More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
SEC Chairman Mary Schapiro told chief compliance officers attending the Commission's second CCOOutreach seminar January 26 that since more and more firms registered with the SEC are either dually registered as broker/dealers and investment advisors, or have affiliates that represent each type of firm, the SEC has begun "much greater collaboration between the broker/dealer and advisor examination programs, resulting in successes at uncovering wrongdoing and determining the full nature and extent of fraudulent schemes." Recent enforcement actions have included failure to disclose material conflicts of interest, Ponzi schemes, fraudulent investment schemes, illicit trading on behalf of customers, insider trading, and improper valuation of client accounts. Schapiro noted that Carlo DiFlorio, the new director of the SEC's Office of Compliance Inspections and Examination (OCIE), plans to "think about ways we can better integrate our examinations of investment advisors, broker/dealers, and mutual funds." Schapiro also said the SEC continues its search for staff with expertise in particular areas and also bolstering its training programs. She said SEC examiners are receiving "regular and relevant training," with more than 300 becoming certified fraud examiners last year alone. The Commission is also "seeking input from staff with expertise in areas where risk-targeted examination sweeps might uncover fraudulent acts or might provide valuable insight on strong compliance practices," Schapiro said.
The SEC staff is currently conducting an examination sweep targeting more than 50 registrants across the U.S. and the UK, she said. The sweep "focuses on the manner in which investment advisors that manage CDOs, hedge funds, and other vehicles that hold asset-backed securities and other structured products have managed those assets under the ongoing stresses of the credit market."
FINRA recently issued guidance to securities firms and brokers regarding the use of social networking Web sites such as Facebook, Twitter, LinkedIn, and blogs to communicate with the public. The guidance in Regulatory Notice 10-06, which is presented in Q&A format, clarifies the responsibilities of firms to supervise the use of social networking sites to ensure that recommendations are suitable, and customers are not misled. The Notice also addresses the recordkeeping and other responsibilities of firms. "Social networking sites and blogs raise new regulatory challenges, particularly in the areas of supervision, advertising, and books and records requirements," said FINRA Chairman and CEO Rick Ketchum, in a statement. "Our goal in issuing this Notice is to ensure that firms and brokers use social networking sites in an appropriate manner." The Notice emphasizes that each firm must develop its own policies and procedures -- in the context of its own particular business model and compliance and supervisory programs -- designed to ensure that the firm and its personnel are complying with all applicable regulatory requirements when using social networking sites.