Monthly Archives: November 2014

SEC Approves Rule G-44 as the MSRB’s First Rule for Municipal Advisors

On October 24, 2014, the Securities and Exchange Commission (SEC) approved Municipal Securities Rulemaking Board’s (MSRB) Rule G-44, which is the MSRB’s first dedicated rule for municipal advisors. The new requirements take effect April 23, 2015, giving firms six months to implement the required policies and procedures.

Rule G-44, serves as a compliance supervisory rule, which requires the municipal advisor to: 1) have a named CCO; 2) have written supervisory policies and procedures; 3) conduct an annual review of supervisory structure, including its policies and procedures; 4) and obtain an annual written certification by the CEO that the firm has “processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable rules”  in place. The CEO certification, however, does not go into effect until April 23, 2016.

Under the new rule, a municipal advisor’s supervisory system must have written supervisory procedures that are designed to ensure compliance with applicable laws and regulations. Procedures should address nature of the advisor’s municipal advisory activities, including size and structure. The procedures must be updated and communicated to all relevant associated persons when necessary.

There must be a designated municipal advisor principal who is responsible for overseeing required supervision. Any designated principal must have sufficient knowledge, experience and training to understand their responsibilities. Pursuant to Rule G-44 municipal advisors are required to establish, maintain, review, test and modify written compliance policies and supervisory procedures, customized to the firm, which must be reviewed annually, and then certified by the CEO. The certification is attesting only as to having processes in place, and “the execution of this certification and any consultation rendered in connection with such certification does not by itself establish business line responsibility.”

Notably, a municipal advisor that is a bank or division of a bank is exempt from Rule G-44 and certain records requirements. The exemption exists only if the bank certifies in writing annually that it is subject to federal supervisory and compliance obligations, and to records requirements that correspond to the obligations of Rule G-44.

For more information on this and other related subjects, please contact us at info@jackolg.com or (619) 298-2880.

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SEC Charges Another Investment Advisory Firm for Custody Rule Violations

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The Securities and Exchange Commission (SEC) today released an order instituting administrative and cease-and-desist proceedings against an investment advisory firm and three top officials for violating the custody rule that requires firms to follow certain procedures when they control client money or securities. Advisory firms can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year. The custody rule provides investors with verification of their assets to protect against misuse or theft.

According to the SEC’s order instituting an administrative proceeding, Sands Brothers Asset Management LLC (SBAM) provides investment advisory services to a number of pooled investment vehicles, and wrongly stated in its Form ADV that it does not have custody of client assets. The SEC alleges that SBAM violated the custody rule by not timely distributing audited financial statements to investors in ten private funds. According to the SEC, SBAM was at least 40 days late to distribute statements in 2010.  SBAM was allegedly six months to eight months late in delivering the audited financial statements for those same funds late the very next year.  The same statements for 2012 were distributed approximately three months late.

Notably, in 2010, SBAM and two co-founders were sanctioned by the SEC for custody rule violations. The SEC’s order found that that SBAM “willfully violated the custody rule by improperly relying on the pooled investment vehicle alternative, which allowed for the distribution of audited financial statements in lieu of submitting to a surprise examination by an independent public accountant to verify custody of assets, among other requirements.”

“The custody rule is not a technicality.  It is a critical investor protection provision designed to help ensure that investor assets are safe,” said Andrew Calamari, director of the SEC’s New York Regional Office.  “Sands Brothers and its senior-most officers have persistently disregarded their obligations under the law and left their clients waiting for months at a time to have the materials they need to verify the existence and value of fund assets.”

For more information on this and other related subjects, please contact us at info@jackolg.com or (619) 298-2880.

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