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No Slack for Firms on Compliance with Reg BI and Form CRS; SEC Eases Deadlines and Restrictions on Custody and Mutual Funds, and Disclosure of PPP Loans for Advisers: Regulatory Update for May 2020

For Investment Advisers and Broker Dealers: SEC Actions

SEC Provides Scope and Content of Upcoming Examinations Related to Form CRS.  After June 30, 2020, the Office of Compliance Inspections and Examinations (“OCIE”) plans to examine subject broker-dealers and SEC-registered investment advisers to determine whether those firms have made a good faith effort to comply with Form CRS.  Firms should ensure their implementation plan addresses the following focus areas:

  • Delivery and Filing. File Form CRS with the Commission before the June 30, 2020 deadline, post it to the firm’s website, and deliver to retail investors (both new and existing) by July 30, 2020.  Also, evaluate the firm’s policies and procedures to ensure they adequately address the delivery processes and dates.
  • Ensure all Required Items are included in the relationship summary and contain true and accurate information.  Also, identify omitted or misleading material facts related to the firm’s services, fees and costs, compensation, conflicts of interest and disciplinary history.
  • Formatting. Assess whether the summary includes prescribed and distinguishing text features and is written in plain English.
  • Updates. Review policies and procedures for updating the relationship summary, including filing with the Commission, providing notification to retail investors, and highlighting the most recent changes.
  • Recordkeeping. Update policies and procedures and records to include the firm’s compliance with recordkeeping requirements.

Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

SEC Aggressively Pursues Misuse of MNPI during COVID-19 Pandemic. Stephanie Avakian and Steven Peikin, co-directors of the SEC’s Division of Enforcement, issued a public statement warning corporate insiders to be “mindful of their obligations” to keep material nonpublic information confidential and not use it for personal gain.  This statement was released on March 23, just four days after four senators dumped millions of dollars of stock following classified briefings on the threat of the COVID-19 outbreak in January.  The senators denied any wrongdoing, but it seems the SEC decided to take advantage of the situation and issue this pointed reminder.  The SEC has also been actively issuing trading suspensions related to the COVID-19 pandemic, citing concerns “about the adequacy and accuracy of publicly available information,” including the spread of misinformation about the availability of N95 masks, purported coronavirus treatments and vaccines, COVID-19 testing kits, and COVD-19 prevention products.  The SEC is sending a strong message that it will crack down on insiders and others that try to profit illegally from the COVID-19 crisis.

The takeaway for advisers, especially those managing private equity and hedge funds, is to be especially alert to the risk of trading on inside information. Remind employees that nonpublic information from Congress, the executive branch, and government agencies can be deemed MNPI, and these areas of government have rules in place governing confidential and nonpublic information.  Advisers receiving information from government employees should make it clear that they do not want to receive confidential or MNPI regarding governmental actions.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

For Investment Advisers: SEC Actions

SEC Custody FAQs Updated Again to Address the Impacts of COVID-19 Pandemic.

  • Surprise Exams (Question IV.7): This new FAQ confirms that independent public accountants that are unable to complete a surprise examination and submit Form ADV-E within 120 days due to disruptions caused by COVID-19, will have until 45 days after the original due date in which to file the Form ADV-E.
  • Physical, Non-Transferrable Certificates (Question VII.4): In another new FAQ, the SEC acknowledges that some qualified custodians are temporarily not accepting physical certificates of certain securities in response to the COVID-19 pandemic.  These are securities that, due to the existence of a certificate, fail to qualify as a “privately offered security” as defined by Rule 206(4)-2(b)(2) and therefore a qualified custodian would otherwise be required to hold (Example: a collateralized loan obligation or other types of certificated notes).  In response to this challenge, the adviser may temporarily hold such securities, subject to the following conditions:

“(1) the physical certificates can only be used to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer; (2) ownership of the security is recorded on the books of the issuer or its transfer agent (or person performing similar functions) in the name of the client; (3) the physical certificates contain a legend restricting transfer; (4) the physical certificates are appropriately safeguarded by the adviser and can be replaced upon loss or destruction; and (5) the adviser makes and keeps (in accordance with the terms of Advisers Act Rule 204-2) a record of the custodian’s closure.”

These updates are just two more in a series of FAQ updates by the SEC in response to challenges created by the COVID-19 pandemic.  Here are links to the SEC’s Custody Rule FAQs and a new COVID-19 FAQ page geared towards RIAs and Investment Companies.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

Fund Managers with Direct Investments in Foreign Entities Can Apply for Extension for BE-10 Filing. The U.S. Department of Commerce, through the Bureau of Economic Analysis (the “BEA”), instituted a mandatory survey five years ago called the Benchmark Survey of U.S. Direct Investment Aboard.  The BEA’s rule requires the filing of Form BE-10 by any U.S. person that had a “Foreign Affiliate” (defined below).  This year, the deadline for the 2019 BE-10 Survey is (a) May 29, 2020 for respondents with fewer than 50 BE-10 forms, and June 30, 2020, for respondents with 50 or more BE-10 Forms to complete.  To get an extension, contact the BEA before the applicable deadline using the E-File system.  The BEA is actively considering extensions to August 31, 2020 on a filing-by-filing basis.

There is no “de minimis” exemption to this filing, so any U.S. investment adviser that manages funds with direct investments in foreign entities may be required to report. For example, a U.S. investment adviser that manages U.S. funds that own or control (directly or indirectly) 10% or more of the “voting securities” of a non-U.S. entity (“Foreign Affiliate”) is required to file.  Additionally, a U.S. general partner, managing member, or similar entity that owns 10% or more of the “voting securities” of a foreign fund (including a U.S. person holding voting shares of a fund organized as a Cayman corporation) will also have to file.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Between a Rock and a Hard Place: Do Advisers Have to Disclose PPP Loans?  The big question investment advisers are asking is whether they need to disclose that they have received a Paycheck Protection Program (“PPP”) loan from the U.S. Small Business Administration in connection with COVID-19 in its Form ADV Part 2A. Item 18 B of the form states:

If you have discretionary authority or custody of client funds or securities, or you require or solicit prepayment of more than $1,200 in fees per client, six months or more in advance, disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.

First, a firm does not have to make disclosures related to its financial condition if a firm does not (i) have discretionary authority (ii) have custody of client assets, or (iii) require prepayment of fees or more than $1,200 in fees per client.

Second, the SEC’s Division of Investment Management Coronavirus Response FAQs addressed the question in Q II.4.  The SEC did not state that advisers are required to disclose that they took advantage of the PPP loan program.  Instead, the Staff said:

As a fiduciary under federal law, you must make full and fair disclosure to your clients of all material facts relating to the advisory relationship.  If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.  If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact.   In addition, if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18…”

What does this mean?  Every adviser has to make its own determination, based on a “facts and circumstances” analysis.  Many firms could have met their obligations to clients without the PPP loan, but would have had to consider cutting salaries or staff due to the economic uncertainty and market volatility caused by the COVID-19 pandemic.  In that situation, a firm could argue that the PPP loan was necessary but not material to meeting its obligations to clients.  However, if a firm already had financial issues and the loan was a way to keep its doors open, then disclosure would be required.

Most advisers hate to disclose anything negative about their financial condition since they don’t want clients to view the firm as unstable.  From a compliance standpoint, the most conservative approach is to disclose the loan in the Form ADV Part 2A under Item 18.

Most firms have already delivered either the Form ADV Part 2A to clients, or a letter offering to deliver the brochure, along with a summary of material changes to meet the April 29 delivery deadline.  If this disclosure about the PPP loan was not included, the firm has to decide whether it needs to be disclosed and whether the disclosure is material.  If the disclosure is material, then the firm would have to notify clients of the change, thus incurring additional delivery charges and calling attention to the disclosure.

Of course, with all the buzz about this question, many firms are going to make the disclosure.  Firms that take a PPP loan and do not disclose it are probably going to receive extra regulatory scrutiny. Our advice is to document the reasons for taking the PPP loan to support the decision about disclosure and about materiality.  The arguments for taking the loan depend on each adviser’s unique situation and the nationwide effects of the COVID-19 pandemic.  For example, in late March the U.S. economy was closed down as a result of national “shelter in place” orders, the Dow Jones Industrial Average was down 36% from its high less than six weeks earlier, and the markets became increasingly volatile, resulting in the decline of firm assets under management (and accompanying revenue).  Given the financial uncertainty and the devastating effects of COVID-19, many firms wanted to avoid laying off staff until the economy became more stable.  Under those circumstances, it could be argued that the loan was not material to a firm’s ability to meet its client obligations, but it was necessary to continue to maintain its current staff.  For more on this thorny issue, see the Worth Reading section.  Contributed by Jaqueline M.  Hummel, Partner and Managing Director.

For Mutual Funds:  SEC Actions

SEC Issues Short-Term Funding Relief for Registered Funds. The SEC has issued conditional exemptive relief permitting open end funds to borrow from non-registered investment company (RIC) and non-bank affiliates, and for those affiliates to make collateralized loans to such open-end funds, subject the fund Board’s determination that the loan is in the best interest of the fund and its shareholders, and that borrowings will be used to meet redemptions.  Additionally, RICs may leverage interfund borrowing capabilities through this relief, subject to conditions that vary by whether or not the fund already has an established interfund lending facility.  Finally, an open-end fund may deviate from its policy on “lawful lending or borrowing” (as stated in the fund’s registration statement), again subject to certain conditions detailed in the order.  Funds may leverage this relief from March 23, 2020 to the latter of June 30, 2020 or at least two weeks from the date of a public notice of termination by the SEC.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

SEC Statement on Mutual Fund Disclosures Regarding COVID-19.  Following guidance to public issuers by the SEC’s Division of Corporate Finance, the Staff issued a statement reminding investment companies of their disclosure obligations.  The guidance encourages funds to consider whether COVID-related events may impact their fund disclosures, including those pertaining to risk.  “These are unprecedented times raising unique and often previously unconsidered issues.  We recognize circumstances may evolve, and some investment companies may encounter particularized obstacles.  To the extent that an investment company is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, the investment company should engage with the Division of Investment Management.”  Funds should consider whether to update disclosure documents to address increased risk, and whether the increased risk is due to business operations, financial condition or market risk.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

For Broker-Dealers:  FINRA Actions

SEC Publishes Risk Alert re: Reg BI.  After June 30, 2020, OCIE plans to examine subject broker-dealers to determine whether those firms have established and implemented policies and procedures reasonably designed to achieve compliance with Reg BI.  The Appendix to the risk alert provides a sample documentation request list that OCIE may use in upcoming examinations and is a helpful tool for developing your policies and procedures.  Firms should ensure their implementation plan addresses the following focus areas:

  • Disclosure Obligation. Assess the firm’s disclosure of the capacity in which a recommendation is made, material fees and costs that apply to the customer’s transactions, holdings, and accounts, and material limitations.  This includes a review of the content and timing of disclosures and other firm records (e.g., fee schedules, compensation programs and related conflicts of interest, monitoring disclosures, disclosures of limitations, lists of proprietary products sold to retail investors).
  • Care Obligation. Review documentation of information collected to develop an investment profile, the process to assess potential risks, rewards, and costs of the recommendations in light of the investment profile, and the process to ensure interests of retail investors are placed ahead of the broker-dealer.  Also, review documentation supporting that recommendations made are in the retail investor’s best interest.
  • Conflict of Interest Obligation. Assess the firm’s policies and procedures addressing conflicts that create an incentive for an associated person to place its interests ahead of their customers, conflicts associated with material limitations, and the elimination of sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities or products within a limited period of time.  In addition, OCIE is interested in firm policies and procedures to identify, disclose, and mitigate or eliminate current and future conflicts of interest.
  • Compliance Obligation. Evaluate the firm’s controls, remediation of noncompliance, training, and periodic review conducted as part of its policies and procedures.

Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

Lessons Learned

SEC Settles Final Share Class Selection Disclosure Initiative Enforcement Actions. On April 17, 2020, the SEC settled three additional share class selection cases with advisers who self-reported.  Settlements were reached with Merrill Lynch, Cozad Asset Management and Eagle Strategies, bringing the total reimbursements to investors to $139 million.  The SEC noted that these orders are the last in the Share Class Selection Disclosure Initiative (SCSD Initiative), but firms should remain on top of their disclosure game as the SEC focus on conflict disclosures continues unabated and the favorable settlement terms offered by the initiative have come to an end.  When announcing the SCSD Initiative in February 2018, the Division of Enforcement warned, “Eligible advisers are cautioned that staff from the Commission’s Office of Compliance Inspections and Examinations and the Division of Enforcement plan to continue to make mutual fund share class selection practices a priority…  Enforcement actions outside of the SCSD Initiative will likely result in the staff recommending violations and remedies beyond those described in the Initiative, including penalties.”  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

Worth Reading

Filing Deadlines and To-Do List for May 2020


  • Form 13F: Form 13F quarterly filing is due for Q1 2020 within 45 days after the end of the calendar quarter. Due date is May 15, 2020.
  • Annual Entitlement User Certification: FINRA requires firms to conduct an annual review of its IARD user accounts and ensure 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 through IARD.  Only the SAA has access to this certification, and a Quick Reference Guide to the entitlement process is available on the IARD site.  This year, the certification period opened on April 20th and must be completed by July 20, 2020.


  • 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, 2020.
  • 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, 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.

BROKER-DEALERS  (* Filing extensions may be available)

  • 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.  Notifications were delivered to the SAAs on or around April 20th.  Due July 20, 2020.
  • Rule 17a-5 Monthly and Fifth FOCUS Part II/IIA Filings *: For the period ending April 30, 2020.  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 26, 2020.
  • Supplemental Inventory Schedule (“SIS”) *:For the month ending April 30.  The SIS must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, with inventory positions as of the end of the FOCUS or FOGS reporting period, unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000; or (2) inventory positions consisting only of money market mutual funds.  A firm with inventory positions consisting only of money market mutual funds must affirmatively indicate through the eFOCUS system that no SIS filing is required for the reporting period.  Due May 29, 2020.
  • SIPC-3 Certificationof Exclusion from Membership: For firms with a Fiscal Year-End of April 30, 2019, 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 30, 2020.
  • 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, 2020.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of March 31, 2019.  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, 2020.



  • 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, 2020.


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Have a compliance question or want an independent review of your compliance program?  Hardin Compliance can help!  Call us today at 1.724.935.6770, 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.

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