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Compliance Corner

Preparing for SEC Examinations
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. Over the past few months several ICSGroup clients have had their very first SEC examination. We’ve noticed some noteworthy trends in the types of issues that the regulators are most concerned. Being aware of these issues will enable you to be more prepared for the inevitable SEC exam and help you avoid being cited for a compliance deficiency. What We’ve Noticed Here we have compiled a
Valuations as a Private Equity Risk
While accounting standards, valuation frameworks and industry guidelines have been moving towards standardization of valuation principles, private equity (“PE”) fund managers still have substantial freedom when valuing their portfolio companies. For example, there is inevitable temptations to present interim performance numbers in a particularly favorable light when raising a follow-on fund or limiting write-downs during down markets. On the other hand, there may be general incentives to smooth returns by using conservative values in normal or good times to avoid a negative surprise to investors when assets are ultimately sold. Recent academic studies have shown that some advisers do in fact inflate valuations during periods of fundraising. The first large scale study on this topic by Tim Jenkinson, et al. stated: “We find that valuations of remaining portfolio companies, and therefore reported returns, are inflated during fundraising, with a gradual reversal once the follow-on fund has been closed. This finding
Creating Value out of Environmental, Social and Governance Integration
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. The focus on environmental, social and governance (ESG) as a means of creating sustainable value is on the rise. Institutional investors are increasingly considering nonfinancial performance, such as ESG issues, when making investment decisions. The three factors of ESG and the corresponding investment-related sustainability issues are: Environmental – Is the company environmentally responsible? Does the company use scarce resources wisely and address environmental risks such as
Five Most Common Compliance Deficiencies
On February 7, 2017, the Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a risk alert identifying the five compliance areas most commonly cited in deficiency letters sent to SEC-registered investment advisers (“RIA”). The risk alert focuses on deficiency letters from more than 1,000 RIA audits conducted over the past two years. This list of top deficiencies can help investment advisers develop a stronger compliance program as well as prepare for a regulatory examination. The OCIE’s top five compliance deficiencies fall under five categories: Compliance Policies and Procedures Required regulatory filings Custody Code of Ethics Books and Records 1.     Compliance Policies and Procedures Rule 206(4)-7 (the “Compliance Rule”) requires that RIAs have written policies and procedures that are “reasonably designed to prevent violations of the Advisers Act”. For a compliance manual to be “reasonably designed to prevent violations of the Investment Advisers Act”, it must be
A Strong Ethics Culture:  How Does Your Firm Rate?
Assessing your firm’s ethics culture is the first step in developing and maintaining a strong ethics culture and, ultimately, to earning investors’ trust in your firm. In remarks from the 2016 FINRA Annual Conference, Chairman and CEO of FINRA, Richard Ketchum stated: “Having spent nearly four decades regulating the securities industry, and spending some time with a firm, I can say unequivocally that firm culture has a profound influence on how a securities firm conducts its business. I can’t count the number of times throughout my career where a culture that doesn’t value ethical behavior has led to compliance failures for a firm and significant harm to investors. High ethical standards are critical to maintaining investors’ trust in the financial markets and in the professionals and firms with which they work.” Beyond the ‘big picture’ justification of “maintaining investors’ trust in the financial markets” there are at least two reasons
Securities Regulatory Outlook for 2017
With 868 enforcement actions brought by the SEC, 2016 was a year of increased regulations and record enforcement actions against Investment Advisors/Investment Companies and Broker Dealers. More than $4 billion in disgorgement and penalties were assessed by the SEC and $145 million in fines and $41 million in restitution by FINRA. Promises of deregulation and a new administration in the White House raises the question: What will 2017 bring? From the Regulators FINRA On January 5, 2017, FINRA released its Regulatory and Examination Priorities letter highlighting areas FINRA will focus on in 2017. The focus areas are: High-Risk and Recidivist Brokers FINRA will devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers. FINRA will identify high-risk brokers and examine their customer interactions and compliance with relevant regulations. They will assess whether firms develop and implement a “supervisory plan reasonably tailored to detect and prevent future misconduct
Department of Labor’s Intial Guidance on Fiduciary Rule
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. On October 27, 2016, the U.S. Department of Labor (“DOL”) released initial guidance primarily addressing the BIC exemption under the Fiduciary Rule. The Fiduciary Rule expands the scope of the definition of fiduciary for employer-sponsored plans and swept in non-ERISA investment vehicles such as IRAs and HSAs. A key aspect of the expanded definition is the “Best Interest Contract” exemption (BIC) which allows firms and advisers
High Integrity Matters
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. Despite mounting regulations, pressure on corporate leadership to run a compliant and ethical organization, and headline-making consequences of corporate misconduct, unethical behavior seems to persist within the financial industry. A survey of the US and UK financial services industries conducted by the University of Notre Dame and Labaton Sucharow LLP concluded, “Numerous individuals continue to believe that engaging in illegal or unethical activity is part and
Operational Due Diligence  –  Part 3 of a 3-Part Series
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. Operational Due Diligence (“ODD”) has grown in importance significantly for institutional investors looking to invest in funds. Prior to 2008, ODD played an insignificant role compared to investment due diligence (“IDD”) when it came to investors making their final investment decisions. Because of the 2008 financial crisis and the string of investment scandals and bankruptcies (e.g. Bernie Madoff and Lehman Brothers) that followed as well as
SEC Amends Recordkeeping Rules
About our Contributors ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions. On August 25, 2016, the Securities and Exchange Commission (“SEC”) adopted amendments to the Investment Advisers Act of 1940 (the “Advisers Act”) and Form ADV to enhance and improve the reporting requirements for registered investment advisers (“RIAs”). The Amendments become effective on October 1, 2017. According to the