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February 4, 2022

regulatory update


For Investment Advisors and Broker-Dealers

For Investment Advisors

  • Sharpen Your Pencils – Form ADV Amendments are Due Soon! Advisors should begin working on their Form ADV updates since March 31 will be here before you know. That’s the deadline for filing the annual updating amendment for advisors with a fiscal year ending December 31. The Form includes new questions in Item 5.L. Marketing Activities, which asks advisors whether their advertisements include performance results, specific investment advice, testimonials, endorsements, third-party ratings, hypothetical or predecessor performance. But you can ignore those questions for now, since the SEC stated in the Marketing Rule’s Final Release that “each advisor is only responsible for filing an amended form that includes responses to the amended questions in Item 5 in its next annual updating amendment that is filed after the eighteen-month transition period.”(Page 252 of the release).

A few things to keep in mind when preparing the update:

  1. Where’s the money? Firms must have sufficient funds in the IARD Flex Funding Account, or the IARD system will not accept the filing. So do not wait until the last minute!
  2. Be consistent. Form ADV Parts 1A and 2A ask for a lot of the same information about assets under management, compensation, personal trading, custody, affiliates, and referral arrangements. So make sure that the answers in Part 1A and 2A are consistent.
  3. Trust the Data. The SEC expects to see evidence supporting your responses to the Form ADV and that evidence should be credible.  As a result, there should be reports to substantiate the number of clients, types of investments, and assets under management.  For example, instead of assuming that you have no non-United States clients, run a report of client addresses to confirm.
  4. Document the Process. Some items in the Form ADV require advisors to make their own determinations and calculations, such as classifying clients, calculating regulatory assets under management (RAUM), and custody. Firms should develop a consistent and repeatable process for responding to these questions, supported by data. For example, document the method used to classify clients when answering questions about the number and types of clients. Similarly, when calculating RAUM, identify the source of information, how reports were created, and how the data was scrubbed.
  5. Bare your Soul. Item 2 of Form ADV Part 2A requires advisors to identify and discuss material changes, starting from the last annual updating amendment. This means all changes since the last annual update, not just changes since the previous other-than-annual amendment.
  6. Stop Brooding.  The Form ADV has been a source of confusion for years. During an examination, the SEC may question your responses, and if, in the staff’s view, you responded incorrectly, you will be asked to revise the Form ADV.  However, in many situations, if a firm has a reasonable explanation for the response and has no intent to defraud, the issue will not go any further.

For other tips on completing your firm’s annual update to Form ADV, check out our previous posts, Feeling your Pain: Advice on Answering Form ADV’s Trickier Questions and How I Learned to Stop Worrying and Learned to Love Form ADV. Contributed by Jaqueline Hummel, Managing Director.

  • Looming Deadline for Advisors Recommending Rollovers. The Department of Labor’s (DOL) Prohibited Transaction Exemption 2020-02 (PTE 2020-02) relating to rollover advice will go into partial effect by January 31, 2022. For a full explanation of PTE 2020-02 and how it affects advisors dealing with retirement plan assets, check out our blog post, What Advisors Should Know About Giving Rollover Advice After January 31, 2022. In Field Assistance Bulletin No. 2021-02, the DOL has agreed to forgo pursuing prohibited transaction claims against investment advice fiduciaries who “worked diligently and in good faith to comply with ‘Impartial Conduct Standards.’”  According to the bulletin, these standards require fiduciaries to ERISA, and IRA plans to:
  • “Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty;
    • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
    • Under the loyalty standard, advice providers may not place their own interests ahead of the interests of the retirement investor or subordinate the retirement investor’s interests to their own;
  • Charge no more than reasonable compensation and comply with federal securities laws regarding “best execution”; and
  • Make no misleading statements about investment transactions and other relevant matters.”

The DOL will not enforce the “specific documentation and disclosure requirements for rollovers in PTE 2020-02 through June 2022.”  Contributed by Jaqueline Hummel, Managing Director.

For Broker-Dealers

  • FINRA Confirms the Value and Effectiveness of the Business Continutiy Plans (BCP) Rule. Based on the results of FINRA’s retrospective review of the BCP Rule and feedback received from its Pandemic Review, the SRO has decided to maintain Rule 4370 without change. Respondents to both reviews overwhelmingly expressed appreciation of the BCP Rule’s flexibility and risk-based approach. FINRA is also considering modifications to Rule 3110 (Supervision) in light of the ongoing COVID-19 pandemic to address the definition of branch office and related exemptions, as well as a firm’s obligations to conduct office inspections. To be continued… Contributed by Rochelle Truzzi, Senior Director.
  • FINRA Updates the Interpretations of FinOp Rules. FINRA Notice 21-45 addresses the following revisions and resignations, which will interest FinOPs.
    • SEA Rule 17a-4(b)(5)/01 (15c3-3 Reserve Computations) – Page 3103
    • SEA Rule 17a-3(b)(2)/01 (Exchange Market Maker’s Using Clearance Account as Books and Records). Redesignated to SEA Rule 17a-3(c)/02 – Page 3061
    • SEA Rule 17a-4(i)/01 (Exchange Market Maker’s Using Clearance Account as Books and Records) Redesignated to SEA Rule 17a-4(i)(1)/01 – Page 3124

Contributed by Rochelle Truzzi, Senior Director.

  • Get the “411” on Firms with a Significant History of Misconduct.  FINRA adopted Rule 4111, under which it will begin using quantitative, risk-based “Preliminary Identification Metrics Thresholds” to identify firms with, or having a high concentration of representatives with, a significant history of misconduct (“Restricted Firms”).FINRA expects to start the assessment process in June 2022 and conduct it annually thereafter. Firms preliminarily identified as a Restricted Firm will have an opportunity to address, correct, or dispute the designation, including a one-time opportunity to reduce the number of representatives with a significant history of misconduct. Those ultimately designated as Restricted Firms will be required to establish and maintain cash or qualified securities in a “Restricted Deposit Account,” with the required deposit to be determined by FINRA, based on several firm-specific factors. FINRA may also impose other conditions or restrictions on the firm’s business, as it deems necessary for the protection of investors. The “Preliminary Criteria for Identification” are based on six categories:
    1. Registered Person Adjudicated Events;
    2. Registered Person Pending Events;
    3. Registered Person Termination and Internal Review Events;
    4. Member Firm Adjudicated Events;
    5. Member Firm Pending Events; and
    6. Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).

Firms are encouraged to read FINRA Notice 21-45 in detail to identify short and long-term opportunities to improve their score, which may include enhancing hiring standards and practices. Contributed by Rochelle Truzzi, Senior Director.

For CPOs / CTAs

  • NFA Changes Requirements for Branch Office Managers under Compliance Rule 2-7.  Effective January 3, 2022, a branch office manager for a CPO or CTA engaged only in swap trading is NOT required to pass the Series 30.  The NFA determined that a swap Associated Person’s (AP’s) requirement to pass the Swap Proficiency Requirement is sufficient. Contributed by Sarah D’Amico, Senior Director. 

Lessons Learned 

  • Industry Giant Fined $200 Million for Recordkeeping Violations. Marking the largest recordkeeping fine imposed by the SEC, a well-known bank has been fined $125 million after admitting to widespread violations related to the use of personal devices. The violations stemmed from employee use of text messages, personal email accounts, and the messaging app “WhatsApp” without proper recordkeeping. Simultaneously, the CFTC announced that it fined the bank $75 million for the same violation.  Not only was this a widespread issue at the bank, but managers and senior personnel responsible for compliance were also using personal devices for business communications in violation of firm policy and had been for years.

In addition to penalties and fines, the firm agreed to improve compliance controls and engage an independent consultant to review and update its policies and procedures. Before this settlement, the firm was already upgrading its technology for capturing and retaining communications on personal devices. Of note, the SEC emphasized that it is launching additional investigations into record retention practices at other financial firms. The SEC is also encouraging any firms that believe their recordkeeping practices are not in compliance to contact them at  Firms relying on their employees and policies to prohibit the use of unapproved communication apps for business purposes should seriously reconsider these practices. Texting and instant messaging are here to stay, and firms need to implement archiving solutions to keep up. Contributed by Doug MacKinnon, Director.

  • SEC Continues Enforcement of Form CRS. Another firm earned the SEC’s wrath for failing to timely file and deliver the Form CRS to its retail investors.  In December 2021, the SEC ordered a New York RIA, with approximately $107 million in RAUM, to pay $25,000 for failing to file and deliver Form CRS by the regulatory deadlines.

Similar to other recent actions, the SEC’s Division of Examinations (EXAMS) contacted the firm in October 2020, alerting the CCO of its failure to file Form CRS.  Six months later, after the firm still had not filed, EXAMS rang again to announce an examination.  The firm finally filed and delivered Form CRS to its retail clients in June of 2021.

This case serves as another piece of “guidance by enforcement” and reinforces the recent statement on Form CRS by the SEC’s Standards of Conduct Implementation Committee.  Advisors should ensure the Form CRS complies with the SEC instructions and is updated as necessary, delivered to clients and prospects timely, and prominently posted to the RIA’s website. Moreover, advisors should ensure that Form CRS is consistent with firm business practices, Form ADV disclosures, policies and procedures, agreements, websites, social media sites, marketing materials, and discipline history if any. Contributed by Andrea Penn, Senior Director.

  • New Year Déjà vu?! Share Class Selection Troubles Continue. The SEC continues to find advisors inadequately disclosing conflicts of interests to clients regarding compensation received in connection with 12b-1 fees, the availability of lower-cost mutual fund share classes, if available, and revenue sharing arrangements with their affiliates.  In December 2021, the SEC settled charges against a Texas-based advisor for breaches of fiduciary duty for failing to disclose that advisory client mutual fund and money market investments generated compensation for its affiliated broker. The firm agreed to pay disgorgement, prejudgment interest, and a civil penalty totaling just under $17 million.

More specifically, the SEC found that the firm failed, for at least four years, to adequately disclose conflicts of interest in its selection of mutual fund share classes that charged 12b-1 fees (and were paid to the firm’s affiliated broker) when lower-cost share classes of those same funds were available. In another misguided disclosure attempt, the firm disclosed a “potential” conflict of interest regarding 12b-1 fees rather than an “actual” conflict. The advisor also received revenue-sharing payments resulting from investments in certain mutual funds and cash sweep vehicles without properly disclosing that conflict of interest to its clients. Finally, similar to other share class selection cases, the firm breached its fiduciary duty by failing to adopt and implement policies and procedures to ensure that its selection of mutual fund share classes and cash sweeps options met its best execution obligations. The SEC also found that the firm should have self-reported during the SEC’s Share Class Selection Disclosure Initiative.

An advisor’s fiduciary duties include, among other things, an obligation to seek best execution for client transactions. Accordingly, advisors should have policies and procedures to ensure that mutual fund share class selection is based on the client’s needs and not on which share class pays the most. Moreover, firms should disclose all material facts regarding the conflict of interests, such as receiving 12b-1 fees, revenue sharing, and related compensation.  Finally, firms should avoid using the word “may” and “potential” when describing conflicts if the conflicts actually exist.  Contributed by Andrea Penn, Senior Director.

  • Advisor and Dual-Hatted Principal/CCO Settle Host of Violations, Forced to Divest Ownership Interest. The SEC straddled both private fund and retail worlds to settle a case involving principal transactions and unsuitable recommendations.  On the private fund side, the SEC found that an Atlanta-based advisor conducted more than 500 principal trades without proper disclosure or consent as required under Section 206(4) of the Advisers Act.  The staff also found that the offering documents for the private fund were not sufficiently customized to reflect the actual investment strategy and risks associated with an investment in the fund.  As a result, the SEC found them to be inadequate and misleading.

On the retail side, the SEC found that the firm and its Investment Advisor Representatives (IARs) were recommending leveraged ETFs to clients in situations where the investments were unsuitable.   This is another case indicating a trend by the SEC to find a firm principal personally liable for wrongdoing.  In this situation, the principal also acted as CCO when the offenses occurred.  The SEC also forced the principal to divest his equity interest in the firm under the settlement terms.

This case offers multiple reminders to advisors – First, regulators constantly scrutinize principal and cross trades for compliance with disclosure and consent requirements.  Firms considering these activities for the first time should work closely with compliance to develop their procedures.  Firms already engaged in principal trading should review the adequacy of their policies and procedures to monitor the activity.  Second, using boilerplate fund offering documents may be an efficient starting place, but firms should not get lazy.  The offering memorandum should be customized to reflect the fund’s specific investment strategies and associated risks.  Finally, firms should take extra care on product due diligence and IAR training when recommending complicated investment vehicles to their clients.  Many firms benefit from a cross-departmental product review committee to help identify and address these and other risks.  Firms should also prepare for increased regulatory scrutiny of their due diligence process and suitability determination, especially for retail clients. Contributed by Cari Hopfensperger, Senior Director.

Worth Reading, Watching, and Hearing

To-Do Checklists for the Month of February 2022


  • Form 13F: Form 13F (institutional manager) quarterly filing for Q4 2020 is due within 45 days after the end of the calendar quarter, on February 14, 2022.
  • Form 13H: Form 13H (large trader) annual filing is due for advisors that already have a Form 13H filing obligation by February 14, 2022. (This filing is not required if the quarterly amendment was filed for the fourth )
  • Schedule 13D and Schedule 13G: Annual amendments are due for advisors that have changes to disclosure information on previously filed 13D or 13G forms, on February 14, 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. Did you know that Foreside offers a convenient and economical blue sky filing service to help firms manage this complicated monthly task?  Learn more here and give us a call to discuss your needs further.  Due February 15, 2022.


  • Form OBS: For the Quarter ending December 31st. 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 February 2,
  • Rule 17a-5 Monthly and Fifth FOCUS Part II/IIA Filings: For the period ending January 31st. For firms required to submit monthly FOCUS filings and those firms whose fiscal year-end is a date other than a calendar quarter. Due February 24, 2022.


  • Form CTA-PR should be filed with National Futures Association (“NFA”) by registered Commodity Trading Advisors for the year ended December 31, 2021, by February 14, 2022. This filing satisfies the CFTC annual and NFA 4th quarter filing requirements for Form


  • 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 February 7, 2022.




[1] OCIE Risk Alert: Examinations that Focus on Compliance with Regulation Best Interest, April 7, 2020.

[2] SEC Press Release: SEC Charges 27 Financial Firms for Form CRS Filing and Delivery Failures, July 26, 2021.


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.