Monthly Archives: March 2015

SEC’s Jane Jarcho Discusses the Second Wave of Upcoming Cybersecurity Exams

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This March the Securities and Exchange Commission’s (“SEC’s”) national associate director of investment advisor and investment company exams at its Office of Compliance Inspections and Examinations (“OCIE”), Jane Jarcho (“Jarcho”), spoke at the Investment Advisor Association’s compliance conference in Arlington, Virginia. Jarcho discussed cybersecurity and the upcoming second round of sweep examinations.

OCIE’s National Examination Program staff recently examined 57 registered broker-dealers and 47 registered investment advisers. The firms were selected “to provide perspectives from a cross-section of the financial services industry and to assess various firms’ vulnerability to cyber-attacks”. The findings from the exams have been summarized and can be found in the National Exam Program’s February 3, 2015 Risk Alert.

According to Jarcho, the SEC plans to begin its second round of sweep examinations this summer with shorter but “more in-depth” exams of broker-dealers, advisors and transfer agent’s (transfer agents were previously excluded).  These exams will take place onsite and evaluate cybersecurity compliance controls. Jarcho stated that the “vulnerabilities that we want [advisers] to think about” include; advisors’ relationships with vendors and third parties; authentication procedures, such as logins and firewalls; as well as “response plans” advisors have made for cyberattacks that have been “successful.” The continued risk-based cybersecurity exams are part of OCIE’s 2015 priorities.

It is important to take the appropriate steps to  develop and implement an effective cybersecurity policy within your organization. Not only will you be safeguarding and protecting your clients, but you will be better prepared for your next regulatory exam.

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 Broker-Dealer with Failure to Supervise its Registered Representatives

The Securities and Exchange Commission (“SEC”) has charged brokerage firm H.D. Vest Investment Securities (“H.D. Vest”) with failure to adequately supervise its registered representatives, which the SEC alleges led to a violation of key customer protection rules. H.D. Vest will be required to pay a penalty of $225,000 and to retain an independent compliance consultant to improve its supervisory controls.

H.D. Vest is based in Irving, Texas and employs more than 4,500 registered representatives who typically also operate tax businesses outside of the firm. These representatives usually work as independent contractors from several branch offices spread across the country. The SEC alleges that H.D. Vest’s lack of supervision allowed its representatives to defraud elderly customers through wire transfers from the customer’s brokerage accounts into the representatives’ outside business accounts. Furthermore, H.D. Vest’s email policy allowed representatives to communicate with clients regarding investment matters with non-H.D. Vest email accounts if they agreed to forward these communications to H.D. Vest. The SEC found that H.D. Vest representatives did not forward the emails and therefore “failed to maintain all required business-related e-mails in violation of certain books and records provisions.”

While the SEC acknowledges the difficulty in supervising such a large number of representatives at so many small branch offices across the country “that doesn’t excuse the firm from establishing adequate policies and procedures to address those challenges “said David R. Woodcock (“Woodcock”), Director of the SEC’s Fort Worth Regional Office. Woodcock also stated that “H.D. Vest lacked sufficient supervisory controls to track the transfer of customer funds to outside entities controlled by its registered representatives.”

To learn more about how Jacko Law Group, PC can assist your firm with its written policies, procedures and internal controls please click here.

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’s Division of Investment Management Issues Guidance Update Regarding Gifts and Entertainment

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This February the Securities and Exchange Commission’s (“SEC’s”) Division of Investment Management issued Guidance Update Number 2015-01 titled  “Acceptance of Gifts or Entertainment By Fund Advisory Personnel — Section 17(e)(1) of the Investment Company Act.” The Update highlights potential conflicts of interest between the personnel of a fund’s investment adviser and those doing business or hoping to do business with the fund.

According to the Update, while there are many provisions of the  Investment Company Act of 1940 prohibiting fund personnel from participating in certain transactions involving the fund, Section 17(e)(1) specifically states “[i]t shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person . . . acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any controlled company thereof, except in the course of such person’s business as an underwriter or broker.”

The guidance is aimed at mutual fund industry participants to remind them “that the receipt of gifts or entertainment by fund advisory personnel, among others, also may implicate the prohibition in section 17(e)(1) of the 1940 Act.” In an example provided in the Update, it is explained that a fund manager would be in violation of section 17(e)(1) by accepting gifts or entertainment from a broker-dealer in exchange for trades of the fund’s portfolio securities.

Rule 38a-1 under the 1940 Act requires funds to create and implement written policies and procedures, appropriate to the fund’s business and reasonably designed to prevent violations of the federal securities laws. The update states that the receipt of gifts or entertainment should be addressed by such policies and procedures. Some funds may outright prohibit the receipt of gifts or entertainment while others may require pre-clearance.

To learn more about this subject please refer to Jacko Law Group, PC’s Legal Risk Management Tip entitled Gifts, Gratuities, Entertainment and Other Forms of Influence and Reward.

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

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