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SEC (Finally) Modernizes Advertising and Solicitation Rules; NY Requires IAR Registration; DOL’s New Rule Eliminates ESG from Investment Decisions; SEC to Take Second Crack at Broker-Dealer Reg BI Compliance: Regulatory Update for January 2021

For Investment Advisers

At Long Last – SEC Modernizes the Advertising and Solicitation Rules!  Cramming it in just before the end of 2020, the SEC adopted a new rule to replace the existing advertising and cash solicitation rules. The final release clocks in at 434 pages, so unpacking all the changes will take some time.  Stay tuned for future posts.  Fortunately for advisers, the runway for compliance is long: 18 months after the effective date (which is 60 days after publication in the Federal Register).

The headlines include removing prohibitions on testimonials and past specific recommendations, adding disclosures about advertising practices in Form ADV, and allowing hypothetical and predecessor performance.  The SEC also dropped the pre-approval requirement for marketing materials included in the proposing release.

On balance, this is a positive development for investment advisers.  The rule provides substantive guidance for many trickier types of disclosures and replaces the current hodge-podge of no-action letters and other guidance, which the SEC plans to withdraw as the new rule becomes effective.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

NY State Updates – Registration of NY IARs and Blue Sky Changes.  On December 1, 2020, New York amended its Investment Advisory Act to require Investment Adviser Representatives (“IARs”) that provide investment advice from a place of business in New York to register in that state.  The registration requirements apply to IARs (and solicitors) of state-registered and SEC-registered firms.  The rule is effective February 1, 2021; however, New York IARs already providing services have until December 2, 2021, to complete their registration, provided their U4 requesting registration in New York is submitted by August 31, 2021.  Registration will require IARs to pay a $200 licensing fee and satisfy examination requirements unless a waiver is approved.  Fortunately, the examination requirement will be waived initially for IARs already providing services for at least two years before February 1, 2021, provided the IAR is not otherwise subject to any disqualifications that are identified in the new rules.  As is the case in other states, IARs may also request waivers if they hold specific designations.  State and SEC-registered advisers with IARs (including solicitors) in New York should begin to prepare for registration and waiver requests as applicable.   New York issued guidance, which includes links to the proposed and final rules and useful instructions to assist firms and their IARs in implementing the new registration requirement.

In concert with the IAR rule-changes highlighted above, New York also approved new requirements applicable to blue sky filings for securities transactions in the state.  Stay tuned for an upcoming Hardin Blue Sky blog post that will break down these new requirements!  Contributed by Cari A. Hopfensperger, Managing Director.

DOL Finalizes ESG Rule.  At the end of October, the Department of Labor (“DOL”) finalized its rule on Financial Factors in Selecting Plan Investment (the “Final Rule”), amending the “investment duties regulation” issued in 1979.  The Final Rule provides ERISA fiduciaries with guidance on evaluating investment opportunities, sending a clear message that financial factors take precedence over environmental, social, and corporate governance (ESG) considerations.  The Final Rule requires ERISA fiduciaries to select investments based on pecuniary factors, defined as “any factor that … is expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.” Simply put, ERISA fiduciaries “must never sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.”

The Final Rule provides guidance on the duty of prudence, stating that ERISA fiduciaries must compare “reasonably available alternatives with similar risks” when making investment-related decisions.  In other words, a fiduciary is not required to scour the universe of investment options but can limit its review to those that are reasonably available.

The Final Rule contains an exception that allows fiduciaries to use non-pecuniary factors when they are “unable to distinguish investment alternatives on the basis of pecuniary factors alone,” also known as the “tie-breaker test.”  Fiduciaries must maintain documentation that demonstrates a “careful analysis and evaluation” when taking advantage of the tie-breaker test.

For participant-directed plans, the new rule permits fiduciaries to include funds or investment products with non-pecuniary goals as a plan option for plans with “a broad range of investment alternatives” if the fiduciary satisfies its prudence and loyalty standards under ERISA in the selection process.  However, investment products may not be added as a qualified default investment alternative (“QDIA”) if the product’s investment objectives, goals, or principal investment strategies include non-pecuniary factors.

A fact sheet summarizing the final rule is available on the Employee Benefits Security Administration (“EBSA”) site.  ERISA fiduciaries will have until April 30, 2022, to implement any necessary changes.  Contributed by Cari A. Hopfensperger, Managing Director.

For Broker-Dealers

Broker-Dealers Should Prepare for Second Wave of Exams on Best Interest Compliance.  The SEC’s Division of Examinations (formerly known as the “Office of Compliance Inspections and Examinations”) announced its plans to “conduct enhanced transaction testing designed to examine whether broker-dealers have implemented effectively their written policies and procedures” for implementing Reg. BI.  Get ready for the staff’s focus on firms’ processes for:

  • selection of investment products,
  • consideration of costs when selecting products,
  • making recommendations to customers, including rollovers, and
  • consideration of complex products and reasonably available alternatives.

Now is also an excellent time to review the Risk Alert on Examinations that Focus on Compliance with Regulation Best Interest to ensure you have the answers to potential SEC examination requests.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

No-Action Relief Under CIP and Beneficial Ownership Rules Extended until December 9, 2022.  The SEC, in consultation with FinCEN, extended the no-action relief allowing broker-dealers to rely on a registered investment adviser to perform some or all of their obligations under the customer identification program rule (“CIP Rule”) and the customer due diligence rule regarding beneficial ownership requirements for legal entity customers (“Beneficial Ownership Requirements”).  The no-action relief has been extended until December 9, 2022.  Broker-dealers must satisfy the other provisions of the CIP Rule and the beneficial ownership requirements, which are:

  1. The broker-dealer’s reliance on the investment adviser is reasonable under the circumstances;
  2. The adviser is an SEC-registered investment adviser; and
  3. The investment adviser enters into a contract with the broker-dealer in which the investment adviser agrees that: (a) it has implemented its own anti-money laundering program consistent with the requirements of 31 U.S.C. 5318(h) and will update it as necessary to implement changes in applicable laws and guidance, (b) it will perform the specified requirements of the broker-dealer’s CIP and/or the broker-dealer’s beneficial ownership procedures, (c) it will promptly disclose to the broker-dealer potentially suspicious or unusual activity detected as part of the CIP and/or beneficial ownership procedures being performed, (d) it will certify annually to the broker-dealer that the representations in the reliance agreement remain accurate and that it is in compliance with such representations, and (e) it will promptly provide its books and records relating to its requirements under the USA PATRIOT Act.  Contributed by Rochelle A. Truzzi, Managing Director.

For Broker-Dealers and Investment Advisers

SEC Finds Advisers and Broker-Dealers Unaware of Large Trader Obligations.  The SEC Division of Examination issued a risk alert about compliance with the Large Trader Rule, Rule 13h-1 under the Securities Exchange Act of 1934 (the “Exchange Act”).  Apparently, the examination staff has been finding enough deficiencies in this area to warrant this reminder to investment advisers and broker-dealers.  As explained on our webpage, Rule 13h-1 requires “Large Traders” to identify themselves on Form 13H, obtain a Large Trader Identification Number (LTID) and provide the LTID to broker-dealers through which it trades.  Broker-dealers must maintain records of the Large Traders’ transactions, perform certain monitoring, and report to the SEC upon request.

Takeaways from this alert for investment advisers include implementing periodic testing to determine whether trading activity reaches the large trader threshold, especially if the firm has taken on substantial new assets.  Broker-dealers should also consider implementing procedures to monitor customer activity to identify customers that may be Large Traders and contacting those who have failed to provide their LTIDs.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

For Mutual Funds 

SEC Takes Fund Boards Off the Hook with New Valuation Rule.  After 50 years without new rulemaking under the Investment Company Act of 1940 to address mutual funds’ valuation practices, the SEC recently adopted a new valuation rule (Rule 2a-5) and a corresponding recordkeeping rule (Rule 31a-4).  Rule 2a-5 establishes an updated regulatory framework for fund valuation practices, including a threshold for when a fair value is required and a definition for “readily available” market quotes.  The rule is “designed to clarify how fund boards of directors can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations.”  Under the new rule, funds will be required to manage valuation-related risks, testing any fair value methodologies used, and monitor the use of third-party pricing vendors.

According to the SEC, the rule recognizes the investment adviser’s contributions to the valuation process by permitting the board to delegate the valuation determination to the adviser, subject to oversight and conditions.  Rule 2a-5 and Rule 31a-4 are effective 60 days after publication in the Federal Register, and funds will have an additional 18 months to comply.  Contributed by Cari A. Hopfensperger, Managing Director.

ADI 2020-11 Registered Funds’ Risk Disclosure Regarding Investments in Emerging Markets.  The Division of Investment Management’s Disclosure Review and Accounting Office (“DRAO”) reviews registered fund filings with a particular focus on “topics that have proven key to assessing investments, including risk disclosures.”  From time to time, DRAO also issues public statements to share observations from its reviews.  Recently, DRAO issued a new statement that encourages funds to enhance their risk disclosures related to emerging market investments.  The publication (ADI 2020-11) can be accessed here.  Contributed by Cari A. Hopfensperger, Managing Director.

Lessons Learned 

SEC Fines Investment Adviser $170 Million for Multiple Disclosure Failures.  UK-based investment adviser BlueCrest Capital Management Limited (BlueCrest) recently agreed to return $170 million to former investors to settle charges levied by the SEC involving disclosure failures, material misstatements, and misleading omissions.  The SEC found that BlueCrest quietly transferred its top traders from its flagship client fund, BlueCrest Capital International (BCI), to an internal fund and left trading for the client fund in the hands of a trading algorithm that was set up to replicate some of the trading activity of BlueCrest’s live traders.  Unfortunately for BCI investors, the algorithm, by and large, underperformed and resulted in inferior returns.

According to the SEC’s findings, BlueCrest failed to disclose to its investors and prospective investors the existence of the internal fund and the change in trading operations for BCI for more than four years.  It also failed to disclose material facts about the trading algorithm to BCI’s independent directors.  In fact, BlueCrest continued to promote its live traders’ talent as though they remained with BCI.

The lesson here is simple yet impactful.  An adviser is obligated to make accurate disclosures to its existing and prospective investors.  As a result of BlueCrest’s failure to act in the best interest of its investors and instead prioritize its own internal capital, the SEC determined that BlueCrest “willfully violated” antifraud provisions of the Securities Act of 1933 and Advisers Act of 1940, as well as the Advisers Act’s compliance rule.  Contributed by Jennifer L. Cagadas, Compliance Consultant.

Valuation Vendor Nailed for Inadequate P&P.  The SEC’s new Complex Financial Instruments Unit brought a case against ICE Data Pricing & Reference Data LLC (“ICE”), a global pricing service and investment adviser, for failing to have policies and procedures to assess the reliability of quotes received from market participants.  From 2015 through September 2020, ICE delivered prices for over 40,000 fixed-income securities based on single-broker quotes.  The SEC found ICE lacked sufficient policies and procedures and quality controls to address the risk that these prices would not reasonably reflect the value of the securities.  Inconsistent application of ICE’s existing procedures impaired its ability to determine the reliability of those quotes, resulting in inaccurate prices being delivered to clients.  Although using a third-party vendor can lend independence to the valuation process, advisers should perform initial due diligence and oversight to ensure the vendors have a sound and reliable valuation process.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Worth Reading, Watching and Hearing

Filing Deadlines and To-Do List for January 2021


  • Form 13H: Amendments to Form 13H are due promptly if there are any changes to information for Form 13H Filers. The SEC’s “Frequently Asked Questions Concerning Large Trader Reporting,” response 2.5 says Form 13H Filers may file an amendment and an annual amendment together if any changes occurred during the fourth quarter to the information contained in Form 13H. Amendments are due “promptly,” which we interpret as within ten days. Recommended due date: January 10, 2021. (Note: Neither the SEC nor its staff has provided guidance on the definition of “promptly” for Form 13H.)
  • Annual Renewal Program for IARD System: The IARD Renewal Program facilitates the annual renewal of investment adviser (IA) firms and their IA representatives’ (IARs) registrations with jurisdictions/states. Final renewal statements will be available on the IARD system on January 2, 2021.  The deadline for the receipt of the final statement payment is January 22, 2021. Questions? Check out the FAQs for more information.


  • 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.  For funds with a December 31 fiscal quarter end, Form PF is due January 15, 2021.
  • 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 January 15, 2021.


  • 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.
  • Customer Complaint Quarterly Statistical Summary: For complaints received during the 4th Quarter, 2020. 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 January 15, 2021.
  • Final Renewal Payment: Full payment of your FINRA 2021 Final Renewal Statement is due January 22, 2021.
  • FINRA Contact System Annual Review: FINRA Rule 4517 requires Firms to review and, if necessary, update the necessary FINRA Contact System information within the first 17 business days of each calendar year.  Due January 25, 2021.
  • MSRB Form A-12 Annual Affirmation: MSRB Rule A-12(k) requires each broker that is a member of the MSRB to review, update as necessary, and affirm the information in Form A-12 during the Annual Affirmation Period that begins on January 1 of each calendar year and ends 17 business days after that.  Due January 25, 2021.
  • Quarterly FOCUS Part II/IIA Filings: For Quarter ending December 31, 2020. SEC requires that member firms file a FOCUS (Financial and Operational Combined Uniform Single) Report Part II or IIA every quarter.  Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Due January 27, 2021.
  • Annual FOCUS Schedule I Filing for Period, 2020: SEC requires all broker-dealers to submit operational information as of December 31st via the Annual FOCUS Schedule 1 Filing.  Due January 27, 2021.
  • Quarterly Form Custody: SEC requires that member firms file Form Custody under Securities Exchange Act Rule 17a-5(a)(5) for the quarter ending December 31, 2020.  Due January 27, 2021.
  • Annual Reports for Fiscal Year-End November 30, 2020: SEC requires that member firms submit their annual 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 January 29, 2021.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of November 30th. 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 January 29, 2021.
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of December 31st 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 January 30, 2021.
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of June 30th. 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 January 30, 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 January 8, 2021.


Partner with Hardin Compliance

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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