Conducting an Annual Compliance Review Session 11 Trading Records, Portfolio Management Records, Financial Planning

Transcription

1 Conducting an Annual Compliance Review Session 11 Trading Records, Portfolio Management Records, Financial Planning

2 Copy of Slides To access a copy of the slides from today s presentation please go to:

3 Presenter Tammy Emsick Director of Business Development & Senior Compliance Consultant RIA Compliance Consultants

4 Presentation Disclosures Although the sponsor of this presentation, RIA Compliance Consultants, Inc. ( Sponsor ), is an affiliate of a law firm and Sponsor may have an individual on its staff that is also licensed as an attorney providing legal services in a completely separate capacity, Sponsor is not a law firm and does not provide legal services or legal advice. A consulting relationship with Sponsor does not provide the same protections as an attorney-client relationship. This presentation is offered for educational purposes only and should not be considered an engagement with Presenter or Sponsor. This presentation should not be considered a comprehensive review or analysis of the topics discussed today. These materials are not a substitute for consulting with an attorney or compliance consultant in a one-on-one context whereby all the facts of your situation can be considered in their entirety. Despite efforts to be accurate and current, this presentation may contain out-of-date information. Additionally, Presenter and Sponsor will not be under an obligation to advise you of any subsequent changes. Information provided during this presentation is provided "as is" without warranty of any kind, either express or implied, including, without limitation, warranties and merchantability, fitness for a particular purpose, or non-infringement. Presenter and Sponsor assume no liability or responsibility for any errors or omissions in the content of the presentation. Information provide during this presentation relates solely to the Investment Advisers Act of 1940 and the rules thereunder and, at times, we may reference similar state securities rules and regulations specific to registration as an investment adviser. Certain circumstances or arrangements you may have may warrant you to consider other regulations that may apply including, but not limited to: the Investment Company Act of 1940; the Securities Act of 1933; the Securities Exchange Act of 1934; ERISA and other Department of Labor regulations; federal or state laws and regulations and self-regulatory (e.g., FINRA) rules for broker-dealers and registered representatives/securities agents of broker-dealers; and state insurance rules and regulations. The Sponsor of this presentation does not provide any advice or consulting services outside the scope of the Investment Advisers Act of 1940 or similar investment adviser state securities rules and regulations. If you need advice regarding any other rules or regulations, the Sponsor recommends that you consult with an attorney or consultant that specializes in those specific rules or regulations.

5 Presentation Disclosures There is no guarantee or promise that concepts, opinions and/or recommendations discussed will be favorably received by any particular court, arbitration panel or securities regulator or result in a certain outcome. To the extent that you provide RCC with your address, it will be added to RCC s electronic newsletter mailing list regarding compliance issues for investment advisors. You may opt out at any time by calling RCC at or clicking at any time the unsubscribe link on the electronic newsletter. Communication with today s webinar presenter is not protected by attorney-client privilege. Please keep questions during this seminar in a hypothetical form. This seminar session and/or the presentation materials may be recorded, copied and/or shared with third parties and/or posted to our public website.

6 Books and Records Agenda Investment Advisers Act of Rule Documents/reports commonly requested but not necessarily referenced in Rule Agency Cross Transactions and Principal Trades Financial Planning Conflicts of Interest Written Policies and Procedures Ongoing Compliance Annual Compliance Review Common Problems

7 Rule Overview Under Rule of the Investment Advisers Act of 1940 ( Investment Advisers Act ), every investment adviser registered or required to be registered with the SEC shall make and keep true, accurate and current certain books and records relating to its investment adviser business.

8 Rule Rule 204-2(a)(3) under the Investment Advisers Act requires investment advisers to maintain, A memorandum of each order given by the investment adviser for the purchase or sale of any security, of any instruction received by the investment adviser concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any such order or instruction. Such memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.

9 Rule The following sections under Rule also address books and records that must be maintained related to trading, portfolio management, and financial planning: Rule 204-2(a)(7) Originals of all written communications received and copies of all written communications sent by such investment adviser relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities, or (iii) the placing or execution of any order to purchase or sell any security: Provided, however, (a) That the investment adviser shall not be required to keep any unsolicited market letters and other similar communications of general public distribution not prepared by or for the investment adviser, and (b) that if the investment adviser sends any notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent; except that if such notice, circular or advertisement is distributed to persons named on any list, the investment adviser shall retain with the copy of such notice, circular or advertisement a memorandum describing the list and the source thereof.

10 Rule Rule 204-2(a)(8) - A list or other record of all accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client. Rule 204-2(a)(9) - All powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment adviser, or copies thereof. Rule 204-2(a)(10) - All written agreements (or copies thereof) entered into by the investment adviser with any client or otherwise relating to the business of such investment adviser as such. Rule 204-2(a)(14)(ii) - Documentation describing the method used to compute managed assets for purposes of Item 4.E of Part 2A of Form ADV, if the method differs from the method used to compute regulatory assets under management in Item 5.F of Part 1A of Form ADV.

11 Rule Rule 204-2(c)(1) - Every investment adviser subject to paragraph (a) of this section who renders any investment supervisory or management service to any client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment adviser, make and keep true, accurate and current: (i) Records showing separately for each such client the securities purchased and sold, and the date, amount and price of each such purchase and sale. (ii) For each security in which any such client has a current position, information from which the investment adviser can promptly furnish the name of each such client, and the current amount or interest of such client.

12 Additional Records Documentation to support AUM reported on Form ADV Part 1A A list of all current clients that at a minimum includes: Client name Custodian Type of account (e.g., equity, balanced, fixed) Whether it is a discretionary account or non-discretionary Current balance of each client s AUM with a total amount of AUM shown on the report A list of all clients that financial planning was provided to during the previous 12 month period List of wrap fee clients (if applicable)

13 Additional Records Trade Blotter containing the following information: Trade date Buy or sell order Number of shares or principal amount of trade Security name Ticker symbol Identifying number (SEDOL/CUSIP) Price Total Commission Commission share/percentage Fees Accrued interest Net amount to/from client Client name Client account number Broker or dealer name

14 Client files Additional Records Executed agreement for services and fee schedule New account forms and any additional documents gathered to establish account and determine suitability Additional legal paperwork for special account types (e.g., trust documentation, estate paperwork) Written acknowledgement of client s receipt of Form ADV Part 2 Written grant of trading and discretionary authority Investment guidelines/restrictions Reports (e.g., performance, position) Correspondence Statements Confirms Fee invoices (if applicable) Written instructions for client directed brokerage (if applicable)

15 Additional Records List of all proprietary trading or investment accounts of the firm List of all agency cross transactions List of all principal trades Trade error file documenting the following for each trade error: Client/account that was affected A description of the error Broker/dealer involved (if applicable) Name of security Transaction date Description of the error and how it was resolved

16 Additional Records Position/performance reports provided to clients List of approved broker/dealers Should identify any affiliated broker/dealers and provide details regarding the affiliation and a description of any clearing arrangements

17 Section 206(3) Section 206(3) of the Investment Advisers Act makes it unlawful for any investment adviser, directly or indirectly acting as principal for his own account, knowingly to sell any security to or purchase any security from a client or acting as broker for a person other than such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction.

18 Agency Cross Transactions An agency cross transaction is defined under Rule 206-3(2) of the Investment Advisers Act as, a transaction in which a person acts as an investment adviser in relation to a transaction in which such investment adviser, or any person controlling, controlled by, or under common control with such investment adviser, acts as broker for both such advisory client and for another person on the other side of the transaction. Agency cross transactions must comply with requirements under Rule 206-3(2) of the Investment Advisers Act

19 Principal Trades Section 206(3) of the Investment Advisers Act generally prohibits principal transactions where the investment adviser is acting as a principal for its own account and knowingly buys securities from, or sells securities to, a client. These prohibitions also apply where an affiliate or controlling person of the adviser is acting in a principal capacity with the advisory clients. Rule 206-3(3T) under the Investment Advisers Act provides relief under Section 206(3) to an adviser that is also registered as a broker-dealer and acts as a principal in a transaction with advisory client s brokerage accounts so long as certain conditions are met.

20 Financial Planning If firm does financial planning it should get an executed financial planning agreement from client even if fees are not charged Recommend that firms have approved financial planning software or platform (approval at firm level) If hourly fees are charged for financial planning, keep log of all activities underlying the hourly charge If financial consulting/planning is done but nothing formal is presented to client in writing, firm needs to require documentation/notes to protect the firm, especially if a fee is charged for the service

21 Financial Planning If financial planning/consulting fees are charged in advance, firm needs to make sure plan/services are completed and plan delivered within 6 months If financial planning fee is paid via automatic fee deduction, separate invoice should be sent to the client

22 Conflicts of Interest or Risk Areas In a document provided during a CCO outreach regional seminar back in 2009, SEC staff list the following as some of the common conflicts of interest and areas of risk exposure for investment advisers: Adviser has discretionary authority Adviser manages different types of accounts in a parallel manner (i.e., registered investment company, private management company, and separately managed accounts all with the same investment objective) Adviser manages accounts with competing investment strategies (i.e., long-only accounts and accounts that concentrate on shorting stocks

23 Conflicts of Interest or Risk Areas Adviser manages accounts with differing compensation structures (i.e., performance-based compensation versus assetbased management fees) Adviser makes proprietary investments in the same securities that are recommended to clients Adviser invests client assets in affiliated entities

24 Written Supervisory Polices and Procedures At a minimum, the firm s written policies and procedures should address: Portfolio management process, including, allocation of investment opportunities among clients and consistency of portfolios with clients investment objectives, disclosures by the adviser, and applicable regulatory restrictions Trade aggregation Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services ( soft dollar arrangements ), and allocating aggregate trades among client accounts

25 Written Supervisory Polices and Procedures Processes used to value client holdings and assess fees based on those valuations Proprietary trading of the adviser and personal trading activities of supervised persons (e.g., principal trades, agency cross transactions) Principal trading Agency cross transactions Client contract to be used and supporting documentation Trading errors Best execution Financial planning

26 Ongoing Compliance Maintain Form ADV to properly disclose services and fees as well as any conflicts of interests that may relate to the firms trading practices or investment advice provided Best execution review at least annually Daily trade reconciliation Maintain current and complete information regarding each client s financial and family circumstances, investment objectives and restrictions, and risk tolerance Periodic reviews of order memorandums to ensure all required information is on memorandum

27 Ongoing Compliance Periodic reviews and testing of trading activities to monitor for: Investment decisions are consistent with client goals and objectives, limitations or restrictions and risk tolerance Potential insider trading violations Cherry-picking Scalping Agency cross transactions or principal trades executed in violation of firm policies or not meeting regulatory requirements Proper allocation of batched or block trades, IPOs or limited securities If don t do block trades, are trades implemented in equitable manner

28 Ongoing Compliance Due diligence for any financial planning software/platforms used Review/supervise financial plans prepared

29 Annual Compliance Review Review Form ADV to ensure that all potential conflicts of interests have been disclosed and to ensure that description of fees and services is consistent with manner in which services are being provided and fees charged Review accuracy of assets under management reported on Form ADV and confirm that documentation is maintained to support the numbers provided Review random sampling of order memorandums to ensure all order memorandums are being properly maintained, can easily be accessed, and all required information is included on the memorandum

30 Annual Compliance Review Review trade blotter Confirm that trade confirmations and client statements are maintained and easily accessible Review client holdings report Review sampling of client files to ensure current and complete information is obtained and maintained regarding client s financial circumstances, goals and objectives and risk tolerance Review trading activities Review of position/performance reports provided to clients

31 Annual Compliance Review Review most profitable trades and least profitable trades to look for outlier performance and determine cause for unusual results Review trade error file Confirm trade errors were corrected in best interest of the client Review for any patterns which may be suspicious or may require special attention Review allocation of and batched/block trades Confirm best execution review performed and review findings Review any agency cross transactions or principal trades to make sure in compliance with regulatory requirements

32 Common Problems No order memorandum or incomplete order memorandum No financial planning agreement No reviews or supervision of financial planning documents prepared No documentation to support financial planning/consulting services where a written plan is not presented No trade error file Poor trade reconciliation or no trade reconciliation

33 Common Problems Not updating maintaining updated client information Supervision or reviews not performed by different parties within the firm Best execution review not conducted or no supporting documentation

34 Copy of Slides To access a copy of the slides from today s presentation please go to:

35 About Us Serve Over 500 Investment Adviser Firms Principals Are Industry Experienced Working in Compliance or Law Departments & Hold Professional Credentials Consult with Retail & Institutional Firms Offer Full Array of IA Compliance Services Reasonably Priced at Midwest Rates RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services.

36 Thank You Schedule Introductory Call via Online Appointment System: Tammy Emsick Senior Compliance Consultant RIA Compliance Consultants, Inc x 102 temsick@ria-compliance-consultants.com

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