Regulatory Compliance E-newsletter – May/June 2018

Feature of the Month

NRS Symposia Preview – Chicago and Boston

Each year, NRS holds Compliance Symposia on the West Coast, Midwest, and East Coast. The NRS symposia offers three days of interactive compliance education for attendees. In the next two months, the Midwest symposium held in Chicago and the East Coast symposium held in Boston offer a solid foundation in the Investment Advisers Act of 1940 along with information on the latest in rules and regulations. Below are previews of key sessions:

SEC Examination and Enforcement Update for Investment Advisers
July 19 – 2:00PM to 4:00PM CDT in Chicago, IL and August 16 – 2:00PM to 4:00PM EDT in Boston

This course will speak to how the examination and enforcement culture has changed at the SEC, the new types of SEC exams, and how firms can prepare for them. Sample document request lists will be provided to review specific requested documents for different types of firms.

Our expert presenters will address:

  • SEC’s Latest Examination and Enforcement Priorities
  • Projected Increase in Frequency of Examinations
  • Increasing the number of examiners
  • The role of Big Data in the examination process
  • Steps firms can take before, during and after an exam to improve exam outcomes

Two Persistent Compliance Challenges: Insider Trading and Advisory Contracts
July 17 – 2:00PM to 4:00PM CDT in Chicago and August 14 – 2:00PM to 4:00PM EDT in Boston

The ongoing surge of insider trading investigations and civil and criminal enforcement actions involving Wall Street professionals is a reminder of the importance of an investment adviser having policies and procedures to detect and prevent the misuse of material nonpublic information. This mission-critical topic will be a focal point of the course.

After attending this course, attendees should be able to:

  • Identify the elements of an effective insider trading policy to help detect and prevent the misuse of material nonpublic information
  • Explain and implement the requirements of SEC Rule 204A-1: Investment Adviser Codes of Ethics
  • Employ processes under your code of ethics to effectively prevent and detect insider trading and monitor personal securities trading by adviser personnel
  • Increase awareness of industry standards for client agreements
  • Use practice points to help improve your firm’s advisory agreement

Form ADV Part 1: Annual Updating Amendment and More
July 18 – 8:30AM to 10:30AM CDT in Chicago

Inaccurate and/or inadequate Form ADV disclosures are consistently cited in the SEC’s and many states’ list of “Top Deficiencies.” In this session, experts will systematically walk through Form ADV Part 1 and examine disclosure requirements that impact all advisers (including private fund advisers). This session will also review the method of calculating “regulatory assets under management (RAUM),” examine the many changes to the ADV Part 1A that were effective with this year’s annual updating amendment and discuss how the SEC’s new custody guidance on first- and third-party transfers should be reflected on Form ADV. Finally, your instructors will provide guidance on correlating the information reported in Form ADV Part 1 to disclosures in Form ADV Part 2.

After attending this course, attendees should be able to:

  • Compile and analyze the new information required by the Form ADV amendments in order to have an accurate Annual Amendment.
  • Identify and avoid common Form ADV Part 1 mistakes
  • Scrutinize your firm’s practices for first- and third-party asset transfers to accurately answer custody questions under new SEC guidance.
  • Calculate Regulatory Assets Under Management (RAUM), using Form ADV instructions
  • Establish a team approach to develop and maintain a Form ADV Part 1 that complies with current regulations and is consistent with your firm’s Form ADV Part 2, policies and procedures, advisory contracts, client communications and advertising
  • Isolate areas of potential conflicts of interest to alert and remind advisory firm employees of potential risk

Find out more about our Symposia by visiting below
Chicago Investment Adviser Compliance Symposia
Boston Investment Adviser Compliance Symposia

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The Challenges of Blue Sky Reporting

Over 90% of all blue sky reporting flows through omnibus relationships for which the intermediary is providing a feed directly to the fund or blue sky administrator. This “full omnibus reporting” model introduces challenges in the identification of exempt transactions which are key to the management of blue sky expenses.

A workgroup challenged with analysis and recommendation of options for improved blue sky reporting data has been in place with the Investment Company Institute and its member firms for years. During the discussions, members have provided suggestions to intermediaries to improve reporting, however have also identified issues within the recommendations that have brought to light the challenges in agreeing to a new standard.

NRS is involved in the workgroup and has made suggestions based on its own industry experience and the on-going development and enhancement of its Blue Sky Solution, Transaction Exemption Module (TEM).

Using our application as an example for best business practices, we outlined how TEM is designed to repurpose data files developed to support Rule 22c-2 compliance – Data Share Activity (“DSA”) files and Data Share Position (“DSP”) files – to support blue sky compliance reporting. With the output files created by TEM, a fund sponsor may replace omnibus reporting feeds one relationship at a time, seeing gradual improvement in the data quality and categorization of daily sales transactions.

Specifically, this works by having the application consume DSA files and DSP files, categorize DSA transactions as reportable or exempt from reporting using user-defined rules, and creating an output file, resulting in increased accuracy and effectiveness for reporting over the current omnibus formats.

Criteria for eligibility for the exemptions is tied to key attributes of the transaction or the investor. TEM already supports these exemption filters by capturing the attributes and testing them against the rules library.

For example, Institutional Exemptions are in many cases tied to state specific asset thresholds for particular kinds of investors. Using TEM as an example, we outlined how the solution processes Data Share Position (DSP) files which contain information about the investor and their aggregate assets on each platform, supporting the need to identify investors with assets over certain key thresholds. Purchases by an identified “institutional investor” are categorized as “exempt” and reported in the institutional exemption column in the output file.

While the industry has for decades relied upon the load structure of funds to determine whether certain fund sales transactions are eligible for the sales to existing security holder (“SES”) exemption, TEM facilitates capture and classification of transactions in load funds that are made at NAV, which would not qualify for the SES Exemption, as SES exempt transactions.

Other research and feedback highlighted concerns around PII data contained in the DSA/DSP files. The sensitive nature of the data significantly influenced the design of our application. TEM resides behind the firewall of the fund sponsor, and the output files contain none of the NPPI data from the DSA files. The output file contains data that has been highly filtered and aggregated while providing more detailed categorical breakouts for each CUSIP/State over and above that which is provided in today’s omnibus data feeds from intermediaries. And additional columns in the output file facilitate reconciliation of the output file to the input data to ensure complete accounting for all transactions.

We believe that our recommendations will allow for improved accuracy in blue sky reporting, resolving both under reporting and over reporting issues inherent in today’s omnibus paradigm.


Find out more about NRS Blue Sky Transaction Exemption Module by going here.

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Senior Safe Act Training

According the U.S. Department of Health and Human Services, over 49 million people living in the U.S., or more than 15% of the population, were 65 or older in 2016. The U.S. Census Bureau, in its Distribution of Net Worth, by Net Worth Quintiles and Selected Characteristics, consistently shows that 65–74 year-olds have the highest net worth of all age ranges. For those in the financial services industry, the message is clear: The seniors in this growing population are living longer; as a result, they need to make their investments last longer and protect their investments from those who seek to exploit them.

In 2017, industry regulators published The National Senior Investor Initiative, based on regulatory audits that found that seniors and specified adults are still being exploited. In response, FINRA adopted new rules to prevent the financial exploitation of seniors and specified adults.

Although these new rules are helpful in preventing financial abuses, regulators have recognized that associated persons and supervisors on the frontline may be hesitant to report suspicious activity for fear of violating privacy concerns and the potential legal ramifications. The Senior Safe Act was instituted to provide a safe harbor and immunity for those who report suspicious activity, as long as appropriate training has been administered.

This month’s newsletter is an excerpt from our newest course, Senior Safe Act, which focuses on the applicability and training requirements to qualify for immunity.

Read FIRE on your side here


Learn more about FIRE Solutions here

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Three key factors to a successful compliance program

Compliance Officers continue to be overwhelmed with the myriad challenges that are encountered in the implementation of an effective compliance program. A lot of solutions that are in-the-box do exist. However, they have the potential to fall short.

On the surface, CCO’s should look at developing a compliance program around three key factors. They include:

  • Support and Resources
    A compliance program should be proactive, hands-on, and have the right support structure to get more things done, done well and on time with the detailed documentation regularly requested by regulatory examiners.
  • Insight and Knowledge
    Complying first, before rule becomes law, is key. A compliance program should provide the insight and visibility into high-risk, perennial regulatory focus areas before they become part of an SEC Exam Priority.
  • A Culture of Compliance
    A compliance program is not just about the factors above, but also about how your organization buys into the compliance. Bringing compliance confidence through a culture of compliance will help your firm be proactive.

Translating these factors into specific needs, effective execution of a compliance program includes:

  • Access to a dedicated compliance professional that can help you review your policies and procedures, code of ethics and marketing materials. This individual can then help you determine what your risk factors are, and work with you to effect corrective action.
  • Training and ongoing education including access to course materials, and custom training sessions.
  • The right technology, based on a tried and tested platform that will help you cover your compliance fundamentals.

In summary, while on the surface, this might be challenging, building or enhancing a compliance program can be well-in-hand, with the right resources at your disposal.

Find out how NRS can help by learning more about it’s Partnership Services.

Learn more about NRS Partnership Program

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