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New Jersey Bureau of Securities begins annual examinations of investment advisors
On June 12, the New Jersey Bureau of Securities, within the Office of the Attorney General Division of Consumer Affairs, announced that its annual investment adviser examinations are underway. This year’s examination will include questions asking investment adviser firms, among other things, about the impact of Covid-19 on operations and the steps taken to protect senior investors. The examination intends to survey the impact Covid-19 has had on investment advisers and to assess their business continuity plans.
New Mexico issues public health order
On May 15, the New Mexico Department of Health issued an order directing that essential businesses must operate in accordance with the applicable Covid-Safe Practices section of the All Together New Mexico: Covid-Safe Practices for Individuals and Employers. Essential businesses include banks, credit unions, insurance providers, brokerage services, and investment management firms, among others.
Kansas Insurance Department Covid-19 FAQs contain guidance for insurance companies and broker-dealers
On May 11, the Kansas Insurance Department updated its Covid-19 FAQs, which, among other things, address how the department is handling licensing for insurance agents and registration for broker-dealers and investment advisers during the pandemic.
Wisconsin extends stay at home order
On April 16, the Wisconsin Department of Health Services extended its order closing all non-essential businesses and ordering residents to stay at home until May 26, 2020. Banks, credit unions, and other depository or lending institutions; licensed financial service providers; insurance services; broker dealers; and investment advisors are not required are considered essential and not required to close.
Washington DFI issues guidance to investment advisers on CARES Act loans
The Washington Department of Financial Institutions issued guidance for state-registered investment advisers regarding CARES Act loans. Should a firm obtain a CARES Act loan, DFI will not consider it a net worth deficiency if certain criteria outlined in the guidance are met. However, if it is determined that some or all of the loan will not be forgiven, the firm must immediately notify the DFI and reclassify the loan as a liability.
Indiana Securities Commissioner eases certain filing and other requirements for financial professionals
On March 24, the Indiana Securities Commissioner issued an administrative order providing relief to broker-dealers, investment advisers, and their registered agents or investment adviser representatives affected by the Covid-19 outbreak. Among other things, the administrative order provides the following relief:
- creates a temporary exemption from registration where a person is working from a location outside of the jurisdiction where that person is currently registered, as long as the person notifies the Division;
- permits firms to submit Form U4 electronically without obtaining physical signatures until it is practicable to do so;
- grants a 45-day extension of time for state registered investment advisers to adhere to any filing, updating, or customer delivery requirements required by Forms ADV; and
- extends the time to May 15 for any broker-dealer or investment adviser to submit complete responses to the 2020 Investment Adviser/Broker-Dealer Questionnaire.
Colorado securities regulator provides temporary relief to securities businesses
On March 20, the Acting Securities Commissioner of Colorado provided temporary regulatory relief to broker-dealers, state-registered investment advisers, federal covered investment advisers, and their registered agents. The relief exempted these professionals from certain registration and filing requirements if, among other things, they are displaced and working from a location outside their jurisdiction of registration or their clients have been displaced from their ordinary state and are now residing in Colorado, and they were properly registered with all required regulators on March 1, 2020.
Alabama Securities Commission provides temporary relief for certain financial professionals
On March 19, the Alabama Securities Commission (ASC) issued an emergency order temporarily exempting certain financial professionals (i.e. broker-dealers, investment advisers, and their registered agents or representatives) who are not registered or notice filed with the ASC and who have been displaced from their ordinary business locations from the registration and filing requirements of the Alabama Securities Act, subject to certain conditions. The emergency order also provides broker-dealers, state registered investment advisors and federal covered investment advisers with relief from the requirement to obtain physical signatures on Forms U4 under the Alabama Securities Act and related regulations, subject to certain conditions. Further, the emergency order permits investment advisors registered with the ASC to perform any of the Form ADV filing, updating and customer delivery requirements set forth by the Alabama Securities Act and related regulations up to 45 days after such action is due to be performed. The emergency order will remain in effect until April 30, 2020, unless extended or rescinded.
SEC Reaches Settlement With Investment Adviser for Allegedly Overcharging Clients
On September 14, the SEC announced a settlement in an administrative proceeding against a national bank’s investment adviser subsidiary that allegedly overcharged more than 4,500 clients a total of over $1.1 million for costlier mutual fund share classes that carried 12b-1 marketing and distribution fees when shares of the same mutual funds were available without such fees. The SEC alleged that, from at least December 2011 through approximately June 2015, the investment adviser breached its fiduciary duties, made inadequate disclosures regarding conflicts of interest between the investment adviser and its representatives (who ultimately shared in the gains from the 12b-1 fees as compensation), and did not update its compliance policies and procedures to require its investment adviser representatives to identify or evaluate available share classes. The order cites violations of the Investment Advisers Act of 1940, as well as Rule 206(4)-7. While the investment adviser has neither admitted nor denied the allegations, it has, among other things, agreed to pay a penalty of more than $1.1 million, will provide disgorgement plus interest on any 12b-1 fees that have not yet been refunded to customers, and has been censured.
FINRA Fines Financial Firms $2.4 Million for Improper Customer Records Storage
On July 5, the Financial Industry Regulatory Authority (FINRA) announced that several investment firms agreed to pay fines totaling $2.4 million for allegedly failing to maintain customer records in an electronic format that cannot be altered or destroyed. The firms all signed FINRA’s letters of Acceptance, Waiver, and Consent (AWC) containing allegations and proposed settlement terms for the alleged violations. See agreements here, here, and here.
In the agreements, FINRA emphasizes that financial firms are storing more and more sensitive customer data. FINRA asserts that broker-dealer electronic records must be complete and accurate to assist FINRA and other regulators in examinations and to ensure that member firms can conduct audits. Increasingly aggressive hacking attempts also enhance the need for firms to keep these records in the required format. According to the allegations in the agreements, the firms violated Section 17(a) of the Exchange Act of 1934 (the "Exchange Act"), NASD Rule 3110 and FINRA Rule 4511 by not maintaining electronic brokerage records in non-erasable and nonrewritable format, known as “WORM” format. The electronic records contained information about millions of securities transactions, millions of customer account records, numerous financial records, and records regarding anti-money laundering compliance.
FINRA also asserts that the firms: (i) failed to give 90-day advance notice to FINRA before storing records electronically; (ii) failed to set up audit systems for retaining records electronically; (iii) failed to obtain attestation letters from vendors agreeing to provide all firm records to regulators, if needed; and (iv) failed to set up and enforce written procedures to ensure electronically stored records were retained in compliance with FINRA and federal securities laws.
In addition to monetary sanctions, the firms agreed to review and update policies and procedures to ensure compliance with FINRA and federal securities laws. Additionally, the firms must submit remediation plans to FINRA for approval.