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Compliance Corner

Welcome to Compliance Corner! ICSGroup will bring you monthly updates on regulatory trends and issues affecting investment advisors, particularly the issues that are most relevant to advisors of PE funds. Our goal is to help NAIC member firms develop and implement robust compliance programs that meet regulatory requirements and institutional investor expectations. We hope you find this information helpful and welcome your feedback. – Medina Jett, President, ICSGroup

One Size Does Not Fit All: The CAB License Offers Relaxed Regulatory Requirements for Limited Broker Dealers

One Size Does Not Fit All: The CAB License Offers Relaxed Regulatory Requirements for Limited Broker Dealers

ICSGroup has received several inquiries over the past several months about the Capital Acquisition Broker (“CAB”) License, its boundaries and requirements, such that I thought I would make it the topic of this month’s regulatory article. This information is most applicable to placement agents, private funds, investment bankers and the compliance professionals who help keep them out of trouble. The Problem the CAB License is Intended to Address. Prior to the establishment of the CAB license, all broker-dealers were required to comply with a single set of fairly onerous requirements. Individuals and businesses that limit their activities to capital raising…
Personal Securities Trade Reporting for Private Equity Firms: A Round Peg in A Square Hole

Personal Securities Trade Reporting for Private Equity Firms: A Round Peg in A Square Hole

In 2004 the SEC has adopted Rule 204A-1 (the “Rule”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Rule requires each adviser’s “Access Person”1
Best Practices Guide for Marketing Reviews

Best Practices Guide for Marketing Reviews

1. Marketing and Advertising Rules Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) prohibits the use of fraudulent or misleading advertising or marketing material. In order to ensure that marketing materials comply with the Investment Advisors Act’s anti-fraud rules and SEC no-action letters and guidance, investment advisors should have in place strong supervisory and compliance policies and procedures. Because the anti-fraud rules apply to all investment advisors, not just SEC registered advisors, it is important for all investment advisors to implement similar policies and procedures governing marketing materials. Under SEC Rule 156, private…
Best Practices Guide for Solicitation of Investors

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.…
Best Practices Guide for Email Surveillance

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…
SEC Risk Alerts Provide a Great “Heads Up”

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…
Marketing & Advertising Pitfalls: What’s an Investment Adviser to Do?

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…
2017 – The Year of SEC Exams

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,…
Amendments to Form ADV are Now Effective

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…
CABs Now Subject to Pay-To-Play Rules

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…
SEC Issues Advertising Risk Alert

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…
The Rise of Text Messaging for Business Purposes

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…
New Disclosures for Form ADV

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…
Preparing for SEC Examinations

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…
Valuations as a Private Equity Risk

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…
Creating Value out of Environmental, Social and Governance Integration

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…
Five Most Common Compliance Deficiencies

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…
A Strong Ethics Culture:  How Does Your Firm Rate?

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…
Securities Regulatory Outlook for 2017

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…
Department of Labor’s Intial Guidance on Fiduciary Rule

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…
High Integrity Matters

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…
Operational Due Diligence  –  Part 3 of a 3-Part Series

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…
SEC Amends Recordkeeping Rules

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…
Proposed Regulation AT: Has the CFTC Gone Too Far?

Proposed Regulation AT: Has the CFTC Gone Too Far?

The Commodity Futures Trading Commission (“CFTC”) has recently caused quite a flurry among automated traders with its proposed Regulation Automated Trading (“Regulation AT”). The days of pit trading are long gone. Automated trades involving algorithms now make up a substantial portion of U.S. markets. Trading disruptions, unfortunately, have steadily increased as the use of automated trading has risen.
Business Continuity Plans

Business Continuity Plans

Although business continuity plans (“BCPs”) have been an SEC expectation, on June 28, 2016 the Securities and Exchange Commission (“SEC”) proposed a rule that would require all SEC registered investment advisers to adopt and implement a business continuity and transition plan.
Effective Due Diligence of Sub-Advisers: A Fiduciary Duty  –  Part 2 of a 3-Part Series

Effective Due Diligence of Sub-Advisers: A Fiduciary Duty – Part 2 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. In Part 1 of ICSGroup’s Due Diligence Series, Managing Vendor Risks: Implementing an Effective Third-Party Due…
Must Private Equity Firms Register as Broker Dealers?

Must Private Equity Firms Register as Broker Dealers?

Does your firm routinely solicit investors and/or co-investors? Does it market its funds to endowments, pension funds and high net worth individuals? Does your firm advise companies on mergers and acquisitions and debt offerings? If your firm receives compensation for any of these services, then you could be engaging in broker-dealer activities for which registration as a broker-dealer is required.
Managing Vendor Risks: Implementing an Effective Third-Party Due Diligence Program – <i>Part 1 of a 3-Part Series</i>

Managing Vendor Risks: Implementing an Effective Third-Party Due Diligence Program – Part 1 of a 3-Part Series

Financial services firms are increasingly contracting with third-party service providers to perform activities related to their business functions and regulatory responsibilities.
Exclusively for NAIC Members: ICS Group Offers Complimentary Mock Exams

Exclusively for NAIC Members: ICS Group Offers Complimentary Mock Exams

The SEC expects to increase the number of investment adviser examinations in 2016. The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) is also increasing the number of examiners by almost 20% this year...
Form ADV Danger Zones

Form ADV Danger Zones

March 8, 2016 - March 30 is the deadline for registered investment advisory (“RIA”) firms to file Form ADV annual updating amendments. Executives, including CCOs, who have intentionally or inadvertently misstated or failed to disclose material information on their Form ADV have been personally fined and/or barred from the financial industry. As NAIC’s Compliance Partner we’re here to help you avoid regulatory blemishes.
Don’t Get Charged with Misallocating Fees and Expenses

Don’t Get Charged with Misallocating Fees and Expenses

February 9, 2016 - Over the past several years, the Securities and Exchange Commission (“SEC”) has been increasingly focused on the fee and expense practices of private equity firms. In 2016, the SEC will continue its focus on whether fee arrangements are in the best interest of the investor and if adequate disclosures are made to investors about fees and expenses.
Compliance Hot Topics for 2016

Compliance Hot Topics for 2016

January 12, 2016 - For our Compliance Corner inaugural issue, we are highlighting some of the compliance hot topics that will be front and center for the SEC. We believe this list, while not exhaustive, addresses the high-risk practice areas and major initiatives that can help you build an effective compliance program.

Founded in 2008, ICSGroup is a boutique compliance firm that provides regulatory compliance services to registered investment advisors, including advisors to private equity funds, hedge funds and fund of funds, banking institutions and insurance companies. Prior to starting ICSGroup, its founder, Medina Jett, served in senior compliance roles at several large financial services companies where, in spite of good values and a strong ethical culture, compliance was often at odds with business interests.

Medina envisioned an easier way to deliver compliance services. ICSGroup partners with its clients to create risk-appropriate compliance solutions, to integrate compliance procedures seamlessly into business practices, and to create a culture of employee engagement, while meeting regulatory expectations and enhancing investor confidence. ICSGroup is a minority and woman-owned business enterprise with offices in downtown Hartford, CT and downtown Manhattan.

Contact ICS Group

ICSGroup offers a variety of compliance services ranging from a la carte services to fully outsourcing the compliance function.