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COVID-19 Tests Firms’ BCP Efforts and Regulators Step Up with Relief; Conflicts of Interest and Custody Rule Stay on SEC’s Radar Screen, and Resources for Dealing with the Pandemic: Regulatory Update for April 2020

A Note to Our Clients and Readers

Like many businesses and families, we at Hardin remain concerned about the COVID-19 pandemic and its impacts to our clients, employees and the larger global community that connects us.  We continue to take our business continuity efforts seriously and remain fully operational providing uninterrupted service to our clients.  We also continue to closely monitor the situation and have taken various measures as a precaution.  These measures include restricting non-essential business travel and implementing work-from-home arrangements.  Most importantly, we are committed to maintaining open communication with our clients and employees as we navigate this ongoing issue.  Be well and please contact us with any questions.

For Investment Advisers: SEC Actions

Update to SEC Exemptive Relief for Form ADV & Form PF Due to COVID-19 Pandemic. The SEC issued exemptive relief on March 13th and March 25th offering more time for advisers unable to meet their Form ADV and Form PF filing obligations due to the impact of COVID-19.  The relief permits firms affected by COVID-19 to delay the filing and delivery of Form ADV and the filing of Form PF by up to 45 days from their original due date.  The relief applies to filings with original due dates from March 13, 2020, up to and including June 30, 2020.  Advisers must notify the SEC of their reliance on the relief, but under the March 25th order, they do not have to specify why they are unable to file on time or provide an estimated filing date.  Notification of Form ADV delays should be sent to and for Form PF, to  Additionally, a firm relying on the Form ADV relief must disclose this on its public websites or, if it does not have a public website, it must notify its clients and private fund investors.  We encourage our clients and investment advisers to stay the course and file on time, absent extreme circumstances.  Contributed by Cari Hopfensperger, Senior Compliance Consultant.

SEC Updates Form ADV and Custody FAQs to Address Certain Impacts of the COVID-19.

  • Business Offices – Form ADV Item 1.F: The SEC clarified that as long as employees are “temporarily teleworking as part of the firm’s business continuity plan due to circumstances related to COVID-19, staff would not recommend enforcement action if the firm does not update Item 1F of Part 1A or Schedule 1.F of Schedule D to list temporary teleworking addresses”.
  • Custody: An existing FAQ (Question II.1) was updated to clarify that the SEC will not consider an adviser to have received client assets until the adviser’s personnel can access mail or other deliveries at the adviser’s office location.  As a result, if the adviser’s personnel cannot receive the mail or other deliveries because of an office shutdown, the firm will not be considered to have “custody” because of the failure to return any checks inadvertently received by the adviser within three business days.  The clock will not start ticking until personnel can access the mail or other deliveries.  Contributed by Cari Hopfensperger, Senior Compliance Consultant.

SEC Publishes Form ADV Part 3: Instructions to Form CRS. Although overshadowed by the COVID-19 pandemic, the SEC issued the final Form CRS and instructions.  The document itself holds no surprises, but perhaps the more important question is whether the requirement to make this filing by June 30, 2020, is subject to the relief provided under the SEC’s recent exemptive order allowing firms to delay filing Forms ADV and PF.  The order states that it applies to filing and delivery deadlines “for which the original due date is on or after the date of the Original Order but on or prior to June 30, 2020.”  Although this exemptive relief may apply, advisers should do their best to meet the existing deadlines.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Practical Tips for Compliance Professionals for Dealing with the COVID-19 Pandemic.  Check out our latest advice on dealing with the pandemic, compiled by Cari Hopfensperger and Jaqueline Hummel.

For Mutual Funds:  SEC Actions

SEC Requests Comment on Fund Names Rule; Seeks to Eliminate Misleading Fund Names. In another move demonstrating its focus on modernizing regulations to protect main street investors, the SEC has requested comments on the effectiveness of the Fund Names Rule (Rule 35d-1 under the Investment Company Act).  The rule requires a fund to maintain at least 80% of its assets in securities that are referenced in the fund’s name.  The Commission is looking for feedback on ways to “better inform and protect investors” from misleading practices.  The Commission has been challenged by market developments such as the increasing use of derivatives, convertible securities, index-based funds, and ESG (environmental, social and governance) funds, where fund names are not always consistent with a main-street investor’s understanding of the characteristics and risks of the fund.  The comment period is open until May 5, 2020; however, with the ongoing COVID-19 crisis, the SEC has been extending some comment periods, so this may be subject to change.  For more details, this linked Barron’s article highlights some of the issues.  Contributed by Cari Hopfensperger, Senior Compliance Consultant.

For Broker-Dealers:  FINRA Actions

FINRA Issues BCP Guidance and Regulatory Relief in Light of COVID-19. FINRA recommends that firms consider, and document as necessary, the following:

  • Updates to the BCP to address issues noted or anticipated as a result of COVID-19;
  • Implementation of revised supervisory procedures, as appropriate, to supervise the activities of associated persons working from alternative or remote locations during the pandemic;
  • Changes resulting from consideration of the increased risk of cyber events;
  • Changes in the manner of communicating with Customers; and
  • Communications with FINRA.

FINRA has temporarily suspended the requirement to maintain updated Form U4 information regarding the office of employment address for temporary relocations.  Firms do not need to submit branch office applications for temporary office locations.  Depending on the duration and severity of COVID-19, FINRA may re-evaluate firms’ abilities to complete on-site inspections of branch office in 2020.  Firms may consider requesting extensions from FINRA with regard to regulatory filings and response to FINRA inquiries, matters, and investigations.  Individuals with open examination and CE windows that are about to expire should consider requesting an extension.   Refer to FINRA Notice 20-08 for full details.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

FINRA Updates the Interpretations of Financial and Operational Rules about the single issuer exemption. FINRA updated the Interpretations regarding paragraph (e)(1)(i)(A) of Securities and Exchange Act Rule 17a-5 to reflect amendments to the rule issued by the SEC last June.  See Release No. 34-86073.  Broker-dealer firms that limit their activity to acting as an agent for a single issuer in soliciting subscriptions for securities of that issuer may be eligible for a specified exemption related to the annual report requirements under Rule 17a-5.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

UGMA and UTMA Reminders in FINRA Regulatory Notice 20-07. FINRA reminds firms of their obligations to ensure the assets in a custodial account are transferred into the name of the beneficiary once they have reached the age of majority.  Firms should consider the following supervisory systems and procedures related to UGMA/UTMA account services, which FINRA views as effective:

  • Termination of Custodianship – Having a system to record and track the beneficiaries’ age and using automation to track when a beneficiary reaches the age of majority.
  • Representative Notification – Providing the assigned representative with automated alerts before the beneficiary reaching the age of majority, requiring the rep to communicate with the custodian.
  • Custodian Notification – Establishing procedures requiring communication with the custodian advising them that the beneficiary is approaching the age of majority and setting expectations as to what will happen after that date.
  • Verifying Authority – Having procedures to prevent the custodian from managing assets in the UTMA/UGMA Account after the beneficiary has reached the age of majority.
  • Account Documentation – Having a system that incorporates the date the custodianship terminates and puts the account into the name of the beneficiary.

As with all supervisory systems and procedures, they must be reasonably designed in the context of each firm’s specific circumstances and ensure compliance with all applicable rules and regulations.  Contributed by Doug MacKinnon, Senior Compliance Consultant. 

Lessons Learned from SEC and FINRA Cases

Exempt Reporting Adviser Falls Down on the Job, Put in SEC Penalty Box. Naya Ventures (“Naya”), an exempt-reporting adviser owned and controlled by Dayahar Puskoor and Prabhaker Reddy, were nailed by the SEC for failing to meet their obligations as general partner of a fund and inadequate conflict disclosures.  First, the general partner of the fund, owned by controlled by Puskoor and Reddy (the “General Partner), took no action when investors failed to meet their capital calls. The defaulting investors included Puskoor and Reddy.  Although the General Partner had complete discretion to waive or cure defaults, the other fund investors were never informed of the issue, and no remedies were pursued against the defaulting investors.  Related to this issue was the failure of the General Partner to establish an Investor Advisory Committee (“IAC”) with at least three independent limited partners to vet conflicts of interest.  The IAC would have been the appropriate venue to determine whether to deem Puskoor and Reddy in default, an obvious conflict of interest.  The IAC would also have been the right place to discuss the fact that Puskoor, Reddy, and their affiliated entity provided services to the Fund’s portfolio companies for compensation, another undisclosed conflict.

Although exempt reporting advisers are not subject to the full Adviser’s Act, this case reminds us that (1) they are subject to Section 206(2), the anti-fraud provision, and to SEC examination and enforcement, and (2) advisers to private funds have a contractual obligation to comply with the terms of the fund offering documents.  Private fund advisers should also pay attention to conflicts associated with failing to enforce terms stated in the offering documents, such as a failure to meet capital calls, especially where the principals are also affected.  Even though Naya was universal in not considering any limited partners to be in default, the inclusion of Puskoor and Reddy in this group resulted in an unacceptable conflict that could be especially amplified during these times of volatile markets.  Contributed by Charles McGortey, Senior Compliance Consultant.

SEC Charges Two More Advisers Related to Aequitas Enterprise. Two advisers have been caught in the investment scam perpetrated by Aequitas Management LLC.  The SEC previously charged Aequitas and three of its top executives with fraudulently raising more than $350 million from approximately 1,500 investors.  The SEC found that Jeffrey Sica (NJ) and William Malloy (CA) steered advisory clients to invest in Aequitas securities at the same time that Aequitas was compensating them through loans or consulting services that included introducing investors to Aequitas.  Sica received approximately $2 million, and Malloy was receiving $15,000 in monthly payments from Aequitas.  Neither disclosed these conflicts to their advisory clients.  The advisers were fined a total of $564,000, and Malloy was also suspended from the industry for 12 months.  This case is two of several against firms that failed to provide sufficient comp-related conflict disclosures.  We provide it here as yet another reminder of the risk given the continued regulatory scrutiny.  In short, keep following the money, scrutinizing any direct and indirect compensation, and stay on top of your disclosures.  Err on the side of over, rather than under, sharing.  Contributed by Doug MacKinnon, Senior Compliance Consultant.

Adviser Fined $50,000 and Barred for 5 Years for Custody Rule Violations. Steven Fishman, co-founder of Formation Capital, told investors that he would invest in the single-purpose funds managed by his firm using a series of personal investment vehicles (PIVs).  When he could not fund his own capital calls, he solicited other investors for his PIVs to raise the capital, knowing that his firm forbade this.  Because the firm was unaware of Fishman’s actions, Formation failed to consider these PIVs as funds of the firm.  Consequently, an audit was not performed, and audited financial statements were not delivered to PIV investors as required by the Custody Rule.  The SEC found that Fishman violated the Advisers Act Section 206(4) and the related rule.  He consented to a cease and desist order, paid a penalty of $50,000, and was barred from association with any adviser for five years.

Notably, the SEC did not name Formation Capital in the enforcement action.  The SEC noted that the firm fired Fishman and “took steps to protect assets of the PIV investors”.  Requiring firm principals or other employees to commit personal investment to the firm’s funds is a common way to demonstrate alignment between the interests of the firm with fund investors.  This case highlights a unique risk associated with employee investments made through PIV, but also that compliance policies and procedures may not always catch blatant and deliberate deception by a rogue employee.  Finally, when violations are detected, firms that can demonstrate an appropriate response are much better positioned to head off regulatory problems.  To do this, CCO’s must have the support of their senior management and recognize the risk associated with violations being committed by one of them.  Contributed by Doug MacKinnon, Senior Compliance Consultant.

Worth Reading

Filing Deadlines and To-Do List for April 2020


  • Form 13H: Following an initial filing of Form 13H, all large traders must make an amended filing to correct inaccurate information promptly (within ten days) following the quarter-end in which the information became stale (unless they are on Inactive Status). Recommended due date: April 10, 2020. (Note: Neither the SEC nor its staff has provided guidance on the definition of “promptly” for Form 13H.)
  • Form ADV Part 2A: Registered investment advisers are required to distribute to each client an updated Form ADV Part 2A or a summary of material changes with an offer and information on how to obtain the updated Form ADV Part 2A, within 120 days of fiscal year-end. Due April 29, 2020.  Relief is available from the delivery deadline under the SEC’s recent exemptive order.   Advisers can take advantage of the SEC’s exemptive relief by promptly notifying the SEC by email at that they intend to rely on the SEC’s order.  However, an adviser relying on this relief must also notify clients and investors via the firms’ public website, or, if the firm does not have a website, by notifying clients and private fund investors of its reliance on the relief. Advisers are required to distribute the Form ADV Part 2A “as soon as practicable, but not later than 45 days after the original due date for filing.”  See the SEC’s Release.
  • Form ADV Part 2B: Registered investment advisers should review their Form ADV Part 2B Brochure Supplements to ensure continued


  • 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.  Due April 15, 2020.  Advisers can take advantage of the SEC’s exemptive relief from the filing deadline for Form PF by promptly notifying the SEC by email at that they intend to rely on the SEC’s order.  There is no obligation to notify clients and investors.  Advisers are required to file the Form PF “as soon as practicable, but not later than 45 days after the original due date for filing.”  See the SEC’s Release.
  • Blue Sky Filings (Form D). Advisers 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 Hardin Compliance Consulting 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 April 15, 2020.
  • Distribute Audited Financial Statements for Private Funds: Private fund investment advisers should have their funds audited by an independent, PCAOB-registered accountant and deliver the audited financial statements to the funds’ investors within 120 days of the end of the funds’ fiscal year (for funds with December 31, 2019 year-end, the date is April 29, 2020). The deadline for private funds that are fund of funds is 180 days of the funds’ fiscal year-end. That’s June 29, 2020, for funds with December 31 year-end.
  • Form PF Annual Amendment: Form PF Annual Amendment is due within 120 days of fiscal year-end for all private fund advisers other than “large hedge fund advisers” and “large liquidity fund advisers.” The due date is April 29, 2020.  Advisers can take advantage of the SEC’s exemptive relief from the filing deadline for Form PF by promptly notifying the SEC by email at that they intend to rely on the SEC’s order.  There is no obligation to notify clients and investors.  Advisers are required to file the Form PF “as soon as practicable, but not later than 45 days after the original due date for filing.”  See the SEC’s Release.
  • Form PF Quarterly Update: Form PF quarterly update is due for “large hedge fund advisers” and “large liquidity fund advisers” who did not submit information relating to their other private funds with their fourth-quarter filing. Due April 29, 2020.  Advisers can take advantage of the SEC’s exemptive relief from the filing deadline for Form PF by promptly notifying the SEC by email at that they intend to rely on the SEC’s order.  There is no obligation to notify clients and investors.  Advisers are required to file the Form PF “as soon as practicable, but not later than 45 days after the original due date for filing.”  See the SEC’s Release.


  • 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 date is April 7, 2020.


  • Annual Entitlement User Account Certification: FINRA requires firms to conduct an annual review of the FINRA application user accounts established for firm personnel and ensure that access and entitlements are appropriate for the personnel’s role and responsibilities. The Super Account Administrator (“SAA”) is responsible for conducting the review, amending and deleting user accounts/entitlements as necessary, and submitting the certification through WebCRD.  Only the SAA has access to this certification.  Remind your SAA to be on the lookout for the notification as it is likely to arrive soon.
  • FINRA Accounting Support Fee: 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. Invoices are sent to the firm via WebCRD’s E-Bill. Due date to be determined.
  • Customer Complaint Quarterly Statistical Summary: For complaints received during the first 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 April 15, 2020.
  • Quarterly FOCUS Part II/IIA Filings: For Quarter ending March 31. FINRA requires that member firms file a FOCUS (Financial and Operational Combined Uniform Single) Report Part II or IIA quarterly. Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Due April 23, 2020.
  • Quarterly Form Custody: SEC requires that member firms file Form Custody under Securities Exchange Act Rule 17a-5(a)(5) for the quarter ending March 31. Due April 23, 2020.
  • Supplemental Statement of Income (“SSOI”): For the quarter ending March 31. FINRA requires firms to submit additional, detailed information regarding the categories of revenues and expenses reported on the Statement of Income (Loss) page of the FOCUS Report Part II/IIA. Due April 28, 2020.
  • Supplemental Inventory Schedule (“SIS”): For the month ending March 31. 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 April 28, 2020.
  • Annual Audit Reports for Fiscal Year-End February 28, 2020: 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 April 29, 2020.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of February 29. 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 April 29, 2020.
  • 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 April 30, 2020.
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of March 31 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 April 30, 2020.
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of September 30, 2018. 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 April 30, 2020.


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Hardin Compliance Consulting provides links to other publicly-available legal and compliance websites for your convenience. These links have been selected because we believe they provide valuable information and guidance.  The information in this e-newsletter is for general guidance only.  It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.

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