The amended Rule 205-3 allows an investment advisor to charge performance fees if the client has at least $1 million (raised from $750,000) in assets under the management with the investment advisor immediately after engagement for advisory services or if the investment advisor believes, immediately prior to being engaged, that the client has a net worth of more than $2 million (raised from $1.5 million) (together, in the case of a natural person, with assets held jointly with a spouse).

Investment advisors should review and amend (if necessary) their disclosure documents and offering materials to comply with the amended Rule 205-3.

Under the rule, family members include all lineal descendants of a common ancestor (who may be living or deceased) as well as current and former spouses or spouse equivalents of those descendants, provided that the common ancestor is not more than ten (10) generations removed from the youngest generation of family members. Furthermore, the rule accepts all children by adoption and current and former stepchildren as family members.

Included in the definition of family clients are family members (as defined above) and all of the following individuals and/or entities: 1) key employees of the family office (including executive officers, directors, trustees and general partners for the family office or its affiliated family office); 2) any other employee of the family office or any affiliated family office (other than an employee performing solely clerical, secretarial, or administrative functions) who has participated in the investment activities of the family office or any affiliated family office for at least 12 months; 3) any estate of a family member, former family member, key employee (and in some instances, a former key employee); 4) nonprofit and charitable organizations funded exclusively by family clients; 5) certain family trusts; 6) and companies wholly owned and operated for the benefit of family clients.

Family Offices are excluded from registration with the SEC. While not required to register with the SEC, those firms fitting the definition of Family Office must respond to certain questions found on Form ADV Part IA and periodically update same.

Please Note: Advisers who are currently relying upon the Family Office exemption but will no longer qualify under the new definition, must register with the SEC by March 30, 2012 (a later compliance deadline of December 31, 2013 has been established for Family Offices that manage assets of nonprofit or other charitable organizations funded by, in part, non-family assets). If you would like to discuss this blog post in more detail, please feel free to contact me in my firm's Lawrenceville, New Jersey with any questions you may have.  

The article discusses the continiuing legal battle AllianceBernstein is engaged in with financial advisors who recently left their firm and took clients with them. The firm filed suit against eight former brokers, claiming that they violated their non-solicitation agreements after they left without giving sufficient notice and taking their client lists and other confidential information with them.

Mr. Lewis comments on AllianceBernstein’s choice not to partake in the Protocol for Broker recruiting. He states, “The reason they have not joined is because they are concerned that it will make it easier for people to leave AllianceBernstein. They don’t want to join the protocol right now because there’s a great concern that there might more people who would want to leave than join, and in that situation, the protocol would not be a good mechanism for them to use.”

 

Recently, Ashton Kutcher’s comments regarding several internet based social media companies has come under scrutiny after Kutcher authored an article for Details magazine in which he praises Tinychat, Fourquare, Arbnb and several other companies, while failing to disclose the fact that he is an investor in the companies. Now the Federal Trade Commission and the Securities Exchange Commission are questioning if this move warrants a federal investigation.

In the article, Mr. Lieberman states, “He's getting close to the line, if not crossing it, in terms of SEC regulations on insider trading."

Exam Priorities

1. Verify customer assets exist and held at secure locations
2. Risk analysis > examiners ask right questions when enter
3. Profiles of firm’s business model and underlying risks
4. Test for compliance with customer protection rules
5. Examiners understand risks/management; looking for control breakdowns
6. Point of Sale exams – focus on branches, rather than headquarters
7. Pilot program – collect data from underwriters and manufacturers via standard request; templates being used: a) 1st round of requests sent April, 2011; and b) 2nd round of requests to VA manufacturers sent July – August 2011

FINRA Goals

FINRA is requesting broader data collection with increased analysis to spot trends and create risk-base exams.

Recent Exam findings

1. Failure to document basic customer information
2. Inadequate policy and procedures
3. Inadequate supervisory reviews > suitability
4. Training programs inadequate
5. Abusive switches and costly surrender charges
6. Over concentration of annuity products

FINRA has modernized its systems of self-reporting misconduct by mandating that electronic filings be made within 30 days of the determination that the Firm or an Associated Person committed a reportable violation. Member firms are required to self report violations. This process, however, allows FINRA and, uncertain circumstances the public, earlier access to such information. The new methodology creates consistency and clarity in the filing process. 

What:  There is a menu in the FINRA automated application system, containing new dropdown items for reporting of events corresponding with Rule 4530 information. The numeric codes previously used will be eliminated.  (See footnotes 8 and 9 of Regulatory Notice 11-10) Batch submissions are possible via a file transfer protocol. There is also a new hyperlink for access.

When:  Reporting must be accomplished within 30 calendar days after the Firm has made its conclusion, based upon the “reasonable person” standard, that either the Firm or one of its Associated Persons has committed a reportable violation.

Why:  A Broker-Dealer or Associated Person is required to self report violation of the securities, commodities, financial, investment related law, rule, regulation or SRO standard of conduct.

How to Report:  (1) Firm designates an individual to make an internal investigation and complete a report. The designated firm individual would then access the system and utilize the dropdown menu to make the report. (2) An update of the firm’s written supervisory procedures to reflect the compliance process concerning Regulatory Notice 11-10 should also be considered.

Who:  Firms’ internal decision making for self reporting must be done by an experienced and trained individual. The “reasonable person” standard is applied to the conclusion that a violation occurred. The internal decision maker must review the conduct and consider its impact, including potential, actual, and widespread impact to the firm, its customers and brokers.  Conduct that must also be considered when making a report:

• any material failures of the firms’ policies and procedures; and
• whether or not the specific violation has involved numerous clients, material errors, significant dollar amounts and/or patterns or series of events that are related

In order to support the firms’ good faith reasonable determination, the firms’ decision making individual must be able to support the conclusions reached as to whether the event requires disclosures with relevant documentation for each filing or the decision that no filing is required. The Firm should assure that Associated Persons understand that they are required to promptly inform the proper individual at the Firm of any reportable event. Rule 4530 includes findings of financial, business, or professional misconduct which may result in civil litigation, arbitration proceedings or regulatory matters. Note that non-securities insurance products are covered.

Mr. Lewis was also quoted in the February 22, 2011 Wall Street Journal article, US Trust's 'Garden Leave' May Start Trend. The article is a follow up to the Febryary 18th article in which Mr. Lewis states, "Garden leave provisions apply to many senior executives. They haven't typically been applied to financial advisers until now, however, mainly because they cripple their ability to convince clients to stick with them during the transition. Sixty days is an eternity in the brokerage world."

The seminar will discuss the Dodd-Frank Wall Street Reform Act (consumer protection act) and the passage of the Bush tax cuts and their effect on your business and clients. For questions, additional information, or to register for the event, please contact Rich Campbell at 732-530-7588 by January 5, 2011.

The article discusses the Securities & Exchange Commission’s recent revisions to the Form ADV and the steps registered investment advisors are taking in order to comply with the latest round of changes. The article discusses Fidelity’s efforts to assist their clients with the changes through webinars and regional workshops. Mr. Galletto states, “states are now converting over to the Part 2 A form, and no state is rejecting the format.” Mr. Galletto, and Mr. Giachetti are assisting Fidelity with its webinars and workshops series.

You can read the full article online here.
 

And it doesn’t look like the number of claims will be settled any time soon. Mr. Lewis states, “There is a common misconception among advisors that brokerages will negotiate the balance, and that is contributing to the increase in the number of cases. There's a notion among brokers that firms will take fifty-cents on the dollar, but firms want a hundred percent.”

You can read the full article online here.
 

Mr. Carlis states, “With an SEC-registered RIA firm, the disclosure regulations are substantial. But, there’s far more flexibility to sell different sorts of products in the RIA model, as long as disclosures are made.”

You can read the full article online here.

You can read the full article online here.

The article discusses the recent expulsion of Miguel A. Chavez by the Financial Industry Regulatory Authority (FINRA). The expulsion comes as a result of Chavez's association with firms that sell securities after he opened an outisde account and did not inform his employer of the account. Mr. Lewis states that brokers who are contemplating a job change may want to move their assets to another brokerage if they anticipate a dispute about money owed for a signing or retention bonus, which are typically secured by promissory notes.

You can read the full article oline here. (PDF)