i)                   Exchange-Traded Equity Securities

(ii)                 Non Exchange-Traded Equity Securities

(iii)                U.S. Government/Agency Bonds

(iv)                U.S. State and Local Bonds

(v)                 Sovereign Bonds

(vi)                Investment Grade Corporate Bonds

(vii)              Non-Investment Grade Corporate Bonds

(viii)             Derivatives

(ix)                Securities Issued by Registered Investment companies or Business Development Companies

(x)                 Securities Issued by Pooled Investment Vehicles (other than Registered Investment Companies or Business Development Companies)

(xi)                Cash and Cash Equivalents

(xii)              Other

Item 5K(2) – Indicate whether you engage in borrowing transactions on behalf of any separately managed account clients that you advise.  If so, please let me know as there is other information that will need to be provided.

Item 5K(3) – Indicate whether you engage in derivative transactions on behalf of any of the separately managed account clients that you advise. If so, please let me know as there is other information that will need to be provided.

Item 5K(4) – Indicate whether any custodian holds 10% or more of SMA RAUM.

Report RAUM attributable to clients other than those listed in Item 5D(3)(d)-(f) (see list above) (separately managed accounts).

* A separately managed account (SAM) is defined as advisory accounts other than pooled investment vehicles (e.g., registered investment companies, business development companies and private funds). Based on this definition it is my understanding that an SAM is a mutual fund, ETF, and individual stocks.

In Schedule D for Item 5K(4) provide the following information for any custodian that holds 10% or more of your aggregate SMA RAUM.

(a)     Legal name of custodian

(b)     Primary business name of custodian

(c)     Location of custodian’s office(s) responsible for custody of the assets (city, state, country)

(d)     Is custodian a related person of the firm?

(e)     If the custodian is a broker-dealer, provide its SEC registration number

(f)      If the custodian is not a broker-dealer, or does not have an SEC registration number, provide its legal entity identifier

(g)     Provide the RAUM attributable to separately managed accounts held at the custodian



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