March 15, 2024

FinCEN Proposal: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements


Proposed Rule: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz
                           Senior Compliance Consultant
                             AdvisorAssist, LLC

On varying occasions, the Financial Crimes Enforcement Network (FinCEN) has submitted rule proposals regarding the need for Registered Investment Advisors (RIAs) and Exempt Reporting Advisors (ERAs) to be subject to comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures. FinCEN’s recent synopsis is driven by the 2024 Investment Adviser Risk Assessment, which identified several illicit finance and national security risks such as sanctioned individuals, corrupt officials, tax evaders, and other criminal actors using RIAs to gain access to US Markets. Furthermore, the risk assessment identified cases of foreign adversaries, including China and Russia, investing in early-stage companies through RIAs to access sensitive information and emerging technology. The proposal would include RIAs and ERAs in the definition of “financial institution” under The Bank Secrecy Act (BSA). Under the BSA, RIAs and ERAs would be required to:
  • implement an AML/CFT program;
  • file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
  • keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
  • fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

Furthermore, the proposal would grant information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions to RIAs, along with subjecting RIAs to the “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act. Nuances to this proposal to highlight are the following:

  • The proposal will not include the requirement to have a customer identification program that aligns with BSA requirements, nor beneficial ownership requirements for legal entity customers via the Customer Due Diligence rule. It is expected both these requirements will come with joint SEC rule proposals down the line.
  • The proposal will not require RIAs to apply AML/CFT program or SAR filing requirements to mutual funds they advise, as mutual funds are already defined as “financial institutions” under the BSA.
  • Finally, FinCEN will be delegating examination authority to the SEC for compliance with the BSA and FinCEN’s implementing regulations.

At this time, no action is required for RIAs or ERAs. The proposal will remain in a comment period through April 15, 2024. Should the rule become effective, compliance will be required on or before 12 months from the final rule’s effective date.

February 7, 2024

Navigating the New Independent Contractor Rule: Insights for Registered Investment Advisors


Contributed By: Thomas Yates
                           Managing Director & Partner
                             AdvisorAssist, LLC

Over the recent weeks, we have received inquiries regarding the U.S Department of Labor final rule on defining “independent contractor” under the Fair Labor Standards Act (FLSA) and what that means for registered investment advisors (“RIA”). Although we are not specialists in employment law, nor are we attorneys, we have consulted with legal experts to help break down the rule in regard to W-2 employees and 1099 Independent Contractors (collectively “Supervised Person(s)”) at an RIA. We note that Supervised Persons can be either Investment Adviser Representatives (“IAR”) or client administrative support persons, or other persons that are subject to the Advisor’s Compliance Program. Our goal is to provide Advisors with a basic understanding of rule language to help guide RIAs to compliance with federal wage-and-hour laws, as applicable.

The Essence of the New Rule 
The rule's emphasis on the "economic reality" of the employment relationship underlines the importance of determining whether a worker is genuinely operating an independent business or is economically dependent on the employer. 

The rule focuses on six key factors, including the worker’s opportunity for profit or loss and the nature of control over the work, among others. This holistic approach encourages a deeper analysis beyond mere contractual terms to the actual practices and dynamics of the working relationship between the RIA and the Supervised Person. 

To simplify, here is how AdvisorAssist views the six conditions, and helps Advisors assess whether or not their Supervised Persons can be deemed Independent Contractors:

Opportunity for Profit or Loss: If a Supervised Person can earn more by the more work they put in, clients obtained, and/or the result of their investment management, which could result in additional income earned, they can be perceived as operating as an independent contractor.
Investments by the Worker and Employer: If the Supervised Person spends their own money to purchase tools, technology, or any other resources, at their discretion, to provide their services, this would suggest that they are likely acting as an Independent Contractor.
Degree of Permanence of the Relationship: If the Supervised Person is an IAR and can leave at their own discretion, and take their clients to another RIA, this suggests that they are likely acting as an Independent Contractor.
Nature and Degree of Control: If an RIA’s degree of control over the Supervised Person is only exercised due to the necessity to comply with regulatory requirements, and nothing more, this suggests that they are likely acting as an Independent Contractor.
Extent to Which the Work is Integral to the Potential Employer’s Business: If the Supervised Person does not participate in the day to day operations of the RIA or does not influence management-level decisions, where they solely work with their own clients, suggests that they are likely acting as an Independent Contractor.
Worker’s Skill and Initiative: Generally, Supervised Persons are considered “specialized” in their type of work, as they are trained to operate in this industry and if the Supervised Person is an IAR, are required to obtain a certification to provide investment advice. However, being specialized does not automatically mean a Supervised Person is working in the capacity of an Independent Contractor. Rather, the RIA should assess whether or not the Supervised Person’s skill/application is “in connection with business-like initiative”. This is a broad statement but should go into the overall analysis when determining a Supervised Person's contribution to a firm's growth vs. their intent to specifically service their own clients.

Ultimately, if Supervised Persons are compensated through fees for the services provided to clients, demonstrating minimal economic dependence on the firm, aligns well with the Independent Contractor status. Conversely, a Supervised Person on a salary or hourly wage, especially those without a direct link between compensation and client services rendered or who rely heavily on the firm for their economic sustenance, may not fit the Independent Contractor definition.

Conclusion When completing the Form U4 for a Supervised Person who is an IAR, it is essential to accurately disclose their employment status in Section 1 of the form. This section specifically inquires whether the IAR maintains an independent contractor relationship with the firm. Proper classification is crucial because it is a regulatory filing, and the way an IAR is classified must be properly reflected.

It is important to note, that this rule does not change an RIA’s responsibility to supervise its Supervised Persons, nor does it change the RIA’s obligations to act as a fiduciary. However, RIAs should consider how this rule would impact them from an employment law perspective. It is necessary for RIAs to ensure they maintain a robust employment policy to ensure adherence to the Department of Labor’s rules on the classification of its employees and ensure that wage-and-hour laws are in fact adhered to, helping mitigate the internal legal risk posed to the RIA.

While AdvisorAssist is not an employment law firm, we feel it is prudent that RIAs have a basic understanding of these conditions to help determine whether or not a Supervised Person can be classified as an Independent Contractor. We want to emphasize however, that all six factors, ranging from the worker’s opportunity for profit or loss, the relative investments by both parties, the permanence of the relationship, the degree of control, the integral nature of the work to the employer’s business, to the worker’s skill and initiative, must be considered in holistically. There is no single category that would determine a Supervised Person’s status, as all six categories as a whole should be assessed to an RIA determine a Supervised Person’s employment status with the RIA. With all this in mind, if RIAs ever do question the appropriate classification of a Supervised Person, do not hesitate to reach out to an employment attorney, as RIAs should want to ensure that they have the appropriate legal backing in these classification decisions.

December 20, 2023

Modernization of Beneficial Ownership Reporting in 2024


Modernization of Beneficial Ownership Reporting in 2024

After 50 years the SEC has decided to adopt amendments to long-standing reporting requirements for beneficial ownership under Sections 13(d) and 13(g) of the Securities and Exchange Act of 1934. Starting in Q4 2024, the amendments will require Form D/G Filers to provide more timely information regarding their beneficial ownership in the following manner:
  • 13D Filers
    • The deadline for the initial 13D filing has been shortened from 10 days to 5 business days
    • Amendments to 13D filings are required to be reported within 2 business days
  • 13G Filers
    • Qualified Institutional Investors and Exempt Investors: Initial filing deadline shortened from 45 days after year end, to 45 days after the end of the calendar quarter.
    • Passive Investors: Amendments of ownership changing 5% or more shorten the filing deadline from 10 days to 5 business days.
    • All amendments generally required to be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.  
  • Require Schedule 13D and 13G filings be made using a structured, machine-readable data language, XML, via the SEC Edgar System.
The amendment also provides guidance with respect to “formation of a group”, and it is of the Commission’s view that the determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding, or disposing of securities of an issuer are sufficient to constitute the formation of a group.
Compliance with the revised Schedule 13G filing deadlines will be required beginning on Sept. 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on Dec. 18, 2024. Compliance with the other rule amendments will be required upon their effectiveness. The final rule, and fact sheet can be found within the SEC’s press release.

AdvisorAssist is in the process of reviewing rule requirements for enhancements to applicable manual language, and compliance tasks. We will be releasing further communication regarding this rule update as needed, but should you have any questions, please contact your Compliance Consultant.

Update - March 2024: On the tailwind of this adopted amendment, the SEC announced that they settled charges against a New York-based Investment Advisor (IA) for its failure to make timely ownership disclosures. This failure led to an agreed upon $950,000 civil penalty to settle the SEC’s charges. 

Although the Advisor disclosed its ownership of more than 5% of the common stock in question in December 2021, the Advisor did not properly file its change in control status and increased ownership in the position as required by federal securities laws. Please review the full press release here.

AdvisorAssist wants to remind Advisors, especially with the upcoming adopted amendments, that if the Advisor has exceeded the 5% threshold, the Advisor is required to file an initial Section 13D or G promptly and then an annual filing thereafter. In accordance with Rule 13d‐1(h), a firm may file Schedule 13G (shorter form) as long as the shares are not held with control intent – and the pitfall with our NY based IA in this scenario. 

Having appropriate controls in place is imperative for supervising security thresholds for accurate and timely reporting, which includes a process for aggregating trades across various custodians. Advisors should also contact their custodians to determine if they monitor if the firm needs to file Form 13D or G. 

November 20, 2023

Investment Advice Fiduciary and Prohibited Transaction Exemptions Proposal


Department of Labor Proposal: Investment Advice Fiduciary and Prohibited Transaction Exemptions 

As expected, the Department of Labor (DOL) released the Retirement Security Rule: Definition of an Investment Advice Fiduciary proposal for its 60-day comment period to the Register, along with amendments to the various Prohibited Transaction Exemption (PTE) regulations. The intent is to expand the definition of whom qualifies as an “Investment Advice Fiduciary” under ERISA, and clarify the standards set forth in PTE regulation. Per the rule proposal’s definition, a Provider is someone whom:
  • Provides investment advice or makes an investment recommendation to a “retirement investor” (i.e., a plan, plan fiduciary, plan participant or beneficiary, individual retirement account (IRA), IRA owner or beneficiary, or IRA fiduciary);
  • Receives a “fee or other compensation, direct or indirect” for the advice or recommendation; and
  • Makes the recommendation in one of the following contexts of a professional relationship where the individual investor would reasonably expect to receive sound investment recommendations that are in their best interest:The provider has discretion over the retirement investor’s investment decisions;
    • The provider makes investment recommendations to investors on a regular basis as part of his, her, or its business, and the recommendation is provided under circumstances that would indicate that the recommendation is based on the retirement investor’s particular needs or circumstances, and 
    • the advice may be relied upon by the retirement investor as a basis for making investment decisions that are in the retirement investor’s best interest; or
  • When making the investment recommendation, the provider acknowledges or represents that they are acting as a fiduciary.
The reason for expansion? The rule doesn’t cover IRAs. The current five-part test to determine if you are an Investment Advice Fiduciary is a Provider whom:
  • Renders advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
  • On a regular basis;
  • Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that;
  • The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that;
  • The advice will be individualized based on the particular needs of the plan or IRA. 
With the expansion of the “on a regular basis” item, to cover a Provider’s day-to-day business would effectively capture one-time advice recommendations; i.e whether a retirement investor should roll over their employer-sponsored 401(k) into an IRA, an annuity, or keep his or her assets in the plan. In conjunction with these changes, the DOL will be maintaining core components of the PTE 2020-02. However, this amendment will require additional disclosures to investors, which if adopted may require amendments to Advisor’s client disclosures and policies and procedures. In addition, the proposal includes enhanced language regarding the exemption’s conditions, such as the fiduciary acknowledgment requirement and a new requirement to provide a written statement of the best interest standard of care owed by the investment professional to the investor. PTE 2020-02 would furthermore be expanded to cover certain transactions involving pooled employer plans (PEP) and transactions involving “pure” robo-advice providers. AdvisorAssist will continue to monitor this proposal through its comment period in January and will communicate out further action steps as necessary. No action is needed at this time. Please contact us with any questions regarding this proposal, or your current PTE 2020-02 processes.

November 3, 2023

Investment Advisor Representative Continuing Education


Investment Advisor Representative Continuing Education 

Investment Advisor Representatives (IARs) have their hands full at year end with such items as required minimum distributions, end of year tax loss harvesting, client gifting, annual meetings, and the list goes on! A requirement, introduced in 2020, has added a yearly addition to certain IARs via the NASAA Model Rule on Investment Adviser Representative Continuing Education. Continuing education (CE) is required for every IAR registered in a jurisdiction that adopts the Model Rule. The program applies to all registered IARs of both state-registered and federal covered investment advisers in adopted jurisdictions.

IARs are free to select an approved course provider, along with applicable classes that interest them or align to their business model, so long as the IAR obtains 12 CE credits each year - 6 credits of Products and Practices and 6 credits of Ethics and Professional Responsibility.
IARs have an annual deadline to complete their CE requirement. Should they not complete their CE by December 31st the IAR will pay the registration renewal fee and become “CE Inactive”. This status will allow the IAR to continue doing business, but should the IAR not complete the CE requirement by end of year the IAR will be unable to renew his or her registration and become a status of “Fail to Renew”. If you are CE Inactive, courses completed in the current year will apply to the past year’s deficiency – so you will want to work with your provider and Firm to ensure you are covering prior/current year requirements. IARs should be aware of particular nuances to the Model Rule and CE requirements, which can be reviewed on both the NASAA FAQ and also the Program Handbook:

Newly Registered IARs: Newly registered IARs will be required to meet CE requirements by the end of their first full calendar year following the year in which they first become registered.

IAR Multi-State Registration: An IAR is responsible for the requirements of each state they are registered in during that year, whether it is a home state or additional state, whether they add the in-scope state registration halfway through the year, or whether they withdraw from an in-scope state during the year – requirements apply. For additional considerations regarding in-scope/out-of-scope states, we urge IARs to review the NASAA FAQ for scenario examples, or reach out to state regulators.

Professional Designations: Although there are no exemptions to CE requirements, it would be prudent to work with a provider who can assist IARs in taking classes that cover the requirements for their professional designations and count toward state CE requirements as well.

Dually Registered IARs: Currently, FINRA CE content meets NASAA eligibility to count toward the six credits of Products and Practices credit hours. Dually registered IARs should work with their BD Firm to determine if additional training, such as Annual Firm Element classes, are approved to count toward their completion requirements for IAR CE.

When an IAR completes courses, the vendor/provider reports course completion to FINRA, NASAA’s vendor for program tracking. The responsibility of tracking the vendor/provider’s submission falls on the IAR and regulators urge IARs to open a FinPro account for CE tracking purposes. Advisors can also pull CE reporting through FINRA Gateway to monitor IAR annual completions.

As additional states adopt the Model Rule, CCO’s and other compliance professionals can review the NASAA Investment Advisor Representative Continuing Education training webinar for additional information, or reach out to their AdvisorAssist consultant.

October 26, 2023

Electronic Communications: Trending Fines in the Industry


Electronic Communications: Trending Fines in the Industry

As we head into the holiday season, let’s introduce a small history lesson. On December 3, 1992 the first SMS message was sent from a computer by Neil Papworth, a 22 year old engineer, to a colleague’s phone stating a simple message “Merry Christmas”. Thirty years later, we look at the wide array of communication methods available to us: email, texting, instant messaging, hundreds of applications with messaging capabilities, and video conferencing. The way we communicate is changing every day, but with those changes remain the steadfast rules of this industry - it needs to be maintained, it needs to be preserved, and it needs to be supervised.
“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust.” Securities and Exchange Commission Chair, Gary Gensler
Over the past two years there has been a resounding increase in violations surrounding the Securities and Exchange Commission's ongoing recordkeeping initiative. The most recent release in September announced another ten firms charged for widespread and longstanding failures to maintain and preserve electronic communications, totalling $79 million in fines and penalties. This news came on the tailwind of August’s release where the SEC charged eleven firms with penalties totaling $289 million. In conjunction with the total fines and penalties from 2022 regarding record-keeping violations, this brings the tally to over $1.8 billion and over 50 enforcement actions. In reviewing these enforcement actions, the commonalities are:

  • Failure to reasonably supervise, with a view to prevent and detect violations of federal securities laws.
  • Failure to maintain and preserve business communications, whether it be internal or external communications.
  • Inadequate policies, procedures, and controls that are compliant and designed to detect and prevent violations.
RIAs have a fiduciary responsibility to their Clients, and recordkeeping has been vital to preserve that integrity. As technology continues to advance, so should the policies and procedures of every RIA to ensure all communications are being maintained. So, how does an Investment Advisor effectively mitigate their risk? Really, an Advisor has two options:
  • The Advisor opts to completely ban the use of personal devices and/or other various off-channel communication applications. Examples of certain control measures that can be put into place regarding this policy are:
    • Written policies and procedures stating that personal devices and other various off-channel communication applications can not be used for business purposes, and have supervised person’s attest to those policies.
    • Enhance review of supervised electronic communications (i.e email) to ensure that off-channel communication is not occurring with clients or members of the firm alike.
    • Provide training for all supervised person’s of the Advisor regarding what is and is not acceptable, and the ramifications for violations.
  • The Advisor opts to allow for the use of text-messaging and other electronic communication methods with appropriate policies and procedures in place. Examples of certain control measures that can be put into place regarding this policy are:
    • Written policies and procedures regarding personal devices and/or electronic communication applications may be utilized on an approved basis by the Chief Compliance Officer.
    • Advisors undergo a due diligence process for vendors they seek to utilize as part of the firm’s communication platform. This includes the reviewing the messaging platform for supervised person use, ensuring there are supervisory capabilities, and understanding the archiving set up.
    • Provide training for the supervised persons who use the platform and compliance reviewers who supervise the platform, and the ramifications for violations.
Advisors in need of a solution, should start with current vendors they utilize to determine if they can bundle their email, social media, website, and texting platforms which, in turn, streamlines supervision and cost as well.

Whether an Advisor allows the activity or not, having the appropriate testing and supervision measures in place is the best line of defense. Effective supervision, due diligence and proper training are key when it comes to mitigating risk. If you are questioning whether your supervised persons are utilizing personal text messaging or emails to communicate with clients, or that your policies, procedures, and controls are inadequate please contact us today!