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January 11, 2022

January regulatory update

For Investment Advisors

Robo-Advisers Flunk Compliance 101.  The SEC’s Division of Examinations (the “Division”) recently issued a Risk Alert focused on advisors that offer automated digital advisory services, also known as “robo-advisors.”  Unsurprisingly, the Division found that many robo-advisors failed to heed the guidance issued by the Division of Investment Management back in 2017, and their compliance programs have suffered.  The litany of compliance problems the Division noted in the Risk Alert runs the gamut, including failure to get and retain sufficient information to determine suitability, misleading performance advertising, inadequate disclosures, and failure to comply with the Investment Company Act’s Rule 3a-4 safe harbor provisions (allowing advisors to avoid having to register as an investment company for providing the same or similar investment advice on a discretionary basis to a large number of clients).

Although aimed at robo-advisors, the Alert provides good advice for all advisors reviewing their compliance programs. For example, the Division cited the following deficiencies:

  • Failure to obtain “sufficient information to allow the advisor to conclude that its initial and ongoing advice were suitable and appropriate for that client based on the client’s financial situation and investment objectives” meaning that responses to a questionnaire may not be sufficient to address the client’s investment needs and additional interaction may be required.
  • Failure to have written policies and procedures to oversee the automated platforms, including monitoring for scheduled rebalancing and detecting trading errors, and actions to take in light of unforeseen or unusual market conditions that portfolio management software might not adequately address.
  • Failure to perform and document best execution reviews.
  • Failure to disclose the trade error correction procedure, including the treatment of profits and losses from trade errors; and
  • Inconsistent disclosures regarding advisory fee calculations.

These are common deficiencies, so advisors should consider whether their compliance policies and procedures address these issues.

For advisors that provide automated digital advisory services, consider the following best practices outlined in the Alert:

  • Tailoring your compliance program to your actual business model, paying special attention to (1) portfolio management (e.g., having a solid process for determining that the investment advice provided is in the best interest of your clients, documenting periodic best execution reviews, and ensuring that disclosures reflect actual practices); (2) custody; and (3) creation and retention of required books and records.
  • Providing “a description of the assumptions and limitations of the algorithm used to manage client accounts (e.g., if the algorithm is based on modern portfolio theory, a description of the assumptions behind and the limitations of that theory)” and “a description of the particular risks inherent in the use of an algorithm to manage client accounts (e.g., that the algorithm might rebalance client accounts without regard to market conditions or on a more frequent basis than the client might expect; that the algorithm may not address prolonged changes in market conditions).”
  • Testing software, such as algorithms, to ensure it is working as expected. Best practices include quarterly testing that involves software developers and portfolio management, compliance, and IT staff.
  • Safeguarding algorithms from unauthorized changes. Like any system containing sensitive information, firms should control access to their software and periodically review access logs.

Robo-advisors should also review the SEC’s Investment Management Guidance (see link above), which provides detailed advice on disclosures the SEC expects to see, recommendations on how to design client questionnaires, and compliance policies and procedures specific to their business models.

The SEC has robo-advisors on its radar and will likely focus on them over the course of the next few exam cycles.  Contributed by Alan Foxman, Managing Director.

Do the Math: SEC Finds Advisers Still Weak on Fee Billing. The SEC’s Division of Examinations (“Division”) delivered yet another Risk Alert containing its observations relating to advisors’ fee calculations, following up the Risk Alert issued in April 2018 on the same topic.  Advisory fees always receive a lot of attention during SEC examinations because, as the recent Risk Alert notes, “every dollar an investor pays in fees and expenses is a dollar not invested for the investor’s benefit.”  In this Alert, the Division summarized the most common deficiencies from about 130 examinations.

The Division found issues with fee calculations, including using incorrect percentages, double-billing, breakpoint or tiered billing rates being calculated incorrectly, not householding client accounts for discounts and using incorrect valuations. Other advisors failed to refund prepaid fees on terminated accounts or did not assess fees for new accounts on a pro-rata basis. The SEC also noted that it was inappropriate to require clients to provide written requests for refunds of unearned advisory fees.

Form ADV Part 2A disclosure relating to fees and the fee billing process was also found wanting by the Division.  Examples of fee-related disclosure issues include inconsistent or insufficient disclosures of the treatment of cash flows and their effect on fees; failure to describe the timing of fee billing; the source of valuations used to calculate fees; and disclosure of a firm’s minimum fees, additional fees charged to clients, and applicable discounts.

Other areas discussed by the Division included missing or inadequate policies and procedures on fee billing and inaccurate financial statements.

To address the deficiencies highlighted in the Risk Alert, advisors should consider:

  1. Developing written policies and procedures outlining the billing process, addressing how fees should be calculated and who is responsible for overseeing the process.
  2. Reviewing Form ADV Part 2A, investment management agreements, and other disclosures to ensure that they are consistent and that they address (i) the timing of fee billing (e.g., monthly, quarterly, in advance, or in arrears), (ii) the values used to calculate advisory fees (e.g., month-end accounts values or average daily account values), (iii) the effect of cash flows on fees, (iv) whether fees are negotiable, (v) any additional fees such as minimum fees, platform administration fees, and wrap fee program fees, and (vi) available discounts.
  3. Adopting a robust account onboarding process that requires a review to ensure that that billing information for each client is consistent with the terms of the investment management agreement and has been entered into the billing system correctly.
  4. Centralize the billing process and institute quality controls to ensure that fees charged to clients are consistent with advisory contracts, disclosures, and firm procedures.
  5. Developing checklists and other tools to help reconcile fee calculations with the investment management agreement to ensure consistency by staff.
  6. Instituting periodic transactional testing of fees (such as by operations or accounting during the invoicing process) as well as forensic testing by compliance (such as during the annual compliance program review) to ensure that the fees are being calculated in accordance with the investment management agreement’s terms.

Despite our best efforts, process, and system developments, mistakes happen.  But advisors that establish written policies and procedures to ensure that fees are billed accurately and consistent with the investment management agreement are better off in the long run.

Fee billing issues have been an examination priority each year since 2018.  Fee calculation and billing has been, and will continue to be, an area that “warrants routine review during investment adviser examinations.”  Contributed by Alan Foxman, Managing Director.

For Broker-Dealers and Investment Advisors

SEC Touts 2021 Enforcement Record. Just in time to dampen our holiday cheer, the SEC released its enforcement results for 2021.  Like prior years, the report congratulates the SEC’s Enforcement Division for obtaining judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties.  This compares to $3.6 billion in disgorgement and about $1.1 million in penalties in the fiscal year 2020. The Enforcement Division brought 697 enforcement actions, down from 715 in 2020, although the Commission stressed that there was a seven percent increase in new standalone enforcement actions from 2020 (434 in 2021 versus 405 in 2020).   Investment advisors and investment companies received the most attention from the Enforcement Division, with 23 percent of total cases, followed closely by securities offerings at 22 percent.  Delinquent filings and broker-dealers came in at third and fourth, with 17 and 16 percent of cases, respectively.

The big takeaways from the report include:

  1. The Division’s long-term priorities include individual accountability for gatekeepers and market participants. For example, in 2021, 70 percent of new enforcement actions involved at least one individual defendant or respondent.  The SEC charged auditors, CPAs, and attorneys with improper conduct.  Investment advisors, fund managers, and traders were also targeted for fraud, misleading investors, unauthorized trading, and breaching their fiduciary duties.
  2. Emerging market trends are fair game. The SEC highlighted its actions in the crypto and special purpose acquisition company (SPAC) spaces, which seem especially attractive for fraudsters.
  3. Penalties may be on the rise. Disgorgement was down from last year, likely because of the Supreme Court’s decision in Lui vs. SEC, which limited this remedy to the wrongdoer’s net profits.  But the total penalties imposed increased 33 percent from 2020.
  4. SEC will continue to get creative. For example, in 2021, the SEC brought insider trading charges against an individual for trading in another company’s options based on confidential information from his own company.
  5. Whistleblowers grew in power. The enforcement report highlighted two of the highest awards in the program’s history, including a $114 million and $110 million award to recent tipsters.  In fiscal year 2021, the SEC awarded more than $564 million awards to 108 whistleblowers and passed the $1 billion mark to total awards issued under the program. And the public is ready and willing to help.  According to the SEC’s annual report to Congress on the Whistleblower Program, the SEC received 12,210 tips, a 76 percent increase over the prior fiscal year.

SEC Chair Gary Gensler wants everyone to know there’s a tough new sheriff in town.  “As these results show, we go after misconduct wherever we find it in the financial system, holding individuals and companies accountable, without fear or favor, across the $100-plus trillion capital markets we oversee.” Contributed by Jaqueline M. Hummel, Managing Director.

For Broker-Dealers

FINRA Allows Registrants to Hold onto Their Qualifications After Leaving the Industry.  FINRA announced two pivotal changes to its continuing education program, including a rule change that allows those that have exited the industry to retain their qualifications for up to five years, provided they keep up with their continuing education requirements.  Another significant change requires registered individuals to complete their continuing education requirements yearly instead of every three years.

FINRA issued Regulatory Notice 12-41 amending Rules 1210 and 1240 and introducing the Maintaining Qualifications Program (“MQP”) which becomes effective March 15, 2022.  The MQP allows registered persons to maintain their qualifications, even after they leave a registered firm if they complete annual continuing education courses through the new program as described in FINRA Rule 1240(c).  Before this change, registered individuals had to requalify by retaking examinations if they had not registered with another firm within two years filing of their Form U-5.

Individuals whose registration(s) terminated between March 15, 2020, and March 14, 2022, may be eligible to opt into the MQP if they make their election between January 31, 2022, and March 15, 2022, through the Financial Professional Gateway.  Individuals whose registration is terminated on or after March 15, 2022, have two years to elect to participate in MQP.

Once MQP is effective, FINRA will no longer accept new designations into its Financial Services Affiliate Waiver Program (“FSAWP”).  Individuals participating in the FSAWP as of March 15, 2022, may continue in the FSAWP, provided they satisfy the annual regulatory element CE requirements.  Foreside’s Managing Director, Jennifer DiValerio provided excellent coverage of the MQP in her December 14th blog post titled, “FINRA Seeks to Lessen the Burden to Return to the Financial Service Industry.”  Check out Jennifer’s post to learn more about the eligibility standards and other MQP details.

Effective January 1, 2023, the Regulatory Element of the CE Program will become an annual requirement.  All registered persons will be required to complete Regulatory Element CE requirements annually by December 31st of each year they are registered.  Furthermore, FINRA will require individuals to complete the Regulatory Element for each representative or principal registration category they hold.  For most registered persons, the first annual requirement will be due on or before December 31, 2023.  However, there are situations (e.g., when a new registration category is achieved) where an individual may not be subject to the annual Regulatory Element requirement until December 31, 2024 (See Table 1 of FINRA Notice 21-41).  Foreside recommends that firms require registered persons to complete the annual Regulatory Element requirements prior to FINRA’s deadline (e.g., implement a target date of September 30th) to prevent individuals from becoming CE Deficient.  Foreside also recommends firms require their registered personnel to establish a FinPro account to take advantage of FINRA’s system enhancements related to notification, management, and tracking of individuals’ CE obligations and statuses.

Effective January 1, 2023, FINRA Rule 1240(b)(1) has been amended to extend the annual Firm Element requirement to all registered persons, including those who only maintain a permissive registration.  Firm Element training must cover topics related to the roles, activities, or responsibilities of registered persons and their professional responsibilities.  Contributed by Rochelle Truzzi, Senior Director.

For CPOs / CTAs

Action Required: NFA Adds Virtual Currency and Micro Contract-Related Questions to Annual Questionnaire.  NFA has added new questions to its Annual Questionnaire to address the increasing interest in these activities.  Also, don’t wait for your next Annual Questionnaire to respond to these new questions, as Notice I-21-42 “requires Members to complete the new questions as soon as possible to avoid unnecessary inquiries.”  Contributed by Cari Hopfensperger, Senior Director.

Entities Operating Under Exemption from CPO/CTA Registration – Mark Your Calendar for the Annual Affirmation. Notice I-21-38 reminds those entities operating under an exemption from CPO or CTA registration of their annual affirmation responsibilities.  Exemptions not affirmed by March 2, 2022, will be withdrawn.  Firms can complete the affirmation process at NFA’s Electronic Filing Systems webpage.  The notice also contains several FAQs, links, and resources to complete the affirmation. Contributed by Cari Hopfensperger, Senior Director.

Lessons Learned 

Yes, Virginia, There is an SEC and RIAs with Custody Must Use a Qualified Custodian – Advisor and President Charged with Custody Rule Violations.  At the heart of this case, an advisor and its president failed to comply with the Advisers Act Custody Rule (Rule 206(4)-2) because promissory notes held by its clients were not custodied with a “qualified custodian.” The problem started when the firm’s president suggested that several clients invest in promissory notes issued by a mortgage company that was also a client of the firm. The clients agreed and, instead of placing the notes with a qualified custodian as required by the Custody Rule, the president requested that copies of the promissory notes be placed in each client’s online “drop box.”  The firm had Custody Rule policies and procedures that (1) prohibited taking custody of securities absent CCO approval, and (2) required compliance and others to review client accounts periodically for compliance with portfolio and trading procedures.  However, because the promissory notes were not held at the firm’s usual broker-dealer custodian, the client’s custodial did not reflect the promissory notes.  As a result, the CCO and CIO were unaware of the investments and unable to monitor them.

The Custody Rule includes an exception from the qualified custodian requirement applicable to certain privately offered and uncertificated securities[1]; however, the promissory notes were apparently not eligible.  The SEC’s order found that the advisor and its president violated the Custody Rule and failed to implement their policies and procedures.  Without admitting or denying the findings, the firm agreed to pay a civil penalty of $50,000, engage a compliance consultant, and be censured by the SEC.  The president agreed to pay a civil penalty of $20,000.

The action also specifically notes the following were true:  The advisor and president had no prior disciplinary history; no compensation was received by the advisor or president in connection with the promissory note investments; the promissory notes were repaid in full ahead of maturity; and no clients lost money.  This case serves as a reminder of the Custody Rule’s technical requirements and that the SEC can, and does, bring enforcement actions even when no clients are harmed. Firms that invest in non-traditional securities should carefully consider where these securities will be custodied and how the investments will be monitored to ensure compliance with the Custody Rule and their fiduciary duties.  It may also be advisable to consult outside counsel when determining if any the firm can rely on the exemption from the Custody Rule for privately offered securities.  Contributed by Andrea Penn, Senior Director.

Worth Reading, Watching, and Hearing

Current and Former SEC Chairs Discuss Blockchain and Crypto Assets. Foreside Managing Director Gabriel Edelman shares highlights from former SEC Chair Jay Clayton’s recent keynote address with Current Chair Gary Gensler at the Digital Asset Compliance & Market Integrity Summit 2021.

What Advisors Should Know About Giving Rollover Advice After January 31, 2022. Jaqueline Hummel, Foreside Managing Director, provides practical thought leadership responding to a burning question on many CCO’s minds – “What should I do next about the DOL’s PTE 2020-02?”

Cybersecurity: Meeting the Emerging Challenge. SEC Commissioner Elad Roisman spoke to the Los Angeles County Bar Association about the growing risk of cybercrime, the regulatory framework on cybersecurity applicable to RIAs and BDs, and the potential for new regulatory guidance and/or rulemaking from the SEC.  The message is clear – no firm is immune to this risk!

Who Says the SEC doesn’t Have a Sense of Humor?  If you need a laugh, check out the “Are You Cyber-Savvy?” Quiz on the SEC’s Cybersecurity page.  I promise you won’t be disappointed.

Did you miss the SEC’s recent CCO Municipal Advisor Outreach Event?  Check out the SEC’s webpage for a recording.

Filing Deadlines and To-Do List for January 2022


  • Form 13H: Amendments to Form 13H are due promptly if there are any changes to information for Form 13H Filers. The SEC’s “Frequently Asked Questions Concerning Large Trader Reporting,” response 2.5 says Form 13H Filers may file an amendment and an annual amendment together if any changes occurred during the fourth quarter to the information contained in Form 13H. Amendments are due “promptly,” which we interpret as within ten days. Recommended due date: January 10, 2022. (Note: Neither the SEC nor its staff has provided guidance on the definition of “promptly” for Form )
  • Final Renewal Statement: Final statements will be released on January 2, 2022. Download your final renewal statement and arrange for payment of any additional fees as needed by January 28, 2022.


  • 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. Due January 15, 2022.
  • Form PF for Large Liquidity Fund Advisers: Large Liquidity Fund Advisers must file Form PF with the SEC on the IARD system within 15 days of each fiscal quarter-end.  For funds with a December 31 fiscal quarter end, Form PF is due January 15, 2022.


  • FINRA Accounting Support Fee: Firms receive a quarterly invoice to support the GASB budget based on the municipal securities the firm reported to the MSRB. De minimis firms (that owe less than $25) will not receive an invoice.  Payments are sent to the firm via WebCRD’s E-Bill.  Due January 15,
  • Customer Complaint Quarterly Statistical Summary: For complaints received during the 4th FINRA Rule 4530 requires Firms to submit statistical and summary information regarding complaints received during the quarter by the 15th day of the month following the calendar quarter.  Due January 15, 2022.
  • Final Renewal Payment: Full payment of your FINRA Final Renewal Statement is due January 28, 2022.
  • FINRA Contact System Annual Review: FINRA Rule 4517 requires Firms to review and, if necessary, update the necessary FINRA Contact System information within the first 17 business days of each calendar year. Due January 25, 2022.
  • MSRB Form A-12 Annual Affirmation. MSRB Rule A-12(k) requires each broker that is a member of the MSRB to review, update as necessary, and affirm the information in Form A-12 during the Annual Affirmation Period that begins on January 1 of each calendar year and ends 17 business days after that. Due January 25, 2022.
  • Quarterly FOCUS Part II/IIA Filings: For the Quarter ending December 31, 2021. SEC requires that member firms file a FOCUS (Financial and Operational Combined Uniform Single) Report Part II or IIA every quarter.  Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Due January 26, 2022.
  • Annual FOCUS Schedule I Filing for Period, 2021: SEC requires all broker-dealers to submit operational information as of December 31st via the Annual FOCUS Schedule 1 Filing. Due January 29, 2022.
  • Quarterly Form Custody: SEC requires that member firms file Form Custody under Securities Exchange Act Rule 17a-5(a)(5) for the quarter ending December 31. Due January 26, 2022.
  • Annual Reports for Fiscal Year-End November 30, 2021: SEC requires that member firms submit their annual 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 January 29, 2022.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of November 30th. 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 January 29,
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of December 31st 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 January 30,
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of June 30th. 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 January 30,


  • 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 January 10, 2022.



[1] 17 CFR § 275.206(4)-2 – Custody of funds or securities of clients by investment advisers.  Privately Offered Securities under the Investment Advisers Act Custody Rule, Commission Guidance Regarding Independent Public Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 1940,

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.