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Compliance Corner

Best Practices Guide for Solicitation of Investors
PRIVATE PLACEMENTS Advisors to private funds engage in the solicitation of the private placement of interests in a fund. Interests in private funds are not registered under U.S. or foreign securities laws because of the exemption offered by Rule 506 of Regulation D. Previously, private funds were prohibited by Rule 506 from publicly offering and conducting general advertising or general solicitation in offering and selling the private fund’s securities. In 2014 the JOBS Act directed the SEC to remove the prohibition on general solicitation provided that sales are limited to “accredited investors” that issuers have taken reasonable steps to verify. Investment advisors are permitted to engage in private or general solicitation with respect to private placement of interests in a fund. The type of solicitation used should be determined and maintained throughout the capital raise process. Private Solicitation Under the private solicitation rules, investment advisors are prohibited from soliciting investors
Best Practices Guide for Email Surveillance
An important topic in SEC exams has been the application of the SEC’s “Books and Records Rule” to the storage and review of electronic communications by Registered Investment Advisors (RIAs). This Best Practices Guide provides valuable information based on our experience, observations and input from our clients. Emails, and their attachments, fall under the regulatory definition of “written communications” and therefore are subject to the archiving requirements defined within the Books and Records Rule. The SEC requires that all electronic communications be retained and reviewed. The same logic that applies to email surveillance also apply to review of all other forms of electronic communication, such as text messages, instant messages, and messages sent within social media platforms. For ease of reference, we will refer to all electronic communications as emails. Policy Requirement: Because written communications transmitted via any of these electronic means must be captured, archived and reviewed pursuant to
SEC Risk Alerts Provide a Great “Heads Up”
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. In addition to the annual publication of its exam priorities, the SEC’s OCIE issues periodic Risk Alerts which are aimed at promoting compliance by sharing the most frequently-cited deficiencies arising from its exam program. To bring attention to issues that the SEC has concerns about and to foster increased compliance, the SEC issues Risk Alerts. Two Risk Alerts have been issued so far in 2018: 1.
Marketing & Advertising Pitfalls: What’s an Investment Adviser to Do?
In September 2017, we provided a summary of the SEC’s Advertising Risk Alert noting that the most common deficiencies cited were all related to misleading performance advertising. Now we will look more broadly at the marketing and advertising challenges advisers face and offer guidance on how to avoid common marketing and advertising pitfalls, namely the use of testimonials and endorsements, social media, and performance advertising. Rule 206(4)-1 (the “Testimonial Rule”) explicitly prohibits testimonials and endorsements of any kind. The SEC consistently interprets testimonials to include any statement expressing a client’s experience with an advisor or endorsement of an adviser. Testimonials imply that the experience of the client providing the testimonial is typical of the experience other persons might have working with that adviser. Such expressions are therefore considered to be misleading. Advisors to private equity funds must be mindful of the fact that the SEC has determined that favorable statements
2017 – The Year of SEC Exams
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. Now that the holidays are behind us and we look forward to a promising new year, I find myself marveling at the year we had and proud of the results we achieved. We were busy on-boarding many new clients and continuing to manage and update the compliance programs for our existing clients. Meanwhile, the OCIE was busy trying to meet its goal of examining 40% of
Amendments to Form ADV are Now Effective
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 amendments to Form ADV became effective on October 1st. Unless you registered with the SEC on or after October 1st or have had a material change requiring an “other-than-annual” amendment since that date, you have not yet seen the following on the amended Form ADV. 1. Separately Managed Accounts Prior to the amendments, investment advisors disclosed information on their pooled investment vehicles and the amount
CABs Now Subject to Pay-To-Play 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. In August 2016 the SEC approved FINRA rules for a new category of advisers known as “Capital-Acquisition Brokers” or “CABs”. CABs are firms that engage in a limited range of activities, essentially advising companies and private equity funds on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions. But, unlike full-service brokers, CABs are
SEC Issues Advertising Risk Alert
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. In September 2017, the OCIE issued a Risk Alert notifying advisors of the most common deficiencies related to the Advertising Rule. Interestingly, all the deficiencies identified involved misleading performance advertising. The takeaways from the Risk Alert are detailed below. Misleading Performance Results. The Staff observed advisers that presented performance results without deducting advisory fees. The Staff also found that advisers used advertisements that compared results to
The Rise of Text Messaging for Business Purposes
Text messaging. We’re all doing it. It’s not only easy to do, but also a highly effective and efficient way to communicate. According to a survey conducted by Smarsh, a firm specializing in cloud-based archiving solutions, text messaging is the most requested channel for business use by employees in financial firms, up over 20 percent from last year. The increasing number of professionals using text messaging for business purposes has caught the attention of regulators and raises compliance and supervision concerns. During 2016 SEC examinations, twenty-one percent of firms examined were required to provide their mobile device communications policy. Drafting a Policy Surprisingly, more than one-third (36 percent) of the firms allowing text messaging for business purposes lack a written policy governing its use and almost half (48 percent) lack an archiving solution. The first step towards laying a foundation for text message compliance is to have a policy governing
New Disclosures for Form ADV
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. Beginning on October 1, 2017, investment advisers will be expected to comply with the various new disclosures required on the Form ADV. Earlier this summer, the SEC released additional guidance for investment advisers and compliance professionals in the form of frequently asked questions (“FAQ”) to help answer any remaining questions advisers may have on how to comply with the new amendments to Form ADV. We have