Monthly Archives: October 2013

SEC Speech Emphasizes Cooperation and Importance of Compliance Programs

Last month, the Securities and Exchange Commission’s (“SEC”) Chairwoman Mary Jo White caused a stir within the advisory industry when she issued a speech stating that the SEC will begin zeroing in on “minor infractions” of investment advisers.  This past week, Ms. White spoke at the National Society of Compliance Professionals (“NSCP”) National Membership Meeting focusing on how the SEC will approach compliance officers.  Ms. White stated that she envisions the SEC to work with compliance officers “to support [compliance officer’s] efforts to create a comprehensive compliance environment within [their] firms,” and that the SEC is “far more interested in helping [compliance officers] succeed before an examination, than we are in catching…a violation in the course of an examination.”

Ms. White gave examples of how the SEC is trying to support compliance officers.  One method mentioned the SEC conducting in-person meetings with compliance officers and other senior officials of a firm.  These meetings will be used to help identify whether sufficient resources are being provided to compliance personnel, as well as to identify whether compliance is “woven into the fabric of the firm” to  allow for an open-dialogue to help promote the roles of compliance officers within the company.

Another method discussed was the SEC’s initiative to use its website to highlight practices, policies and procedures that may be subject to additional scrutiny, as a means of allowing compliance officers to better focus their efforts and resources in areas of need.

Ms. White also highlighted the agency’s new Risk Analysis Examination (“RAE initiative”).  This type of examination done by the SEC uses “quantitative analytics” enabling the SEC to analyze the metrics of a business to detect and inform compliance officers of activities, trends and issues within a firm which may have otherwise been unknown, allowing compliance officers to stay abreast of possible areas of need within the firm. 

Ms. White also was quick to point out recent enforcement actions of the SEC against advisory firms and compliance officers.  She stressed the importance for firms to create, monitor, test and update their compliance programs, and that failure to do so may result in penalties against firms and their officers.  As such, it is critical for financial firms to design compliance programs that are customized to its particular needs, which includes effective means of enforcing and monitoring such programs. 

For further information on this, or other related topics, please contact us at or (619) 298-2880.

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States Toughening Up and Cracking Down on RIAs

In 2012, states expanded their oversight of registered investment advisers (“RIAs”) from those with $25 million in assets, to those with $100 million or less.  Prior to 2012, the Securities and Exchange Commission (“SEC”) had been responsible for overseeing these RIAs.

Since taking on the oversight of these additional RIAs, state securities regulators have seen a sharp increase in deficiencies actions.  A new report from the North American Securities Administrators Association (“NASAA”) recounted how Investment Adviser (“IA”) exams from 2011 to 2013 increased by 37% (from 825 to 1,130), while the number of deficiencies found during such exams surged by 83% (from 3,543 to 6,482).  To make these numbers even more eye-popping, one must bear in mind that the staggering number of state deficiencies for 2013 (6,482) only represent the first six months of this year.

While it unclear exactly how many of these violations result from IA firms formerly registered with the SEC and are now subject to state oversight, it is clear that states are conducting thorough examinations, and are finding deficiencies in a multitude of areas.  According to NASAA’s report, the top categories for deficiencies were:

  • Books and records – i.e., missing suitability documentation, client contracts, disclosure brochures, etc.;
  • Registration deficiencies – i.e., incorrect or incomplete Form ADV filings, untimely filing of amendments, etc.;  and
  • Contract deficiencies – i.e., not properly executed, missing fee and fee formula disclosures, etc.;

There were also several deficiencies regarding regulations concerning privacy, brochure delivery, advertising, fees, supervision and custody.  These findings presented by NASAA show that importance of understanding and adhering to those state rules and regulations that apply to your RIA firm.  Failure to do so may result in deficiency actions, penalties, fees and even criminal enforcement actions. 

For further information on this, or other related topics, please contact us at or (619)298-2880.  

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States Weigh In on Identity Theft Protections

In April 2013, the SEC and the CFTC jointly issued their final rules and guidelines for entities regulated by each of the respective agencies under Regulation S-ID – Identity Theft Red Flags Rules (the “Rule” or “Regulation S-ID”).  The new regulation became effective on May 20, 2013 and requires all affected firms to have policies and procedures in place by November 20, 2013.  Regulation S-ID requires that all “financial institutions” (as that term is defined in the Rule) develop policies and procedures to prevent, identify and mitigate identify theft.

Now individual states also are creating rules and regulations that may help supplement those policies and procedures required of Regulation S-ID.  For example, in the State of California, Cal. Civ. Code 1798.82 (California’s data breach notification law) describes what the state deems to be personally identifiable information which currently includes information such as a person’s first name or first initial and last name in combination with any of the following: Social Security number, Driver’s license number, etc.  Governor Jerry Brown recently signed into law an amendment (taking effect January 1, 2014) that amends the current code and requires that “user names and email addresses must be combined with a password or security question and answer to permit access to an online account.”  In addition, should there be a breach of this type of information, the firm must provide notice to the affected person, directing him or her to change his or her password and security question or answer, as applicable, and to take other appropriate steps to protect the online account in question and all other accounts for which that person uses the same credentials.

Furthermore, if the firm has more than 500 clients located in the state of California and a breach occurs, not only is the firm required to notify individual clients as described above, but it must also submit an online form to the State of California describing the breach and steps taken in response to the breach.  A sample of this form can be found here.

For further information on this, or other related topics, please contact us at or (619)298-2880.

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Benefit Corporation Legislation – A New Corporate Entity

In April 2010, the State of Maryland became the first U.S. state to pass “Benefit Corporation” legislation, thus permitting the formation of a new type of corporate entity structure in that state.  Since that time, several other states – including California, New York and Delaware – have either passed or are considering similar legislation.  Benefit corporations share many of the traits of traditional for-profit corporations.  However, while the main goal of traditional for-profit corporations is to maximize financial returns for their investors, benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making, in tandem with maximizing financial returns for investors.  This blog will discuss the purpose, transparency and accountability of Benefit Corporations.

As mentioned above, the purpose of the Benefit Corporation is to not only maximize profits but also to create a general public benefit.  Benefit Corporations can also choose or pursue a particular public purpose – for r instance, helping underserved individuals or communities.  In most states, the Benefit Corporation must also designate at least one member of its board as a “Benefit Director” to oversee the general and/or particular public purpose and the company’s adherence to it. 

Transparency is afforded to shareholders of a Benefit Corporation through a mandatory annual audit of the corporation’s social and environmental performance.  This audit must utilize a comprehensive and independent third-party standard to assess overall social and/or environmental performance.  In most states, results of the assessment must be posted to the company’s website, and made viewable to the public. 

Finally, Benefit Corporations have a high degree of accountability to their shareholders because they not only must consider the wealth of the shareholders, but also the ramifications of their decisions that benefit the public.  For instance, actions that may affect workers, the community or the environment must be balanced against maximizing profit for shareholders.  Both are focal points for the company, and a Benefit Corporation’s failure to adhere to either may leave the company exposed to lawsuits brought by shareholders.

To read more about the structure and requirements of Benefit Corporations, go here.

For further information on this, or other related topics, please contact us at or (619)298-2880.

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