On March 25th, Murphy’s law took full effect when Morgan Stanley’s order entry and order status systems ground to halt, blocking financial advisors and clients from viewing account information and entering trades. The firm later reported that “multiple applications are experiencing latency or may be unstable.” Some clients reported problems accessing their accounts online; others reported seeing incorrect account values and balances. While advisors were allowed to route trades through a redundant trading system, that system reportedly was very slow.
A day later, Morgan Stanley pledged to “make adjustments” to client accounts that may have experienced losses as a result of the trading glitch. It is unclear, however, whether the firm intends to make those advisors whole, or offer some other form of remediation. According to a Morgan Stanley advisor interviewed by AdvisorHub, “clients will get the best price,” and “management has been busy cleaning up trades.” Clients who lost money as a result of the outage, however, should consider speaking with counsel to explore the full extent of their potential damages.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
In February 2020, the Securities and Exchange Commission (SEC) issued an alert, cautioning investors to be wary of scams tied to the Coronavirus pandemic. It is common for fraudsters to use the latest news developments to lure investors into scams. Nothing has been more prevalent on the news over the past several weeks than Coronavirus/Covid-19.
According to the alert, some of the most common scams so far involve “research reports” touting phony stock price predictions. The SEC cautions that investments in microcap and penny stocks may be particularly vulnerable to fraudulent schemes. It is not hard to imagine “pump and dump” promoters circulating reports describing an early stage, publicly traded pharmaceutical company touting a breakthrough Coronavirus treatment or vaccine. In fact, the alert identified two microcap companies for whom the SEC recently suspended trading based on suspicions of phony or misleading information in the marketplace.
The SEC suspended trading in the first company, San Diego-based Aethlon Medical, Inc. (AEMD), based in part on concerns regarding the accuracy and adequacy of information about the potential of the company’s product to treat the Coronavirus. Trading was halted in the second company, Utah-based Eastgate Biotech Corp. (ETBI) for similar reasons.
Only when the tide goes out do you learn who has been swimming naked. With the market volatility and likely recession caused by the Coronavirus, this is just the tip of the iceberg.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
The past several weeks (which have felt like years) have turned the financial industry on its head. The market has seen unprecedented declines, followed by unprecedented increases as Congress shored up a $2 Trillion–with a T–economic bailout package. That staggering figure represents approximately 10% of the entire country’s annual gross domestic production. Just one of many unprecedented steps the government, and society, have taken to curb the damage caused by the virus.
As investors, brokerage firms, and RIA firms adjust to the “new normal” of remote work and toilet paper hoarding, the show, as they say, must go on. More than ever, clients need advice and guidance from their financial advisors. Financial advisors, in turn, need adequate tools and support to service their clients–including trading and product platforms, communication tools, back office support, and remote work technology. And while it may seem counterintuitive, the temporary chaos of the “new normal” could present a unique opportunity for advisors to transition to a new firm, particularly those who were contemplating a move but had yet to pull the trigger. Brokerage firms and RIAs, in turn, should keep a close eye on the flock.
The reasons why are simple. First and foremost, over the past several years, coinciding with the steady erosion of the Broker Protocol, firms have increasingly threatened or sued departing advisors for alleged misappropriation of trade secrets or violations of confidentiality clauses and sought Temporary Restraining Orders (TRO) preventing them from contacting clients. Financial advisors are aware of the legal risks of making a move. In California, however, state and federal courts either have closed or are offering only limited, emergency services. The same is true in courts across the country, and FINRA’s Arbitration Division has suspended arbitration hearings through the end of April 2020, for now. A business dispute between a financial firm and financial advisor just is not a high priority for the justice system right now.
At the same time, financial firms are dealing with the challenges of adjusting to the new normal and may face an onslaught of customer complaints given the market volatility. Firms may simply not be as willing or able to commit attention and resources to chasing a departed financial advisor. Moreover, now is a time when clients are laser-focused on their investments and retirement accounts. It is also a time when advisors should be in constant communication with their clients about their investments, rebalancing portfolios, and minimizing the risk of loss in a difficult, volatile market environment. It is often easier to transition a client from one firm to another when the advisor has earned the client’s trust and been in close communication with the client. There are, of course, potential downsides to a transition now, or at any time, but with courts essentially closed across the country, this is a unique situation.
It is critical for any firm or financial advisor dealing with a transition to seek sound advice from experienced counsel. Every registered representative or advisor contract is different, and the rules governing the type of information an advisor can–and, more importantly, cannot–take will differ depending on Broker Protocol issues, Regulation S-P and other confidentiality issues, the nature of the firm-advisor relationship, the location of the advisor and firm, etc. There is no one-size fits all approach to transitioning a book of business while minimizing the chance of litigation or a regulatory issue (potential regulatory violations, including violations of Regulation SP are often overlooked in a transition but equally as important).
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
This is a reminder to registered investment advisers about the requirements surrounding your Form ADV annual amendment filing. For most registered advisers,[1] the deadline to file the firm’s Form ADV is rapidly approaching. According to Rule 204-1 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), registered advisers are required to file an annual amendment to Form ADV Parts 1 and 2 “annually, within 90 days of the end of your fiscal year.” As most firm’s have a fiscal year-end of December 31, the deadline to make this year’s annual filing is March 30, 2020. Subsequently, per Rule 204-3(b)(2) and (b)(4), advisory firms must deliver the amended Form ADV Part 2 to clients “within 120 days after the end of your fiscal year.”
This year however, in response to the current outbreak of coronavirus disease 2019 (“COVID-19”), the Securities and Exchange Commission (“SEC”) has provided temporary relief to advisory firms[2] impacted by COVID-19. Specifically, per the SEC’s order, a temporary exemption has been adopted that covers filing and delivery obligations as specified in the Advisers Act that are otherwise due in the period from the date the order was issued through April 30th. The order goes on to state that the time period could be extended, and additional exemptions may be provided.
However, it is important to note that the SEC’s relief is not self-effectuating. Rather, per the terms of the SEC’s order, registrants seeking to rely upon such relief provisions must satisfy the following conditions:
(a) The registered investment adviser (or exempt reporting adviser) is unable to meet a filing deadline or delivery requirement due to circumstances related to current or potential effects of COVID-19;
(b) The investment adviser relying on [the SEC’s order], with respect to the filing of Form ADV or delivery of its brochure, summary of material changes, or brochure supplement required by Rule 204-3(b)(2) or (b)(4), promptly provides the SEC via email at IARDLive@sec.gov and discloses on its public website (or if it does not have a public website, promptly notifies its clients and/or private fund investors of) the following information:
1. that it is relying on [the SEC’s order];
2. a brief description of the reasons why it could not file or deliver its Form on a timely basis; and
3. the estimated date by which it expects to file or deliver the Form.
Further, it is important to remember that state-registrants do not necessarily receive the same exemption. Such firms impacted by COVID-19 should contact the respective state(s) in which they are registered to determine whether such an exemption is applicable.
Should your firm need any assistance with interpreting the provisions of the SEC’s order and/or performing your Form ADV annual amendment filing, Shustak Reynolds & Partners is here to help. Please contact us by visiting our website at https://www.shufirm.com/contact/ or by calling (619) 696-9500.
[1] Including those entities relying upon the “Exempt Reporting Adviser” statutes under 203A(a)(1)(A) of the Advisers Act.
[2] The SEC’s order also provides relief for Exempt Reporting Adviser and private fund reporting (via Form PF) requirements.
The State’s Newest Privacy Law Imposes Strict, New Requirements On Businesses That Collect, Use, or Sell Consumers’ Personal Information.
The California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, significantly changes businesses’ legal obligations in collecting and maintaining consumers’ personal data.
Importantly, the CCPA does not apply to all California businesses. The law applies only to non-governmental, for-profit entities that “[do] business in the State of California” and (a) have gross adjusted annual revenues in excess of $25,000,000; (b) annually buy, sell, or receive personal data of 50,000 or more consumers, households, or devices; or (c) derive more than half of their annual revenue from selling consumers’ personal information.
Insofar as it applies, the CCPA requires businesses to take certain, statutorily-mandated measures to ensure consumers understand how their personal data is being collected and used and allow consumers to opt out of the collection and use of their data. Exactly what measures the CCPA requires any particular business to take depends on the circumstances of that business. Generally speaking, however, the CCPA requires businesses to (1) inform consumers of the types of personal data they collect about them at or before the point of collection, (2) afford consumers the right to request disclosure of all personal data collected about them, (3) advise consumers they have a right to request the deletion of any or all personal data collected and observe consumers’ exercise of that right, (4) advise consumers they have a right to opt out of the sale of their personal data and observe consumers’ exercise of that right, and (5) not discriminate against consumers because they exercise any of the foregoing rights, e.g., by denying them goods or services or charging them higher prices or rates.
Violation of the CCPA subjects businesses to serious risk of civil litigation and penalties. The CCPA specifically authorizes consumers to bring lawsuits against violating businesses for statutory damages, injunctive relief, and other appropriate relief. The law similarly authorizes the California Attorney General to prosecute violating businesses by filing actions against them for injunctive relief and civil penalties in state court. Statutory damages and civil penalties under the CCPA can be substantial. So too can the costs of having to comply with an injunction.
The CCPA is complex and tremendously consequential for many businesses. Principals of businesses subject to it should consult with legal counsel about how to implement its many requirements.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. To speak with an attorney, contact us at (619) 696-9500.
A lot of noise has been made about the new Form CRS, but what exactly does it mean for registered investment advisers? On June 5, 2019, the Securities and Exchange Commission (the “SEC”) adopted Form CRS and new rules, as well as amendments to its forms and rules, under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). While changes to the Exchange Act were substantive, for purposes of this article, only changes to the Advisers Act and subsequent additional requirements to investment advisers registered with the SEC will be discussed. Below is a “Q&A” of some of the more common questions being asked about Form CRS.
Per the SEC’s “Form CRS Relationship Summary; Amendments to Form ADV”[1] as part of the new rules, the SEC “adopted rule 204-5 (delivery of Form CRS) and amended the following form and rules: Form ADV to add a new Part 3: Form CRS, rule 203-1 (Application for investment adviser registration), rule 204-1 (Amendments to Form ADV), and rule 204-2 (Books and records to be maintained by investment advisers).” Basically, the SEC created a new document that needs to be drafted and filed as part of each SEC registrant’s Form ADV filing, which subsequently must be kept in the firm’s books and records in accordance with applicable books and records keeping requirements.
2. Is the New Form CRS in Addition to Current Form ADV Requirements?
Yes. The SEC is considering Form CRS to be “Form ADV Part 3” and is therefore in addition to all current Form ADV disclosure requirements.
If your firm is registered with the SEC, likely yes. According to the new rules, “every firm that offers services to retail investors must file.”[2] The SEC goes on to define “retail investors” as “a natural person, or the legal representative of such natural person.”[3] However, if your firm is registered at the state-level, you will want to confirm with the respective state’s governing body. Several states have chosen not to implement Form CRS requirements at this time.
4. What Needs to be Included in Form CRS?
There are five topics that are required to be addressed as part of Form CRS: (1) Introduction; (2) Relationships and Services; (3) Fees, Costs, Conflicts, and Standard of Conduct; (4) Disciplinary History; and (5) Additional Information. Each topic must be discussed in “plain English” and drafted pursuant to certain electronic and graphical formatting requirements. Additionally, the Form CRS is strictly limited to two (2) pages (or 4 if the firm is a dual registrant). The SEC has provided instructions to assist in the drafting of Form CRS as part of its adopting release which can also be found on the SEC’s website.[4]
5. Is there Any Special Considerations Regarding Form CRS?
Yes, quite a few actually. Below are some of the more important considerations:
Delivery: If delivered electronically, Form CRS must be “prominent’ by including it as an attachment or providing a direct link to the document. If delivered in paper format, Form CRS must be first among any documents delivered at that time.
Disseminating Form CRS: Form CRS must be provided to each retail investor:
Before or at the time the firm enters into an investment advisory contract with the retail investor;
Each time a retail investor opens a new account that is different from the retail investor’s existing account(s) (i.e., if a client opens an account for an IRA after already having a joint account under advisement by the firm, the firm must send out Form CRS at that time);
Each time the advisory firm recommends the retail investor rolls over assets from a retirement account into a new or existing account or investment;
Each time the advisory firm recommends or provides new service or investment that “does not necessarily involve the opening of a new account and would not be held in an existing account;”[5]
Within 30-days of a retail investor’s request;
Within 60-days following any updates/revisions to the current version; and
Annually within 120-days following the end of the advisory firm’s fiscal year.
6. When Does All of this Need to Happen?
For existing SEC registrants, Form CRS must be filed as part of an “other than annual amendment” made by the firm no later than June 30, 2020.[6] Firms applying for registration with the SEC on or after June 30, 2020 will need to include Form CRS as part of its registration application.
As evidenced above, new Form CRS will require not only the drafting of a new disclosure document, but also additional policies and procedures to ensure its content, delivery, dissemination and recordkeeping are in accordance with the new rules promulgated by the SEC.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. To speak with an attorney, contact us at (619) 696-9500.
[6] The IARD system will first be accepting such revisions as of May 1, 2020, so registrants only have a two-month window in which to complete the filing.
