In April 2018, California’s Department of Business Oversight (“DBO”) announced that, beginning in October, it will begin conducting an online questionnaire-based examination of certain investment advisers registered with the DBO. This digital examination will be in addition to the DBO’s onsite examination program. The DBO recently sent registered investment advisers a reminder of this pending initiative. It is unclear from the DBO’s communications whether this online examination will be required for every investment adviser on an annual basis or only after an investment adviser receives an examination request.
Max Schatzow is an Associate and member of Stark & Stark’s Securities Group in the Lawrenceville, New Jersey office. Mr. Schatzow concentrates his practice on counseling financial service entities including investment advisers, broker-dealers and private investment companies (e.g., hedge funds, private equity funds, real estate funds and “fund of funds”) about registration, compliance, liability, and litigation issues.
The United States Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) are now conducting examinations of investment advisers concerning “crypto-assets,” which they define to include crypto-currency, initial coin offerings, distributed ledger technology, blockchain or any related products, and pooled investment vehicles investing in these assets or technology.
On December 30, 2014, the Securities and Exchange Commission (“SEC”) approved a new Financial Industry Regulatory Authority (“FINRA”) rule governing transaction-based payments to unregistered persons. The new FINRA rule—Rule 2040—became effective on August 24, 2015. If you are a FINRA-registered broker-dealer that currently pays an unregistered person, now is a perfect time to examine the relationship and make sure that these payments are proper. In addition, if you are an unregistered or unlicensed person, then you may want to make sure that you can receive or continue receiving these payments. Lastly, if your firm permits “selling groups” of registered representatives for expense paying and marketing purposes, it is also a good time to reassess these practices.
More specifically, this new rule addresses many situations that can arise in a broker-dealer’s regular course of business. These situations include, but are not limited to:
- Asset purchase arrangements between current representatives;
- The receipt of continuing compensation by retiring representatives, their beneficiaries, or estates; and,
- Referral arrangements.
As a result of these new changes, the current FINRA rules addressing payments to non-registered persons, as well as related New York Stock Exchange rules have been deleted from the FINRA rulebook. The rest of this article deals specifically with the requirements and implications of Rule 2040 and Section 15(a) of the Securities Exchange Act (the “Exchange Act”).