Regulatory Compliance E-newsletter – April 2016

Feature of the Month


The long-anticipated fiduciary rule has been announced by the US Department of Labor.  The rule will impose fiduciary status on broker-dealers and investment advisers and insurance firms (“Retirement Advisors”) that provide services to IRAs and ERISA plans. 

While many of the more onerous requirements of the proposed rule have been removed or modified, the rule is still a sea change for broker-dealers and insurance firms, as it now subjects firms providing investment services to IRAs to a fiduciary standard. 

Two big improvements for BD and insurance firms are (a) firms do not have to repaper their existing clients with a new “Best Interest Contract and (b) existing investments can be “grandfathered”.

While the rule has less impact on investment advisers, IAs dealing with retirement plans and IRAs will nevertheless have to fully understand the requirements to be certain that they are being met.

Read More

(Top of page)


Automatically Retrieve FINRA’s Advertising Review Comment Letter with cMAX

Processing the required filings to FINRA’s AREF system and retrieving the comment letters for advertising material are administrative tasks that can consume a great deal of your compliance department’s capacity.  cMAX can reduce the administrative burden with technology that automates the filing of advertising material to FINRA (with Principal approval), and now the retrieval of the comment letter once it becomes available. Once the approved filing has been made, your compliance professionals can focus on other activities with the peace of mind that they will be alerted once the comment letter has been made available by FINRA and automatically linked to the original filing in cMAX.

Additionally, the cMAX Ad Review Module provides:

  • SEC 17a-4(f) compliant storage to maintain records
  • A central data repository backed by a secure business continuity plan (BCP)
  • NRS regulatory expertise combined with state-of-the-art technology to deliver a solution consistent with industry best practices
  • A flexible workflow that can be tailored to your firm’s procedures
  • Submission Form Content tailored to your business which informs reporting
  • Optional Single-Sign-On (SSO) to simplify access and ease-of-use

For more information contact NRS or sign up for a demo today.

(Top of page)


Investment Advisers Act: From Amendments to Political Contributions and More

When was the last time you looked at the Investment Advisers Act of 1940 or one of its related Rule amendments? SEC enforcement actions reveal it’s been less frequently than needed for some firms. A study of the continuing fallout from the 2014 enforcement action against F-Squared Investments, Inc.  (including 2015’s action against  Virtus Investment Advisers, Inc. and 2016’s action against Cantella & Co.) highlights the needs for due diligence on third party claims in performance advertising.   In another vein, the SEC’s (not always successful) objections to the use of the word “may” in the Total Wealth Management, Inc. and The Robare Group, Ltd. cases details the importance of being precise when drafting contracts, Form ADV and other disclosure documents.

Given the current and anticipated changes in the regulatory environment, each NRS Investment Adviser Compliance Symposium holds added significance for compliance professionals and, through a deep dive into the Advisers Act and related Rules, will include updates to help meet these changes including performance and advertising, disclosure, professional ethics and more.

Attend in-person courses of current interest to exchange ideas with seasoned instructors and peers in an all-day forum for one or more days. Participate in lecture and discussion-based learning in an interactive classroom.

Whether you are eager to complete a portion of the education requirement of the NRS Investment Adviser Certified Compliance Professional® (IACCP®) or Core Compliance programs, want to sharpen your understanding of individual compliance topics, or want to earn continuing education credits, these in-person NRS Education events identify key industry requirements and best practices that effectively support compliance programs in the toughest regulatory environment.

(Top of page)


Reasonableness of Reliance on Third-Party Data

On February 23, 2016, the SEC charged Cantella & Co. (“Cantella”), a Boston-based investment adviser, with making misstatements to its advisory clients by advertising F-Squared’s overstated AlphaSector performance track record. AlphaSector was F-Squared’s sector rotation strategy that invested in certain exchange-traded funds (ETFs) that together made up the industries of the S&P 500 Index.  Cantella consented to the entry of the order finding that it violated Advisers Act Sections 204 and 206(4) and Rules 204-2(a)(16) and 206(4)-1(a)(5) thereunder. Without admitting or denying the findings, Cantella agreed to pay a $100,000 penalty.

The Commission argued that Cantella knew or should have known that it did not have a reasonable basis to believe that AlphaSector’s advertising claims were accurate, in part because the AlphaSector strategy significantly outperformed the S&P 500 Index during the time period in question.  The Commission concluded that a general statement Cantella included in its AlphaSector marketing materials indicating that third parties were the source of the performance data and that Cantella did not guarantee their accuracy were entirely insufficient.  Instead, the SEC stated that Cantella’s sole reliance on performance documents that were prepared and provided by F-Squared without any other substantiation, constituted inadequate due diligence and did not form a reasonable basis for such reliance. 

The Cantella matter, along with other related enforcement actions arising out of the F-Squared case have, for a good reason, had an unsettling effect on investment advisers who in their regular course of business rely on third-party performance information. In the wake of these cases, it is not a day too late for advisers to examine their due diligence policies and procedures on third-party managers, sub-advisers and other critical third parties data providers.  The Cantella matter makes it clear that burying one’s head in the sand and hiding behind well-crafted disclosures is a recipe for disaster.  Policies and procedures addressing performance verification, reasonableness testing and other forms of initial and ongoing due diligence and oversight should be implemented without delay.

If you would like to make sure your firm is up for existing and yet to come challenges, please contact us today.


(Top of page)