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DOL Brings Back Impartial Conduct Standards in FAQs, SEC Weighs in on ESG Investing, and FINRA Makes it Even Harder to Hire Reps with Black Marks: Regulatory Update for May 2021

For Investment Advisers and Broker-Dealers

Bringing Back BICE. The Department of Labor (DOL)  issued some Frequently Asked Questions on its new Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”).  First, the bad news.  The DOL is sticking to its guns by affirming that a recommendation to rollover assets from an ERISA plan or IRA can be considered fiduciary investment advice under ERISA if the advice is either part of an existing relationship or the start of an ongoing relationship.  Now, the even worse news.  In FAQ 5, the DOL states that it is not finished yet and intends to make further changes to its fiduciary regulations.  The DOL also released a companion guide for consumers called “Choosing the Right Person to Give you Investment Advice: Information for Investors in Retirement Plan and Individual Retirement Accounts.

The headline from PTE 2020-20 is that it allows investment advisers and broker-dealers to receive otherwise prohibited compensation, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions.  (For more detail, see our article Not Quite Dead Yet – DOL’s Fiduciary Rule Rises Again in our March 2021 Regulatory Update.)  The exemption applies to recommendations to roll over assets from an employee benefit plan to an IRA.  On the surface, this seems like good news.  But the DOL significantly changed its interpretation of the “five-part fiduciary test[1]” in the exemption’s preamble and now holds that a rollover recommendation may be ERISA investment advice if the advice is ongoing.

The cornerstone of the exemption is the requirement that firms adopt Impartial Conduct Standards, which require fiduciaries to ERISA and IRA plans to:

  • Provide prudent investment advice
  • Charge only reasonable compensation, and
  • Avoid misleading statements.

Additionally, financial professionals and their firms must also acknowledge in writing their fiduciary status under ERISA when providing investment advice to retirement investors and provide a written description of the services provided and their material conflicts of interest.  Finally, financial institutions “must adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest, and must conduct an annual retrospective review of compliance.”

The FAQs provide more specifics on what will, and will not, be acceptable from the DOL’s point of view.

  • FAQ 7 discusses when a rollover recommendation can cross the line into “regular basis” fiduciary advice:

“A single, discrete instance of advice to roll over assets from an employee benefit plan to an IRA would not meet the regular basis prong of the 1975 test.”  Advice to rollover plan assets that occurs as part of an ongoing relationship or “as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider” crosses the line into “regular basis,” making the financial service provider an ERISA fiduciary.

  • FAQ 8 says that you cannot avoid fiduciary status with a disclaimer. “Boilerplate disclaimers are insufficient to defeat the test, when the parties have a mutual understanding that the adviser is making an individualized recommendation upon which the investor can be expected to rely in making the investment decision. … Firms and investment professionals cannot use written disclaimers to undermine reasonable investor understandings.”
  • FAQ 15 discusses how investment professionals can comply with their fiduciary obligations. The factors cited are substantially similar to those discussed in “Best Interest Contract Exemption” (“BICE”) and include:
    • Reviewing the retirement investor’s alternatives to a rollover, “including leaving the money in the investor’s employer’s plan, if permitted;”
    • Comparing the fees and expenses associated with both the plan and the IRA;
    • Determining whether the employer pays for some or all of the plan’s administrative expenses;
    • Comparing the levels of services and investments available under each option: and
    • Considering the individual needs and circumstances of the retirement investors

The DOL wants to see documentation showing that the investment professional made “diligent and prudent efforts” to obtain information about the client’s existing 401(k) plan, including asking the client to share the disclosures provided by the plan.  And if this is not available, “the financial institution and investment professional should make a reasonable estimation of expenses, asset values, risk, and returns based on publicly available information.”

  • FAQ 13 includes model language for firms to acknowledge their fiduciary status:

“When we provide investment advice to you regarding your retirement plan account or individual retirement account, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts.  The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours.

Under this special rule’s provisions, we must:

    • Meet a professional standard of care when making investment recommendations (give prudent advice);
    • Never put our financial interests ahead of yours when making recommendations (give loyal advice);
    • Avoid misleading statements about conflicts of interest, fees, and investments;
    • Follow policies and procedures designed to ensure that we give advice that is in your best interest;
    • Charge no more than is reasonable for our services; and
    • Give you basic information about conflicts of interest.”

There’s more in the FAQs, including discussions of conflicts of interest and mitigation requirements, so I highly recommend that investment advisers and broker-dealers read the document in its entirety.  There is an excellent video from the Investment Advisers Association and the Groom Law Firm explaining this exemption for those of you that are visual learners.  Stay tuned for future posts from Hardin.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

[1] The five-part test defines an ERISA fiduciary as someone who, for a fee, (i) provides investment advice to an ERISA plan, plan fiduciary, plan participant, or IRA owner (ii) on a regular basis (iii) pursuant to a mutual agreement.  The advice must (iv) serve as the primary basis for an investment decision, and (v) be individualized based on the particular needs of the plan, plan participant, or IRA owner.

FINRA’s 2021 Entitlement User Account Certification Period Commences. This year’s certification period began on 4/19/21 and will end on 7/19/2021.  The firm’s Super Account Administrator (“SAA”) must be the individual to perform this certification.  As a reminder, SAAs will be notified of the certification on FINRA’s Account Management Home page and receive an email that includes the start and due date of the Certification.  Failure to complete the certification by the established deadline will result in all user accounts associated with the firm being suspended until the certification is complete.  Please refer to FINRA’s Entitlement Program FAQ  and Annual Entitlement User Accounts Certification Process Guide for detailed instructions regarding how to complete the certification.  Contributed by Rochelle A. Truzzi, Managing Director.

Gary Gensler Confirmed as New SEC Chair. Gary Gensler, former chair of the CFTC, was confirmed by the Senate as Chair of the SEC on April 14, 2021.

For Investment Advisers

The Division of Examinations’ Review of ESG Investing. Given the continued increase in investor demand for ESG-focused financial products, regulators, issuers, financial advisors, investors, and other stakeholders have been at the table for some time now over how global securities regulations should address these factors.  Most recently, the SEC’s Division of Examinations (EXAMS) published a risk alert sharing weaknesses observed on the topic of ESG investing by investment advisers and registered investment companies.  In a nutshell, the alert reconfirms the ongoing risks and challenges that stem from a lack of standardized ESG terminology and compliance programs that aren’t keeping pace with their firm’s increased ESG related activities.  EXAMS has a strong appetite for scrutinizing firms’ policies, procedure, disclosures, and practices related to ESG investing with an emphasis in the following areas:

  • Portfolio Management

EXAMS wants to know how a firm defines ESG-terminology applicable to their strategy(ies), how it conducts due diligence on portfolio investments, how securities are selected and monitored through an ESG lens ongoing, and how the firm approaches proxy voting decisions in ESG focused accounts.  EXAMS is, of course, also interested in how these activities are described in marketing materials and other disclosures.  EXAMS observed disclosures that were inconsistent with actual practices and inadequate controls used by firms to maintain client-requested ESG-related guidelines and mandates, including procedures to comply with client-requested restrictions and negative screens.  In particular, EXAMS highlighted firms that touted abilities to manage client ESG restrictions in marketing materials but had not yet implemented such solutions.  On the proxy voting front, the staff observed firms that claimed to have procedures to review ESG-related proxies on a case-by-case basis but failed to implement such procedures.

  • Performance Advertising and Marketing

Expect examiners to review regulatory filings, contracts, websites, due diligence questionnaires, and other marketing materials and communications with clients to confirm whether the firm’s descriptions of their approach to ESG are consistent with actual practices.  This includes claims by firms to adopt a global ESG framework (such as UNPRI).  If you claim to follow any such framework, be prepared to prove it.  Again, EXAMS mainly observed inconsistencies between actual practices and disclosures, and attributed these inconsistencies to a more general “weakness in controls over public disclosures and client-facing statements”, as well as a lack of documentation to substantiate claims related to ESG.  Firms would be wise to take a fresh look at their process to ensure key stakeholders have eyes on these documents initially and as things change over time.  For example, consider your process for multiple parties to review Form ADV 2A disclosures and whether you could adapt similar workflows to help keep tabs on ESG-related content.

  • Compliance Programs

Expect EXAMS to dive deep into written policies and procedures concerning ESG investing practices and comparing them with actual practices used throughout the firm.  This will likely be a test, not only of how well your compliance team understands the academic aspects of compliance for ESG investing, but also how aware the compliance team is of the firm’s investment, sales/marketing, and product development team activities.  EXAMS noted compliance programs that were simply not keeping pace with firms’ ESG product rollouts and investment strategy changes to incorporate ESG factors.  For example, it called out firms without written policies and procedures to address their portfolio management processes and the compliance reviews and oversight that should accompany them.  EXAMS also highlighted inadequate oversight of subadvisers providing ESG-focused services.  Finally, the staff observed compliance departments that, in its view, lacked sufficient ESG-related knowledge about their firm’s activities.

One thing remains clear – firms that manage and market ESG-focused strategies, or simply accept client restrictions of an ESG nature, should be on alert that EXAMS will likely take a very close look under the hood during upcoming exams.  The compliance lift to ensure that policies and procedures reflect actual business practices in this area is already material and only shows signs of escalating.  This is also one area of compliance worth highlighting the tremendous value of having a CCO with a genuine “seat at the table.”  That CCO will be best positioned to manage the risks highlighted by this alert, lead a compliance team armed with current institutional knowledge, and communicate openly across investment, product development, and marketing teams.  Contributed by Cari A. Hopfensperger, Managing Director.

For Broker-Dealers

SEC Issues Risk Alert to Broker-Dealers Identifying Known Deficiencies Related to AML Programs. Broker-Dealers are essential players in preventing criminals from misusing our financial systems to conduct criminal activities, including terrorist financing. To satisfy its obligations under the Bank Secrecy Act, the SEC requires a firm to establish and implement policies, procedures, and internal controls reasonably designed to identify and report suspicious transactions to the appropriate authorities.  In this risk alert, the SEC’s Division of Examinations (“EXAMS”) shares its findings from recent examinations of broker-dealers and mutual fund AML programs.  The material deficiencies noted by EXAMS relate to inadequate and policies and procedures, failure to implement procedures, failure to respond to suspicious activities, and filing of inaccurate or incomplete SARs.  We encourage firms to use this information to review and potentially enhance their AML programs.

Policies and procedures must be specifically tailored to address the firm’s AML risks associated with the firm’s products and services, customer base, and geographic locations.  AML procedures should address red flags relevant to the firm’s business operations, the use of automated monitoring reports to identify suspicious activities, and establish adequate reporting thresholds (e.g., low priced securities transactions, transaction amounts that meet or exceed SAR reporting requirements).   Firms must make reasonable use of available transaction reports to monitor for suspicious transactions and follow-up on red flags identified in the procedures and violations regarding prohibited transactions.  The SEC takes exception when a firm does not conduct or document due diligence in response to known indicators of suspicious activities, or fails to file SARs when the firm knew, suspected, or had reason to suspect they were being used to facilitate a crime.  Finally, EXAMS notes that when firms file inaccurate or incomplete SARs, it hinders the authorities from assessing the criminal or regulatory implications of the suspicious activities.  Do not omit material facts or use boilerplate language.  The information provided should provide a clear picture of the suspicious activities in the customer account(s).

Hardin’s team includes Certified Anti-Money Laundering Specialists, standing by to assist you with the ongoing review and development of your AML Program.  Contributed by Rochelle A. Truzzi, Managing Director.

FINRA Regulatory Notice 21-09: FINRA Adopts Rules to Address Brokers with a Significant History of Misconduct. FINRA has amended several rules to tighten the requirements around the hiring of registered representatives with a history of misconduct.  A number of the rule amendments became effective on April 15, with the remaining becoming effective on May 1, June 1, and September 1.  Highlights from the amendments:

  • Member firms may be required to submit a Continuing Membership Agreement (“CMA”) to FINRA if they wish to hire a registered representative that within the previous five years have: one or more “final criminal matters”; or two or more “specified risk events” on their record. FINRA will make the CMA determination after the member firm submits a Materiality Consultation to FINRA.
  • In instances where disciplinary actions are appealed to the National Adjudicatory Council, mandatory heightened supervisory procedures will be required for the respondent. Further, the FINRA Hearing Officer may impose additional conditions or restrictions on the respondent.
  • Heightened supervisory procedures will now be required for statutorily disqualified associated persons during the period that FINRA reviews an eligibility request.

For another viewpoint, check out this article published by Alan Wolper at Ulmer & Berne: FINRA’s New Rules Are A Game-Changer, Especially When It Comes To Hiring . . . And Not in A Good Way.  Wolper details what FINRA is doing with these amendments and, more importantly, how the amendments will impact member firms going forward.

Firms are encouraged to review and update their hiring procedures, if necessary, to ensure compliance with these new requirements.  Contributed by Doug MacKinnon, Senior Compliance Consultant.

Regulatory Notice 21-07: FINRA Provides Guidance on Common Sales Charge Discounts and Waivers for Investment Company Products. This notice did not create any new legal or regulatory requirements, nor did it provide any new interpretations for any related rules. Instead, FINRA, again, as it has done many times before, is reminding members of their obligations regarding sales charges and waivers for investment company products. The notice addresses types of discounts and waivers, common findings, and adequacy of supervisory systems.  The material presented in the notice is straightforward, yet it provides an excellent blueprint for members to leverage when reviewing their compliance programs.  Contributed by Doug MacKinnon, Senior Compliance Consultant.

Lessons Learned 

SEC Charges Auditor for Failing to Register with the PCAOB. Why is this case important for broker-dealers and investment advisers to read?  Because situations like this can result in multiple rule violations such as violation of Section 102(a) of the Sarbanes-Oxley Act of 2002, Rule 2-02 (b)(1) of Regulation S-X, SEA Rule 17a-5, and Rule 206(4)-2 of the Advisers Act.  Brokers and advisers can avoid this situation by adopting simple written procedures that require the firm to conduct the initial and ongoing due diligence of its auditors.  Due diligence procedures should include verifying an auditor’s PCAOB status before engagement and any audit or attestation commencement.  Research your auditor on the PCAOB website at:  Contributed by Rochelle A. Truzzi, Managing Director.

Lies of Omission are Still Lies – Individuals Censured, Barred Over Private Fund Disclosures. Taylor C. Sadek (“Sadek”), former co-principal of the Indiana state-registered investment advisory firm, Foundry Capital Group, LLC (“Foundry”), was censured by the SEC and ordered to pay a civil money penalty of $30,000.  The censure and fine were related to Sadek’s misrepresentations and omissions to investors on the performance of a private fund managed by Foundry.  Troy Marchand (“Marchand”), another former co-principal of Foundry and portfolio manager to the fund, was also barred from the securities industry for at least five years over his misrepresentation and omissions to investors.

From February to November 2017, Sadek and Marchand sent misleading quarterly newsletters to the private fund’s investors.  The fund made investments in two entities experiencing financial difficulties.  At the same time, investor newsletters reported expected performance that included accrued interest payments from these entities even though they stopped making interest payments for the past eleven months.  To make matters worse, the interest due from these investments comprised about 40% of the interest due to the fund.  The newsletters also omitted material information, such as Sadek’s concerns over the success of these two entities.  Both new and existing investors made investments in the fund after they received the newsletters.

The SEC also censured Scott Wolfrum (“Wolfrum”), an investment advisor and brokerage representative who raised more than $20 million for Foundry’s fund.  Wolfrum was ordered to pay disgorgement of $140,125, prejudgment interest of $21,354, and a civil money penalty of $75,000, resulting from his failure to disclose his conflict of interest in the offer and sale of the fund to investors.  Wolfrum failed to tell investors that he obtained finders fees from the fund’s investment in certain entities and that his family held an equity interest in certain fund holdings.

Whether a firm is an SEC or state-registered investment adviser, broker-dealer, or security issuer, each must follow applicable anti-fraud laws, rules, and regulations and provide disclosures to allow a reasonable person to make an informed investment decision.  This includes disclosing unfavorable information, all material information, and conflicts of interest such as a family or close personal relationship with a portfolio company, and any direct or indirect compensation received from the offer and sale of a security.  Contributed by Glenn R. Skreppen, Senior Compliance Consultant.

Worth Reading, Watching and Hearing

Filing Deadlines and To-Do List for May 2021


  • Form 13F: Form 13F quarterly filing is due for Q1 2021 within 45 days after the end of the calendar quarter. Due date is May 17, 2021.
  • Annual Entitlement User Account Certification. FINRA requires broker-dealers and advisers to conduct an annual review of its IARD user accounts and certify that access and entitlements are appropriate for each user’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.  Only the SAA has access to this certification, and failure to complete the certification timely will result in the suspension of all user accounts associated with the firm until the certification is complete.  The 2021 certification period is April 19-July 19, 2021.
  • ERISA Schedule C of Form 5500 Disclosure: An adviser 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 adviser manages or that are invested in the adviser’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, 2021. (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). 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 May 15, 2021.
  • Form PF for Large Hedge Fund Advisers: Large hedge fund advisers must file Form PF within 60 days of each quarter-end on the IARD system. Due date is May 30, 2021.


  • 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. Failure to complete the certification by the established deadline will result in all user accounts associated with the firm to be suspended until the certification is complete. The 2021 certification period is April 19-July 19, 2021.
  • Rule 17a-5 Monthly and Fifth FOCUS Part II/IIA Filings. For the period ending April 30, 2021. 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 25, 2021.
  • Supplemental Inventory Schedule (“SIS”). For the month ending April 30, 2021. 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 28, 2021.
  • 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, 2021.
  • SIPC-7 Assessment. For firms with a Fiscal Year-End of March 31st. 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, 2021.
  • SIPC-3 Certification of Exclusion from Membership. For firms with a Fiscal Year-End of April 30th, 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, 2021.



  • 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 May 7, 2021.
  • 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 date is May 30, 2021.  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.


Partner with Hardin Compliance

Have a compliance question or want an independent review of your compliance program?  Hardin Compliance can help!  Contact us today at 1.833.942.2218 or, or visit our website at for more information.


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.

Photo by Neven Krcmarek on Unsplash.