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Regulatory Update April 2017

Matthew Hardin will be speaking at the 2017 Financial Markets Association Securities Seminar in Fort Lauderdale, April 26-28. For more information, check out the Financial Markets Association website. Hope to see you there!

  • Compliance Outreach Programs for 2017: The SEC has opened registration for its latest round of compliance outreach program seminars for investment companies and investment advisers. The seminars will be held in Portland, Oregon on May 17; New York, New York on June 7; Boston, Massachusetts on June 13; and Chicago, Illinois on June 13. The Chicago seminar will be webcast. The seminars will include an overview of OCIE’s 2017 exam priorities and panel discussion on “current topics in in investment management regulation.”
  • DOL Fiduciary Rule Status: The DOL has provided a small amount of comfort in light of the uncertainty of when (or if) its Fiduciary Rule will become effective. The department issued a “temporary enforcement policy”, giving financial institutions some breathing room by stating that it won’t be taking any immediate action to enforce the Fiduciary Rule. So, if the DOL decides to delay the Fiduciary Rule, but the delaying regulation is not finalized until after April 10, the DOL will back off from enforcement until the delay is finalized. If the DOL decides not to delay the Fiduciary Rule, advisers and financial institutions will be given a “reasonable period” after April 10 to comply. Unfortunately, the DOL’s statement provides no protection against other regulators or private law suits. The IRS is responsible for enforcing the provisions of the rule with respect to IRAs and has the power to assess excise taxes.
  • DOL Fiduciary Rule limbo:  Chances are good that the delay until June 9 will happen, especially since R. Alexander Acosta, President Trump’s nominee for Secretary of the Department of Labor, said he would follow the president’s February 3 executive order directing a review of the fiduciary rule. Acosta, law dean at Florida International University in Miami, made the statement before the Senate Committee on Health, Education, Labor and Pensions during his confirmation hearing on March 22, 2017. There has also been a huge response from investment advisers, broker dealers, industry groups and the public on the proposal to delay the rule, with more than 1,000 comment letters logged as of March 17, 2017.
  • Information Update for Advisors Relying on the Unibanco No-Action Letters: The SEC’s Division of Investment Management issued a four-page update for multi-national financial firms that rely on the Unibanco series of no-action letters. These no-action letters generally allow a non-U.S. advisory affiliate of a registered adviser, called a ‘‘participating affiliate,’’ to share personnel with, and provide certain services to U.S. clients through, the registered adviser, without requiring the participating affiliate to register under the Advisers Act.  In this update, the SEC staff lists certain “Jurisdictional Documents” it believes affect the staff’s ability to monitor the conduct of participating affiliates. These documents include documentation of a participating affiliate’s consent to U.S. and SEC jurisdiction and evidence that the participating affiliate has appointed a U.S. agent for service of process.  The SEC also provides an email address to use when sending these Jurisdiction Documents ( Although this is simply an “Information Update” and does not have the force of a regulation or law, providing these documents may help firms avoid a deficiency during an exam.

Lessons Learned From Recent SEC Cases:

The Best Defense is Often a Good Offense: In this order, Aaron Parthemer, a registered rep and IAR was selling away from his firm, was nailed for not disclosing his conflicts of interest in the sale of the securities and representing himself as an NFL fiduciary (National Football League Players Association Advisor).  What makes this interesting is that the SEC found that Parthemer violated the books and records requirements of his respective registered entities and committed fraud using his personal email and text messaging systems. Luckily, both firms were able to provide evidence that the Parthemer understood their policies and procedures and had received warnings not to use personal email or text messaging accounts for business use.  The firms were able to distance themselves from this rogue broker by having an accountability system in place.  Parthemer was barred from the industry, and appears to have only escaped fines as a result of personal bankruptcy.

On a lighter note, this is probably the first time the SEC has enforced the NFLPA Code of Conduct, which places a fiduciary duty on NFLPA Financial Advisors to act in the best interest of his/her Player-clients. The broker dealer and investment adviser firms that employed Parthemer undoubtedly had similar codes of ethics.  Maybe this is a signal that the SEC is starting to pay attention to the requirements of designations claimed by financial advisers, or possibly the administrative judge was just a big fan of the HBO series Ballers.

Trading Away in Wrap Programs is still an SEC Hot Button: In 2016, the SEC brought enforcement actions against Robert W. Baird & Co., Inc. and Raymond James and Associates for failure to monitor the trading activity of sub-advisers. Stifel, Nicolaus & Co., Inc. has now joined the party, having been fined $300,000 by the SEC for, among other things, a failure to disclose to wrap account clients the additional fees incurred as a result of “trading away practices” by sub-advisers.  The big issue here is that Stifel offered wrap accounts managed by third-party managers acting as sub-advisers.  Apparently these sub-advisers used other broker-dealers to execute some trades, a practice called “trading away.”  As a result, clients were paying additional commissions but received no disclosure about the practice.  The SEC did not provide any details about how much clients might have been charged as a result, nor was there any discussion of best execution.   The big issue here:  violation of the Compliance Program Rule (Rule 206(4)-7 of the Advisers Act) for failure to have policies and procedures to review the sub-advisers trading away practices, resulting in inadequate disclosure to clients.

Failure to Disclose Revenue Sharing Arrangements Results in Violation of Compliance Program Rule:  Voya Financial Advisors, Inc. (“Voya”) had to disgorge more than $2.6 million and pay a $300,000 penalty to settle charges from the SEC for failing to disclose to clients the compensation received from an unaffiliated broker dealer.  Voya participated in a no-transaction-fee mutual fund program offered by its clearing broker, where the clearing broker gave Voya a percentage of revenues received from mutual funds in the program. Voya was also paid for administrative services it provided to the clearing broker.  The SEC found that Voya’s actions violated the Advisers Act’s anti-fraud provision, Section 206(2), as well as the Compliance Program Rule (Rule 206(4)-7 of the Advisers Act).  The SEC found that Voya only partially disclosed the arrangement on its Form ADV, and its advisory agreements did not contain any disclosures, even though the firm’s policies and procedures required disclosure on all material conflicts of interest.  In addition, the SEC also found that Voya made untrue statements of fact in its ADV.  Even if the DOL’s Fiduciary Rule never becomes effective, rest assured that the SEC is going to start imposing a more rigorous disclosure standard against advisers.

Worth Reading: 

Filing Deadlines and To Do List for April


  • Form 13H: Following an initial filing of Form 13H, all large traders must make an amended filing to correct inaccurate information promptly (within 10 days) following the quarter-end in which the information became stale (unless they are on Inactive Status). The due date is April 10, 2017.
  • Form ADV Part 2A Delivery: Registered investment advisers that have made material changes to Form ADV Part 2A are required to deliver to each client either an updated Form ADV Part 2A that includes a summary of material changes, or a summary of material changes with an offer to provide a copy of the updated 2A and information on how to obtain the Form ADV Part 2A. Delivery is required 120 days after an SEC-registered adviser’s year-end. For advisers with a fiscal year end of December 31, the deadline is April 30, 2017.
  • 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 information about compensation received with respect to ERISA plan assets that the adviser manages or that are invested in the adviser’s funds. If you have ERISA plan clients, they may request this information in order to file Form 5500 by July 31, 2017.


  • 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 (April 15).
  • 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, 2016 year-end, the date is April 30, 2017). The deadline for private funds that are fund of funds is 180 days of the funds’ fiscal year end. That’s June 29, 2017 for funds with December 31 year-end.
  • Form PF Filing Fee: Advisers required to file Form PF by April 29, 2017 should ensure IARD filing fees have been paid before filing is due (May 1).
  • Form PF: Initial Form PF filing is due within 120 days of fiscal year-end for private fund advisers that are not Large Hedge Fund Advisers or Large Liquidity Fund Advisers and manage more than $150 million in regulatory assets under management attributable to private funds as of December 31, 2016. The due date is May 1, 2017.
  • Form PF Annual Amendment: Form PF Annual Amendment is due within 120 days of fiscal year-end for private fund advisers that are not Large Hedge Fund Advisers or Large Liquidity Fund Advisers and manage more than $150 million in regulatory assets under management attributable to private funds. The due date is May 1, 2017.

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.