November 23, 2015

Don't forget about your annual renewal fees!

We have officially entered the annual renewal season for 2016! As we prepare for the holidays, don't forget that you must submit payment for your firm's annual renewal fees. Failure to do so by the stated deadline will result in the termination of your RIA's registration.  You should have already received an email from FINRA in regards to your Preliminary Statement.  Your preparations should be underway now as the deadline for payments is December 18, 2015.  What do you need to do?  


Complete a thorough review of your current registration status.  Here are a few questions to ask yourself:
  • Based on your client growth, have you exceeded the de minimus threshold in additional state(s)?  
  • Are you currently registered in any states where you are now under the de minimus threshold?
  • Are your IARs properly registered?  Key Reminder: For SEC firms, some states do not require IAR registration if there is no place of business or under the de minimus threshold. 
  • Once you have confirmed your applicable registrations, make sure to validate the fees calculated by FINRA and transfer funds into your Renewal Account (IARD system). 
If you are not an AdvisorAssist Compliance Client and are seeking assistance with the Annual Renewal process, please contact us at:  sales@advisorassist.com.

For more information, please see the IARD Renewal Program page:  http://www.iard.com/renewals.asp

October 30, 2015

CCO Series (2015) - Client Suitability

As a fiduciary, an RIA firm is required to make investment decisions in the best interests of its clients. When making decisions regarding the investment options for accounts an RIA firm needs to be able to defend such decisions as being reasonably suitable to the goals and needs of its beneficial owners. Regulators will seek to ensure that decisions made by the firm during the course of providing its services primarily benefit the client and are suitable for a particular account's objectives. Documentation that define a fund's investment objectives or a model portfolio strategy will be compared against the trading history and the decisions made for clients to validate whether or not the firm is making suitable investment decisions when providing its services.

RIA Client Suitability In a Nutshell

Client suitability starts with information about how the RIA firm's investment managers will provide its advisory services and the information about the client or fund that will be relied upon to guide those decisions. For a typical retail RIA situation, this may include your client profile, risk tolerance questionnaire, investment policy statement (IPS), or client notes capturing similar information. For structured investment products this may include the operating agreements, offering documents, and similar information about the funds, parties and entities involved. As these documents are executed, modified, updated or amended the advisor should keep and maintain this additional documentation for their firm's books and records.

Risks related to strategies used by an RIA firm must be disclosed to clients through Form ADV. Specifically in Form ADV Part 2A, the Disclosure Brochure, Item 8 Methods of Analysis, Investment Strategies and Risk of Loss should contain information regarding how the firm's investment management services will be applied to the client's accounts and the potential losses that can occur due to the way the firm will invest the client's assets. It is important for firms to review these disclosures and ensure they accurately reflect the firm's investment methods and cover the risks related to the firm's advisory services.

Confirming Suitability

After collecting a client's information, having them sign an advisory agreement and providing a copy of your ADV and other new client paperwork, suitability becomes a compliance matter for the relationship as you move to digest the information and start making investment decisions for the client's account(s). While your documentation may tell the client to notify your firm of any changes to their profile, goals or objectives, every RIA firm still has an obligation to reach out to the client and confirm the information you have is still accurate and that ultimately to confirm your current understanding of what is suitable for that client.

Confirming suitability can take the shape of having the client complete a new risk questionnaire, sign a new IPS, or to have a meeting with the client where you discuss the management of their account and address suitability matters. Documenting this confirmation is critical to the firm's books and records for compliance purposes on this topic, and can take the form of client notes indicating suitability was discussed and the results of that discussion, or the updated formal documents such as the questionnaire or IPS. For fund managers, this activity means ensuring that the decisions being made for the fund are reasonably accomplishing the objectives of the fund as described in its documentation and ensuring that due diligence documentation is retained for various non-public investments. By having this documentation in your firm's books and records you can demonstrate that your firm has upheld their fiduciary duty when making investment decisions for its various clients.

Through the Regulator's Eyes

Regulators expect RIA firms to maintain documentation on each advisory client to support the investment decisions made for their account(s). During an examination, regulators will typically ask firms to provide their risk questionnaires or similar documents used to obtain information about their clients, and will also request information about trades in client accounts, and will reconcile the two to ensure that decisions made for clients are suitable and that there is a rational basis between the documentation, analysis and investments. Further, regulators will review the information in your firm's disclosure brochure to reconcile to the types of investments to ensure that the strategies and risks are properly and fully disclosed to clients.

CCO Best Practices

  • Review new client documentation templates to ensure it captures what you need to make decisions for their account(s).
  • Verify that suitability documentation is on file for each client.
  • Review client trading history to ensure decisions made are suitable for that client.
  • Confirm suitability with each client at least annually to ensure decisions are still in their best interest.
  • Review Form ADV to ensure the investment strategies, methods of analysis and risks of loss reflect current investment decisions, products and practices.
  • Be wary of clients raising suitability questions or concerns as they can quickly turn into complaints about investment decisions made in their account(s).

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon

September 30, 2015

CCO Series (2015) - Solicitation & Client Referrals

When a friend or colleague refers someone in need to your Registered Investment Advisor (“RIA”) firms you often want to do something kind in reply. But when you want to engage someone professionally to refer business for a cash payment, such as a percentage of that new client's revenue, you are pursuing a solicitor relationship. When engaging a solicitor to drum up new business, RIAs have to understand and comply with SEC and state rules. While these rules may differ, it's clear that the RIA is directly under the spotlight with these agreements, given that individuals who refer clients to an RIA are generally not required to be registered to do so, because the solicitor will be considered a "Supervised Person" of the RIA and subject to their compliance program.

Solicitation & Client Referrals In a Nutshell

Solicitor agreement requirements were implemented by the establishment of Rule 206(4)-3 for SEC-registered RIAs, and while the rules governing solicitors differ from state to state, many states follow suit. 206(4)-3 generally prescribes that individuals who refer prospective clients to an RIA are not subject to registration or any other qualification requirements, provided that the RIA complies with certain requirements.

Similar to the registration of Investment Advisor Representatives ("IARs"), solicitors may be required to register in the FINRA system with the state wherein they are operating or performing solicitation activities, but in most cases are exempt from the examination requirements of IAR registration.

RIA firms that do utilize solicitors are required to: (i) disclose any referral arrangements to Clients including compensation received and relationship to the Advisor; (ii) have a written agreement between the Advisor and the Solicitor that meets the requirements of the Adviser's Act; (iii) not have been convicted of a felony or misdemeanor within the past 10 years and other disciplinary exclusions from being a solicitor; and (iv) make an effort to ensure that Solicitors fulfill their obligations under the Adviser's Act.

Through the Regulator’s Eyes

With regard to solicitor agreements, regulators expect that you fully disclose this practice on your Form ADV, and you must comply with both SEC and state regulations regarding solicitors. When engaging with a solicitor, you are expected to have a written agreement with the solicitor to prescribe proper activities, establish policies and procedures to monitor for compliance with the agreement, verify any disciplinary disclosures related to the solicitor, and maintain proper books and records that demonstrate that you are meeting these requirements in accordance with the Adviser's Act.

CCO Best Practices

CCO’s of RIA’s have an obligation to disclose, document, and monitor solicitor activities. The best path is for CCO to review their solicitor policies and procedures of the compliance program, and be able to answer the following pertinent topics and questions:

  • Disclosure of Solicitor Agreements
    • Do all referred clients receive disclosures that notify them of solicitor arrangements?
    • Do they receive a copy of your Form ADV, Part 2?
    • How do you ensure that the solicitor provides prospective clients with these items?
  • Compensation
    • Does your firm compensate (via cash or non-cash payments) anyone other than an officer or employee of the firm for referring clients?
    • Does your firm direct (or appear to direct) client brokerage to any broker-dealers in exchange for client referrals?
  • RIA and Solicitor Relationship
    • Is the solicitor a related party? If yes, have you disclosed this affiliation to clients?
    • If arrangements are with an unaffiliated solicitor for personal advisory services, does the agreement contain a:
      • Description of the activities and the compensation; and
      • Requirement for the solicitor to perform his duties consistent with your instructions and provisions of the Investment Advisers Act of 1940 and rules?
  • Monitor solicitation activities
    • Are you supervising your solicitors to ensure they have complied with the agreement?
    • Are your solicitors providing disclosure statements to clients being referred?
    • Do your solicitors annually certify that they have no disciplinary matters to disclose?

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon

CCO Series (2015) - Portfolio Management

The duty of an investment advisor to put a client’s interest before their own as a fiduciary permeates all aspects of operations of an advisory firm, but are most pronounced when managing client portfolios and engaging in securities transactions. When an investment advisory representative (“IAR”) is considering a trade for a client, they must also consider how that decision impacts their overall client base so that they can ensure the decisions made are done for all clients fairly and equally. As a result, areas of our operations where we are managing client portfolios must go through some aspect of compliance consideration in order to ensure that the proper process or controls are in place to address compliance risks.

Portfolio Management In a Nutshell

When managing securities for clients of your advisory firm, it is important to consider the compliance issues related to the group of all clients in addition to the unique issues for each individual client. The services your firm offers and the tools that are used to accomplish operational goals can introduce compliance risks that need to be considered and supervised for potential violations and to document such supervision for your firm's books and records.

If your advisory firm allows clients to impose restrictions on the management of their portfolio, it is important to capture these restrictions and configure your tools or perform reviews to ensure they are not violated. For example, a client with a legacy share position from their prior employer may want to keep that position and restrict their advisor from selling it. The advisor would want to consider ways in which they could flag or restrict that position to ensure it is not accidentally traded during a rebalance of the client’s portfolio. As CCO, you may want to put together a list of account restrictions across your clients and review the individual accounts periodically in order to confirm the restrictions have been honored.

RIA firms are required to apply supervision to the investment decisions made for their clients to ensure related aspects of the fiduciary duty such as suitability, best execution, trade error management, engaging cash, rebalancing, trade restrictions, and other issues related to portfolio management are evaluated and analyzed for potential compliance violations. If an RIA firm is not applying proper supervision to their trade operations, this can lead to compliance violations, client complaints, and ultimately regulatory action. Since many aspects of an RIA firm’s portfolio management operations are unique, depending on the services, vendors, and affiliate or other third-party relationships they may have, CCOs will want to review those different tools and relationships used by Supervised Persons of the RIA firm and have an understanding of how they are used in order to properly apply that supervision and compliance review.

Through the Regulator’s Eyes

With regard to portfolio management at your RIA firm, regulators expect that you fully understand and can speak to compliance issues relating to your operational tools and services, including third-parties that may be providing services to your firm or to your clients. By doing so, you can demonstrate that as CCO you are providing adequate supervision to the activities of your RIA firm, and overall that the firm is upholding its fiduciary duty to its clients. You are expected to have an understanding of how compliance impacts your firm’s portfolio management operations, speak to the issues involved, and maintain proper books and records that demonstrate that you are meeting these requirements in accordance with the Adviser’s Act.

CCO Best Practices

CCOs of RIAs have an obligation to understand, supervise and document the firm’s operations as they relate to compliance activities, depending on your tools and services provided. The CCO should review their portfolio management policies and procedures in their compliance program and speak to the following issues:

  • Are clients permitted to impose trading restrictions?
    • How are the restrictions captured to ensure they are respected?
    • Is there a way to restrict in the system?
    • What is the frequency of review of client accounts with restrictions?
  • Sub-advisors
    • Does your firm outsource investment management to another advisor?
    • Are you performing due diligence on the sub-advisor before engaging?
    • Are you providing ongoing supervision to the client assets being managed by the sub-advisor?
    • Do you have books and records to support your answers?
  • Automated order management systems
    • Do you use a system to automatically execute trades based on pre-configured settings?
    • Are you reviewing exception reports of the automated system?
    • Are you providing ongoing supervision to the client assets being utilized in the automated system?
    • Do you have books and records to support your answers?
  • Other potential areas of concern
    • Cash balances
    • Portfolio rebalancing
    • Brokerage recommendation or discretion

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon

August 31, 2015

CCO Series (2015) - Financial Statements

The financial statements that you maintain for your RIA firm, which include income statements, balance sheets, statements of cash flows, are powerful tools. Apart from the fact that they are a required to be maintained for books and records purposes, the data that they contain hold the key many other critical regulatory and practice management activities.

RIA Financial Statements In a Nutshell

Maintaining complete and accurate financials on your business simply makes good business sense. However, our primary purpose here is the maintenance of financial statements for compliance purposes, which may include:

  • Balance Sheet and Income Statement
  • Cash Journals - Documentation including cash receipts and disbursements, records, and any other records of original entry forming the basis of entries in any ledger
  • Banking Information - All checkbooks, bank statements, cancelled checks and cash reconciliations for your firm
  • Business Expenses - All bills or statements (paid or unpaid) relating to the business of your firm
  • Other Financial Statements - All trial balances, financial statements, and internal audit working papers relating to the business of the firm

While maintaining proper financial statements is required in order to avoid regulatory sanctions, it can also be a useful tool for RIAs. Creating and reviewing financial statements on a regular basis can prove to be an indicator of the health of the firm. The financial statements can demonstrate that the firm is performing as intended and disclosed, or act as a tool to show areas where it can improve. Ensuring financial stability of a firm is an important step in gaining client and regulatory confidence. Proving to be solvent and possess secure financials could be the difference between gaining and losing clients, or spending more time with regulators during an exam.

State Specific Requirements

Many of the regulations regarding financial statements for RIAs are dependent on the advisor’s principal state of business. Along with SEC Regulators requiring specific actions regarding financial statements, each state also has specific requirements on the issue. As an advisor it is important to recognize your specific state’s requirements in order to avoid unnecessary regulatory issues. Currently, there are states that require audited financial statements to be sent to their state regulatory agency each year. This applies only if the firm is registered with the state, and does not apply to SEC firms.

It is important to stay updated on your specific state’s requirements in order to avoid unnecessary regulatory issues. Depending on the state, there may be minimum net worth requirements that are to be demonstrated through the financial statements. Where applicable, your firm’s books and records archive should contain the necessary financial statements and audit results.

Custody’s Additional Burdens

When an advisor claims custody of their clients’ assets, there are additional rules and regulations to be aware of in regards to Financial Statements. Advisors that also act as Custodians may be required to submit an audited balance sheet at the end of the their fiscal year. This balance sheet must be prepared in accordance with generally accepted accounting principles (GAAP), and audited by a certified public accountant (CPA). The audit must also include the accountant’s opinion and other qualified notes regarding the firm’s financials. Custodian advisors must also provide clients with a quarterly account statement that outlines all of the activity of their funds in the given period.

Through the Regulator's Eyes

Regulators expect RIA firms to maintain updated financial statements that are created in accordance with generally accepted accounting principles (GAAP). Regulators have put an emphasis on monitoring the financial statements of newly-registered advisors. If they are not completed correctly, it is a sign that a further examination is needed. Compliant financial statements prove to the regulators that the firm is running effectively. Proper maintenance and submission, if required, of updated financial statements is one key way to avoid regulatory sanctions.

CCO Best Practices

  • Do not approach financial statements as just a way to avoid regulatory sanctions. They are important at spotting financial irregularities which might benefit you.
  • Utilize financial statements as a powerful tool to indicate advisory effectiveness and compliance.
  • Always stay informed of specific state requirements, which may differ from SEC and other states’ regulations, for example:
    • Alabama and New York require audited financial statements regardless of custody.
    • If the firm claims custody, the following states require annual audited financial statements: Arizona, Arkansas, California, Washington D.C, Florida, Hawaii, New Mexico and Oregon.
    • Other states may not require financial statements to be submitted at all.
  • Maintain accurate financial statements, in accordance with generally accepted accounting principles (GAAP).
  • Claiming custody of clients’ assets will require an audit by an independent public accountant registered with, and subject to regular inspection by, the PCAOB.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon