The Office of Compliance Inspections and Examinations (“OCIE”) recently sent out an alert highlighting the deficiencies regarding Rule 206(4)-7 (the “Compliance Rule”), a subsection of the Investment Advisers Act of 1940 (“Advisers Act”). It is significant for advisers to understand and uphold these requirements in order to avoid compliance violations.
The Compliance Rule has several notable requirements. First, the rule tells us that it is illegal for a registered adviser to provide investment advice unless the adviser has implemented written policies to uphold the requirements of the Advisers Act. Next, the rule requires brokers to formalize policies regarding their fiduciary and regulatory obligations under the Advisers Act. The act does not set out specifics of what should be included in these policies. However, it advises advisers to develop policies that incorporate the nature of their firm’s operations and have a system in place for any violations that may have occurred. In order to keep the policies current, the Compliance Rule also requires brokers to review these policies annually, taking into account any notable occurrences or changes. Lastly, the rule requires each broker to appoint a qualified chief compliance officer (“CCO”) as an administrator of their compliance policies.
OCIE notes that inadequate compliance resources, insufficient authority of CCOs, annual review deficiencies, inaction regarding written policies, and poorly written and inefficient policies summarize the weaknesses of parties subject to the Compliance Rule. This ineffectiveness, in turn, reveal over-arching issues of lack of accountability and oversight. In its alert, OCIE identifies and describes these deficiencies in detail, pointing to the lack of attention in this area.
Lack of adequate compliance training and minimal resource dedication are specifically cited in the report. In addition, firm CCOs lack access and involvement in important compliance matters. This, coupled with failure to perform annual reviews and failure to promote their own policies, reveals major weakness for many advisers and their firms.
We encourage firms to review their policies no less than annually and make compliance a priority.
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. Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500.
In October 2020, the U.S. Securities and Exchange Commission (“SEC”) proposed an order [1] which could expand when/what “finders” are permitted to receive as compensation without registering as a broker. Generally speaking, a finder connects investors with issuers of securities for a commission, or a finder’s fee. Currently, the Exchange Act of 1934 takes a narrow view on when it is permissible to pay finders without triggering registration requirements. The proposed order would create two classes of finders, each subject to conditions tailored to the scope of their respective activities:
1. Tier 1 finders would be permitted only to provide a list of potential investors, and their contact information, for only a single capital raising transaction per 12-month period. The finder could not contact the potential investors about the issuer or investment opportunity.
2. Tier II finders could solicit individual investors on behalf of an issuer, so long as he or she provides certain disclosures at the time of solicitation. The finder would be limited to these activities:
identifying, screening, and contacting potential investors;
distributing issuer offering materials to investors;
discussing issuer information included in any offering materials, provided that the Tier II finder does not provide advice as to the valuation or advisability of the investment; and
arranging or participating in meetings with the issuer and investor.
The order proposes exemption from registration as a broker at the Federal level, but does not provide relief from any state level restrictions on a finder’s activities. However, finders based in California may rely on Corporations Code Section 25206.1 for exemption from broker-dealer registration when connecting a California issuer with accredited investors if the offering is less than $15 million.
While the period to submit comments on the proposed rule has closed, the SEC has issued some remarks on the progress of proposed regulations. [2]
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. Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500.
