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Regulatory Update – April

April 19, 2022

For Investment Advisors + Broker-Dealers

In addition to laying out exam priorities, the report is also a helpful reference with links to all Risk Alerts from 2021 and summarizes the Staff’s prior year’s fiscal year activities. For example, in fiscal year 2021, EXAMS:

    • Completed 3,040 examinations;
      • Similar to pre-COVID-19 pandemic stats for FY 2019
      • Examined roughly 16% of RIAs and 125 investment company complexes
      • Conducted nearly 450 Broker-Dealer examinations, including Reg BI-focused exams, as well as municipal advisors, national exchanges, and transfer agents;
    • Issued more than 2,100 deficiency letters;
    • Ordered firms to return more than $45 million to investors;
    • Referred more than 190 examination findings to the Division of Enforcement;
    • Participated in over 150 conferences and outreach events; and
    • Published 9 Risk Alerts.

While the list of topics may not change dramatically from year to year, the repetition only underscores the Division of Examination’s views of the continuing and, in some cases, escalating risks. We encourage all firms to consider these examination priorities as opportunities for review to determine whether their own compliance programs sufficiently address these topics.  Contributed by Cari Hopfensperger, Senior Director.

For investment advisors and broker-dealers, the big takeaways include:

  1. To a man with a hammer, everything looks like a nail. In response to the question: “Do I need to consider reasonably available alternatives when making account recommendations?” the Staff said:

[Y]ou cannot recommend an account that is not in a retail investor’s best interest solely based on your firm’s limited product menu or arising from limitations on your licensing. Any limitations on account types considered, in the Staff’s view, are material facts that should be disclosed (along with other relevant material facts, including services, fees, and conflicts of interest) to retail investors.

Understandably, the Staff wants advisors and broker-dealers to put their retail clients’ interests first. And in some situations, a firm may not be the best fit for a potential client. But how far does the Staff want investment professionals to go? For example, are firms expected to recommend insurance or bank products for clients with limited investment experience and low risk tolerance? The answer is not clear. To deal with this conundrum, investment professionals should follow a documented process for making account recommendations. Products and services should be matched to clients based on their needs and preferences. If no match exists, the firm should consider turning away that client and documenting the interaction. Firms should have training programs to ensure their employees understand how to select the right products and services for clients.

  1. Garbage in, garbage out. The Staff requires that investment professionals gather the relevant data before making an account recommendation, which includes the retail investor’s financial situation (including current income) and needs, investments, assets and debts, marital status, tax status, age, investment time horizon, liquidity needs, risk tolerance, investment experience, investment objectives, and financial goals. Investment professionals should also understand what the retail investor wants, such as whether they want to make investment decisions or leave it to the professional and whether they want ongoing account management. Compliance officers should consider reviewing the Bulletin’s recommendations and comparing them against current practices to ensure that investment professionals get all the right information.
  2. Real knowledge is to know the extent of one’s ignorance.[1] According to the Staff, if the investor does not provide the answers needed, then the investment professional cannot provide that prospect with a recommendation. Given this advice, firms should expect to see examination requests for a list of investors turned away.
  3. Always do right – this will gratify some and astonish the rest.[2] To have a reasonable basis for believing the account recommendation is in the client’s best interest, the Staff says investment professionals should consider the products and services provided in the account, the potential costs to the retail investor, alternative account types available, and whether the account offers the services the client wants. Finally, the investment professional must also determine whether the recommended account is consistent with the client’s investment profile and stated goals. Firms should consider the best way to capture these elements, such as a checklist or account recommendation form.
  4. Cash is King. The Staff devotes several paragraphs to discussing cost considerations; therefore, investment advisors and broker-dealers should make this a priority. Specifically, firms should keep written records supporting recommendations for higher-cost products, especially if lower-cost products are available. Additionally, the Staff includes many examples of the types of costs to be evaluated as part of the process, including account fees (e.g., asset-based, engagement, hourly), commissions and transaction costs, tax considerations, and indirect costs such as payment for order flow and cash sweep products. Indirect costs such as fund management, distribution and servicing fees, and transaction costs should also be included in the evaluation. Firms should consider maintaining records showing their evaluation of investment products’ direct and indirect costs.
  5. Special Considerations for Rollovers. The Staff appears to be piggy-backing onto the Department of Labor’s Prohibited Transaction Exemption 2020-02 (PTE 2020-02) by recommending that investment professionals consider the option of leaving a retail investor’s investments in their employer’s plan when determining what is in the client’s best interest (if that is an option). Like PTE 2020-02, the Staff also recommended that firms “obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan” when making a rollover recommendation. This Bulletin signals the Staff’s intent to enforce the documentation requirements mandated by PTE 2020-02.
  6. The Customer is NOT Always Right. According to the Bulletin, firms and their investment professionals cannot rely solely on a retail investor’s preference without discussing other reasonably available alternatives, including the type of account that is in the client’s best interest based on the information provided. If the client directs the firm to open an account contrary to the recommendation, however, the firm “would not be required to refuse to accept the investor’s direction.”
  7. Get it in writing. The Staff expects documentation to support account recommendations. “In the staff’s view, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for certain recommendations.”
  8. Don’t Show Them the Money. The Staff encourages firms to drop any compensation or non-compensation incentives that encourage employees to favor one type of account over another.
  9. Someone to Watch Over Me.[3] Another best practice recommended by the Staff is for firms to “implement supervisory procedures to monitor recommendations that involve the rollover or transfer of assets from one type of account to another (such as recommendations to roll over or transfer assets in an ERISA account to an IRA).”  Firms should consider the best way to supervise account rollovers, such as requiring manager approval before account opening. Alternatively, the firm could adopt a policy that prevents opening an account if the financial professional does not provide the required documentation, a/k/a NIGO (“not in good order”). Keep in mind that although compliance officers can test the process after the fact, supervision is management’s responsibility.
  10. Hitting Them Where it Hurts. Finally, the Staff recommends “adjusting compensation” for financial professionals “who fail to adequately manage conflicts of interest associated with account recommendations.” This is possibly the best piece of advice in the Bulletin. In the financial services industry, decreasing someone’s bonus for failure to do the right thing is often the best way to get their attention.

This Bulletin shows how high the SEC has set the bar for investment professionals dealing with retail clients, although arguably the Staff may be overreaching by suggesting firms look beyond their own offerings to consider investment products they are not licensed to sell. Nonetheless, the Staff is communicating its expectations and investment firms should be listening and learning. The SEC will be asking firms how they meet their Reg. BI and fiduciary obligations in their next exam. Contributed by Jaqueline Hummel, Managing Director.

  • FINRA Regulatory Notice 22-10 Addresses CCO Liability and Supervision. In this recent regulatory notice, FINRA stated that it will not prosecute Chief Compliance Officers for failure to supervise, where the CCO has not been delegated specific supervisory responsibilities. As the industry’s conversation over CCO liability continues to evolve, broker-dealers and investment advisors should pay attention. The key is understanding the difference between supervision and compliance oversight.  The ideal structure is one where designated principals (excluding the CCO) are charged with the supervision of the firm’s activities and representatives, and the CCO, having little to no supervisory activities, serves as an advisor to Executive Management and monitors the effectiveness of the Firm’s compliance program. For additional research, check out Les Abromovitz’s May 1, 2022 article about the NSCP Firm and CCO Liability Framework and the New York City Bar’s Framework for Chief Compliance Officer Liability in the Financial Sector. Contributed by Rochelle Truzzi, Senior Director.
  • Utah Becomes the Fourth State to Adopt Comprehensive Privacy Law. Following in the footsteps of California, Colorado, and Virginia, Utah has enacted the Utah Consumer Privacy Act (the Act). The Act becomes effective December 31, 2023. It applies to any controller or processor conducting business in the state with annual revenue of $25 million or greater AND satisfies at least one of the following:
    • During a calendar year, controls, or processes personal data of 100,000 or more consumers, or
    • Derives over 50% of the firm’s gross revenue from the sale of personal data and controls or processes personal data of 25,000 or more consumers.

The Act does not apply to a financial institution, or an affiliate of a financial institution governed by, or personal data collected, processed, sold, or disclosed following Title V of the Gramm-Leach-Bliley Act and related regulations, (among other types of entities).

For more information, check out Husch Blackwell’s Byte Back, which contains a 2022 State Privacy Law Tracker and a US State Privacy Law Database.  Contributed by Cari Hopfensperger, Senior Director.

Lessons Learned 

  • Reminder to Private Fund Advisors – Deliver Your Audited Financials Timely or Face Custody Rule Violations. The SEC recently settled with a private equity firm for ultimately failing to distribute annual audited financial statements on time to its private fund investors. The firm failed to deliver audited financials timely in 2014 and again for fiscal years 2018 through 2020. Although untimely delivery was the violation, the case highlighted that although the firm engaged auditors, the advisor failed to produce requested records, so the audits could not be completed. The firm also reallocated certain fund expenses to a different fund than the one originally booked without providing sufficient supporting documentation. To make matters worse, the advisor was also relying on the audited financials exception under the custody rule for holding privately offered certificated securities. By failing to deliver the financials on time, the firm also negated its ability to rely on this exception.

 The case provides some valuable lessons.  To rely on the audited financials exception under the custody rule, private fund advisors must deliver audited financials to investors within 120 days of fiscal year-end for private funds and within 180 days for private funds of funds. In this situation, the advisor caused this delay by reallocating expenses between funds without sufficient documentation and without consulting with the auditor about the change.  The advisor also failed to take the advice of a compliance consultant who recommended the firm implement policies and procedures regarding fund expense allocations.   Without admitting or denying the order’s findings, the advisor consented to a cease-and-desist order and a censure and agreed to pay a civil money penalty of $75,000. Contributed by Andrea Penn, Senior Director.

  • SEC Nails VC Fund CEO for Bad Fee Calculations and Undisclosed Inter-Fund Loans. The SEC charged an exempt reporting advisor (ERA) and venture capital fund manager and its CEO for making misleading statements about fund management fees in marketing materials. The firm described the fee structure as “industry standard” and “2 and 20”. However, instead of charging a 2% management fee annually over the fund’s 10-year term, with a separate 20% potential annual performance fee (which is what many consider as “industry standard, 2 and 20”), the advisor charged management fees equal to 20% of an investor’s initial fund investment upfront (representing 2% of annual fees over the 10-year term).

Advisors should note that the CEO was named individually, possibly because he approved the language and even personally used it.  Moreover, he continued this practice despite receiving multiple investor complaints and questions from the company’s board and other leadership. Finally, the CEO admitted that he was unaware of any other advisor that collected multiple years’ worth of management fees at the time of initial investment.

The CEO was also involved in inter-fund loans and cash transfers between funds in violation of the funds’ operating agreements, without disclosure to investors.  To settle the charges, the firm repaid $4.7 million to affected funds and agreed to pay a $700,000 penalty, whereas the CEO agreed to pay a $100,000 penalty. This case demonstrates again the regulatory scrutiny on private fund advisors, including those are exempt from SEC registration. Contributed by Andrea Penn, Senior Director.

  • SEC Provides Guidance on Disclosures for Advisor Recommending Proprietary Funds. A large advisor recently settled with the SEC for investing discretionary client accounts in proprietary mutual funds (“Proprietary Funds”) that resulted in rule 12b-1, shareholder servicing, and other fees to affiliated entities without proper disclosure. For context, the advisor tyipcally invested clients in model portfolios of individual securities; however, in certain cases, the firm instead invested client assets in one or more proprietary mutual funds meant to mirror the diversification in those individual securities portfolios. The advisor also offered mutual funds to provide these strategies, most with two share classes – one with a 12b-1 fee and one without. Clients coming to the advisor from its affiliated “bank channel” received the share class without 12b-1 fees, and clients from a third-party advisor received the share class with 12b1-fees.

In its findings, the SEC provided its thoughts on the appropriate disclosures.  First, the firm did not disclose to clients who did not have sufficient assets to invest in a managed account that they would be placed in Proprietary Funds and pay an account-level fee in addition to the mutual fund advisory fees.  Second, the firm also failed to tell clients that it selected its Proprietary Funds over “peer funds within the same asset classes.”  Finally, the firm failed to let clients know that lower-cost share classes were available if they opened an account through the advisor’s “bank channel” instead of through a third-party advisor. While there is seemingly no end in sight to the SEC’s pursuit of share class selection-related conflicts, this case is an informative read. In particular, firms that limit access to certain share classes by distribution channel should pay attention to ensure that conflict disclosures are sufficiently robust.  Contributed by Cari Hopfensperger, Senior Director.

Worth Reading, Watching, and Hearing  

To-Do Checklists for the Month of May 2022


  • Form 13F: Form 13F quarterly filing is due for Q1 2022 within 45 days after the end of the calendar quarter. Due May 16, 2022.
  • ERISA Schedule C of Form 5500 Disclosure: An advisor may be required to report certain information to its ERISA plan clients and investors for their use in completing Department of Labor Form 5500, including details about compensation received concerning ERISA plan assets that the advisor manages or that are invested in the advisor’s funds. If you have ERISA plan clients that follow a calendar year, they may request this information to file Form 5500 by July 31, 2022. (ERISA plan clients that do not follow a calendar year must submit Form 5500 by the last day of the seventh month following the plan’s year-)


  • Blue Sky Filings (Form D). Advisors to private funds should review fund blue sky filings and determine whether any amended or new filings are necessary.  Generally, most states require a notice filing (“blue sky filing”) within 15 days of the first sale of interests in a fund, but state laws vary. Did you know that Foreside offers a convenient and economical blue sky filing service to help firms manage this complicated monthly task? Give us a call to discuss your needs further.  Due May 15, 2022.
  • Form PF for Large Hedge Fund Advisors: Large hedge fund advisors must file Form PF within 60 days of each quarter-end on the IARD system. Due May 30, 2022.


  • Form OBS: For the Quarter ending March 31. Unless subject to the de minimis exception, all clearing, self-clearing, and carrying firms and those firms that have a minimum dollar net capital requirement equal to or greater than $100,000 and at least $10 million in reportable derivatives and other off-balance sheet items must submit Form OBS as of the last day of a reporting period within 22 business days of the end of each calendar quarter via eFOCUS. Firms that claim the de minimis exemption must affirmatively indicate through the eFOCUS system that no filing is required for the reporting period. Due May 2, 2022.
  • Rule 17a-5 Monthly and Fifth FOCUS Part II/IIA Filings: For the period ending April 30. For firms required to submit monthly FOCUS filings and those firms whose fiscal year-end is a date other than a calendar quarter. Due May 24, 2022.
  • Supplemental Inventory Schedule (“SIS”): For the month ending April 30. The SIS must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, with inventory positions as of the end of the FOCUS or FOGS reporting period, unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000; or (2) inventory positions consisting only of money market mutual funds. A firm with inventory positions consisting only of money market mutual funds must affirmatively indicate through the eFOCUS system that no SIS filing is required for the reporting period. Due May 27, 2022.
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of October 31. SIPC members are required to file for the first half of the fiscal year a SIPC-6 General Assessment Payment Form together with the assessment owed within 30 days after the period covered. Due May 30, 2022.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of March 31. SIPC members are required to file the SIPC-7 General Assessment Reconciliation Form, together with the assessment owed (less any assessment paid with the SIPC-6) within 60 days after the Fiscal Year-End. Due May 30, 2022.
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of April 30 AND claiming an exclusion from SIPC Membership under Section 78ccc(a)(2)(A) of the Securities Investor Protection Act of 1970. This annual filing is due within 30 days of the beginning of each fiscal year. Due May 31, 2022.
  • Annual Reports for Fiscal Year-End March 31: FINRA requires that member firms submit their annual audit reports in electronic form. Firms must also file the report at the regional office of the SEC in which the firm has its principal place of business and the SEC’s principal office in Washington, DC. Firms registered in Arizona, Hawaii, Louisiana, or New Hampshire may have additional filing requirements. Due May 31, 2022 (Conditional 30-Day Extension may be available).



  • Form N-MFP. Form N-MFP (Monthly Schedule of Portfolio Holdings of Money Market Funds) reports information about the fund’s holdings as of the last business day of the prior calendar month and must be filed no later than the fifth business day of each calendar month. Due May 6, 2022.
  • Form N-PORT. Funds with a fiscal quarter end of March 31, must file Form N-PORT reporting month end information for each month-end in each fiscal quarter no later than 60 days after fiscal quarter-end. Due May 30, 2022. Funds must also prepare the information reported on Form N-PORT within 30 days after every month-end and retain these records, which are subject to SEC inspection.




[1] Confucius

[2] Mark Twain

[3] Ira Gershwin and Howard Dietz


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This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.