November 7, 2019

FINRA IARD & CRD Security Updates

This is an update for all users of FINRA Entitlement tools, including IARD and CRD: Effective Saturday July 20, 2013 you are now required to select three security questions and they will be used during your login process. To avoid interruption of using the FINRA website it is recommended that you save these security questions and answers to your files.

FINRA has implemented a new login security feature for users of FINRA Entitlement applications/systems including IARD and CRD. Effective July 20, 2013, the first time a user logs onto IARD/CRD, the user will be required to select three security questions and provide a response to each question. On subsequent logins, a user may be asked to provide the responses to his/her selected security questions. See the frequently asked questions for details on how to complete the new security process. (

This new security process will impact all users, including Super Account Administrators, Account Administrators and regular users (including public accounts).

After your initial login and configuration of the three security questions, subsequent logins to the system will trigger one of the three questions being asked if any of the conditions occur:
  1. During log in, if you did not check the box “Remember this computer (Choose this option only if this is your personal computer and you trust this device/computer).”
  2. You log in from a different computer or use a different browser.
  3. The system detects a change in how you typically interact with the application.
  4. A year has passed since you have been presented with a security question.
  5. Your computer’s cookies were deleted since your last login.

We recommend saving your security questions and answers to your files, however, if you get locked out of your account you should first contact your Super Account Administrator (SAA) or Account Administrator (AA) to unlock your account. If your account is locked because of multiple incorrect responses to your security questions, your SAA/AA will unlock your account and require you to reset your security questions. If you are an SAA and your own account is locked, or if you do not have an SAA or AA to go to for assistance, contact the FINRA Gateway Call Center at 301-869-6699 and they will assist your request.

October 31, 2019

CCO Series - Trade Errors

What You Need to Know

In developing policies and procedures for a Registered Investment Advisor ("RIA") a topic that must be addressed is trade errors. To uphold the fiduciary duty owed to clients of your RIA, your policies and procedures must cover how you handle errors that may occur when trading in a client's account. If a trading error occurs in a client's account managed by an RIA there are critical response items to consider in order to uphold your fiduciary duty. Implementing these compliance components can demonstrate to a regulator that you are satisfying your regulatory requirements.

What is a Trade Error?

The most common trade error is buying the wrong security or the wrong amount. Here are a few other examples of events that are considered trade errors:
  • Trading in the wrong client account
  • Trading in the wrong direction (buy vs. sell)
  • Trading at the wrong price (limit orders, etc)
  • Incorrect block trade allocation
  • Violation of client account restriction (tobacco, oil, military)
  • Violation of client account suitability (aggressive vs conservative)
  • Delayed execution of trade instructions
  • Duplicate execution of trade instructions

How to Handle Trade Errors

Even if the error does not fit into one of these examples you must discuss any potential or actual trade errors with your CCO to ensure compliance. CCOs should document the event within their trade error log and save all related documentation for the RIA's books and records. Consider communicating with the clients as needed to explain events in their statements or other irregular trading activity. Most trade errors can be resolved prior to settlement by the custodian if they are promptly discovered and communicated.

Reviewing Policies and Procedures

Advisors must ensure their policies and procedures require the disclosure of trade errors to the CCO and that trade errors are documented in the Advisor's trade error log. The log must also include any related backup or other documentation, that the trade errors are resolved in a way that makes the client whole and absolves the client of consequences of the Advisor's error. Additionally, trade errors should be reviewed at least annually by the CCO or delegate to ensure that any reasonable changes to the Advisor's business practices that could eliminate future errors are considered for implementation. During this annual review, the CCO or delegate must also update the Advisor's trade error policy as needed to ensure it accurately reflects how trade errors are resolved.

What are the Next Steps for a CCO?

Sample review transactions from your firm’s trading blotter to ensure trades are placed accurately in accordance with documentation and client objectives. Ensure any and all trade errors are documented in your firm's trade error log. Confirm that trade error files maintain documentation related to the specifics of the trade error as well as documentation substantiating the resolution. Consider reasonable changes to business practices that could eliminate the potential for future errors. Finally, remain aware of any changes to trade error policies and procedures that may be imposed by your custodian and ensure your internal policies remain accurate. Ensure proper communication of trade error policies and procedure to supervised persons.

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.

CCO Series - 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

Conduct a random sampling review of client files to verify that suitability is appropriately documented. Run a comparison between the client's trading history and the suitability documented to ensure investment decisions are in line with investment objectives. Validate that the last outreach attempt to each client is within one year. Additionally, review your firm’s client intake/onboarding and ongoing review process to ensure you are capturing adequate information to make, or continue to make, appropriate investment decisions in client accounts and provide advice that is in the client’s best interest.

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.

October 18, 2019

CCO Series: The Race to Zero Commissions

Wrap Fee Programs
A program that investment advisors once utilized to offer their advisory services for a single combined fee, now has a new wrinkle. As you have heard from us many times, part of an investment advisor’s fiduciary duty is to recommend services that are in the best interest of the client. Given the industry shift to no transaction fees for stocks and ETFs, if you currently offer a wrap fee program to clients where you charge a higher advisory fee to take into account transaction costs, have you asked yourself if wrap fee programs really are in the client’s best interest?

It is our belief that regulators will be asking you this question the next time you are visited. Historically wrap fee programs have been scrutinized by regulators to ensure their appropriateness. Specifically, under the microscope were reverse churning and high cash balances. Zero commission on certain securities will certainly draw the attention of examiners as they determine if a wrap fee program is in a client’s best interest.
Action Item:
If you sponsor or recommend the use of a third party wrap fee program, we strongly urge you to conduct a review of the underlying investments utilized to build client portfolios. Items to consider include:
In the last month, we have seen an old fashion pricing war between brokerage giants across the industry. Things kicked off in late September with Interactive Brokers and the introduction of IBKR Lite, followed by Schwab, TD Ameritrade, ETrade and most recently Fidelity moving to zero commissions on all U.S. stock and exchange-traded fund (“ETF”) trades. The initial news sparked positive reactions from your average investor. Zero commissions for stocks and ETFs, what could possibly be wrong with that?
After the dust has started to settle, it got us thinking about the future of wrap fee programs and custodial partnership due diligence. Below we discuss both elements to get you thinking as well.
The Future of Wrap Fee Programs and Custodial Partnership Due Diligence
CCO Series: The Race to Zero Commissions
What is the composition of underlying investments in the wrap fee program (percentage allocated to stocks, bonds, ETFs, mutual funds, options, etc.)?
Do you primarily invest in individual exchange-traded securities such as stocks and ETFs?
Do you primarily invest in mutual funds and if so, are they generally transaction fees or no transaction fee funds?
As you complete your review you may determine that staying the course with your wrap fee program is appropriate. However, if you determine that after your review a change is necessary you should begin to map out how that change will need to be implemented. You may decide that a wrap fee program is no longer necessary for clients. Or you may decide that the fee you previously were charging is no longer appropriate. Whatever the change is, you are urged to put the plans in place to see through a timely and accurate change.
Custodial Partnership Due Diligence
Whether you have brokerage discretion or recommend custodians to clients, these new incentives should be evaluated when considering your existing institutional relationships with your custodians. Although there is no immediate action needed, it’s certainly something worth staying on top of, as changes continue to unravel forcing increased competition in the brokerage space. It’s unclear where all of this is headed as there is already some speculation about potential changes to custody fees to make up for lost revenue and the layering of additional restrictions on zero commission accounts. Needless to say, it seems as though zero commissions are just the beginning.
We encourage all investment advisors to leverage this opportunity to document these reviews and as you complete your due diligence efforts, remember to document! This documentation can be captured either within AdvisorCloud or your own books and records.
What does AdvisorAssist Recommend?
Please contact us at or through your AdvisorCloud if you have any questions.

September 27, 2019

The AdvisorAssist CCO Series: Anti-Money Laundering (AML)

This is one of those subjects that are difficult to imagine until it happens. Fortunately, to date, the regulators have not imposed onerous requirements on RIA firms, like they have with custodians and broker-dealers. AML for investment advisors is one of those regulatory topics that always seems to resurface and we believe that more formal AML procedures will be eventually be expected from RIAs. In the interim, we have produced some best practices so that your RIA firm is aware of the subject and is armed with the basics of identifying suspicious activities.

Anti-Money Laundering (AML) In a Nutshell

Money laundering is the process by which individuals or entities attempt to conceal the true origin and ownership of the proceeds of criminal activities, such as organized crime, drug trafficking or terrorism. Anti-money laundering (AML) is a general term that describes the controls used by financial institutions to prevent, detect and report money laundering activities. AML program requirements for financial institutions are laid out in various laws including the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, and the USA Patriot Act.

For a more digestible summary of all AML-related laws can be found here.

Through the Regulator's Eyes

Registered investment advisors do not fall under the definition of "financial institution", so (at this point) they are not subject to extensive anti-money laundering requirements. There have been many overtures by the U.S. Treasury Department's Financial Crimes Enforcement Network ("FINCEN") to bring RIAs under similar requirements. The director of FINCIN reignited these efforts by indicating that Treasury intends to revisit this topic and finalize rules for RIAs. By all indications, advisors will ultimately have increased AML rules at some point in the near future. For the time being, we recommend that RIAs adopt certain best practices related to AML.

CCO Best Practices

  • Perform due diligence on each new investor to ensure you can confirm their identity and that the individual or entity is not on the Office of Foreign Asset Control (OFAC) sanctioned list. (This may be delegated to a third party like a custodian.)
  • Monitor client transactions for suspicious activity (e.g. reluctance to provide identifying information, frequent deposits of cash, cashier's checks or money orders, or wire transfers slightly under $10,000, or acting on behalf of an undisclosed person or entity.
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.

September 3, 2019

CCO Series: Handling Special Circumstances - The Death of a Client

One of the most challenging situations an advisor can face is the death of a client. The death of any individual is a sad and stressful event for the decedent's family, and one where emotions often run raw. A client’s passing can affect us both personally and professionally, and while death is surely a topic we’d all rather avoid, it is an undeniable facet of the human experience.

In the midst of this challenging time, an Advisor must continue to do their fiduciary duty, and act in the clients best interest. But the death of a client creates additional hurdles to this, and can pose a risk to your practice. By creating and following clear policies and procedures, an Advisor can process the orderly transfer of a client’s assets to their heirs, and meet their fiduciary obligations to their clients for a final time.

Best Practice - Have a conversation with your senior clients about their estate plans, and their goals for the transfer of their accounts. While this can be an unpleasant topic to broach with clients, clear planning can mitigate future problems.

Who owns the Assets?

Upon the death of a client, the legal right to their assets transfers. It is essential that advisors determine which party owns and has rights to a deceased client’s accounts before taking any actions.

Depending on how the account is titled, legal title may pass directly to a named individual beneficiary, trust, or joint account holder, or it may become part of the decedent’s estate. The executor of the client’s estate will be responsible for directing the distribution of the estate assets according to the client’s will, if one exists.

Remember, a power of attorney expires upon the death of a client. Control over a deceased client’s account passes to the executor of the estate, who may or may not be the same person.

What Steps Should You Take

When an advisor or supervised person of a firm learns of the death of a client they must take steps to initiate the transfer of that account to the client’s heirs. These include, but are not limited to:

  1. Contact the custodian and any other applicable third parties to freeze the accounts
  2. Obtain a copy of the client’s death certificate
  3. Identify the executor and obtain copies of documents to evidence their authority
  4. Repaper and transfer accounts to the new owners

As a best practice, your firm should create specific procedures for handling the accounts of deceased clients. The firms CCO should train all supervised persons on these procedures, and test them regularly to ensure the procedures are being followed.

Management of a deceased client’s account during transfer

When a family member passes, often the last thing on anyone's mind is the transfer of investment accounts. This often leaves Advisors in a state of limbo, as they remain responsible for the management of a client’s account until the transfer of assets is completed.

Advisors should review their Investment Management contracts, to determine whether or not a contract continues following the death of a client. One challenge in particular that Advisors face, is the ability to place trades. Without discretionary trading authorization, an advisor may not be able to place trades in the client’s account. Depending on the time it takes to have an executor appointed, and assets transferred, an account may be orphaned for a significant period of time.

In addition to this, the Advisor may face withdrawal, or transfer requests from family members. If the client’s accounts are frozen, it may not be possible to honor these requests. In addition, Advisors should be cautious, and ensure the requesting parties are entitled to receive the decedent's funds.

In all cases, the Advisor should remember to always act in the best interest of their client, and to thoroughly document what they are doing, and why. The passing of a client is an emotionally fraught time for their families, and it is not uncommon for Advisors to be caught in the middle of arguments over the disposition of a client’s assets.

Best Practice - Proceed with caution! Review your contracts and fee agreements. Do not take trade or withdrawal instruction from anyone unless you are sure they are properly authorized to give those instructions.

CCO Best Practices

  • Have clear and consistent policies for the treatment of client accounts following the death of a client.
  • Ensure your supervised persons have been trained on the procedures to follow in the event of a client’s death.
  • Following the death of a client, review the account to determine if any fees need to be rebated or debited prior to transferring the assets.
  • As part of your review of senior and vulnerable clients, review to see if your Investment Advisor Representatives have discussed estate planning strategies.
  • Document, Document and Document. This is a common refrain, but proper documentation is especially important when it comes to handling special client situations.

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.