By Robert R. Boeche

As discussed more fully in our earlier article, the Securities Exchange Commission (“SEC”) adopted its new Marketing Rule on December 22, 2020. The new Marketing Rule effectively merged two sets of rules to create a new paradigm that modernizes adviser marketing. Consequently, most of the SEC’s previous decisions and guidance on cash solicitation and advertisement have become outdated. The SEC’s adopting release indicated that the staff no-action letters which address cash solicitors and advertisement would be nullified.[i] However, it was not immediately clear which of the hundreds of staff statements and no-action letters on the two topics would be withdrawn or modified to support the new paradigm in adviser marketing.

Advertising and Cash Solicitor Letters Withdrawn

In October 2021, the SEC released an “Information Update” intended to clarify exactly which staff letters will no longer apply. In total, a list of 203 staff letters will be withdrawn or modified to align the existing body of staff guidance with the new Marketing Rule.[ii] The withdrawn staff letters date from 1971 to 2017 and represent the same broad array of issues the new rule intends to tackle in a modern way.  Well- known staff letters to be withdrawn include those relating to Clover Capital Management, Franklin Management, Inc., The TCW Group, and Mayer Brown LLP (among many others).

It is common for the SEC’s staff to issue guidance in the form of no-action letters and staff statements. These letters do not hold the force of law, as they are not themselves rules or regulations. However, staff letters are relied upon heavily by securities professionals for clarity in the application of the securities laws that constrain their practice.[iii] Mindful of this reliance, the SEC has released its information update with plenty of time to spare before the new Marketing Rule and the subsequent staff letter withdrawals go into effect on November 4, 2022.

If you have questions about the new Marketing Rule and how it could affect your practice, we are here to help.
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 can be reached in the firm’s San Diego office at (619) 696-9500.

[i] Investment Adviser Marketing, Release No. IA-5653 (Dec. 22, 2020) (“Marketing Rule Adopting Release”).

[ii] Division of Investment Management Staff Statement Regarding Withdrawal and Modification of Staff Letters Related to Rulemaking on Investment Adviser Marketing, Release No. IM-INFO-2021-10 (October 2021).

[iii] Rulings, interpretations, and opinions of administrative staff constitute a “body of experience and informed judgement to which courts and litigants may property resort for guidance.” Skidmore v. Swift & Co., 323 U.S. 134, at 140 (1944).

By Robert D. Conca

On November 10, 20201, the SEC’s Division of Examinations issued a Risk Alert relating to investment adviser’s fee calculations.  The deficiencies discussed in the Risk Alert stem from a nationwide SEC exam initiative that focused on fees charged to retail clients.

This Risk Alert focuses on a litany of advisory fee practices, including accuracy of fees charged to clients, accuracy of disclosures relating to advisory fees, and whether an adviser has proper compliance policies relating to fee practices.  SEC Staff observed fee issues in these areas, among others:

• Inaccurate fee percentages used;
• Clients were “double-billed”;
• Incorrect application of fee breakpoints;
• Numerous errors relating to “householding”[1] of client accounts;
• Failure to refund prepaid fees on a pro rata basis;
• Inaccurate description of fee practices in Form ADV; and
• Missing or inadequate policies and procedures relating to advisory fee billing.

Indeed, advisors should find the recent Risk Alert to cover some familiar ground since the SEC issued a similar Risk Alert detailing nearly identical advisory fee issues in 2018 (see here for the Prior Risk Alert).

By now, it should be clear that the SEC considers the advisory fee to be a fundamental part of any advisory relationship between the adviser and the client.  As the Risk Alert states, “every dollar an investor pays in fees and expenses is a dollar not invested for the investor’s benefit.”

Given this noteworthy regulatory focus on advisory fees, investment advisers will be expected to ensure that their fee calculation and billing practices are implemented and disclosed appropriately.  In addition, policies and procedures should be reviewed and amended as needed so that they accurately describe advisory fee practices.

Advisers need to make advisory fees a regulatory compliance a priority.  We can help.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.

[1] “Householding” is generally defined as combining the assets under management in certain related accounts so that all accounts qualify for a lower advisory fee.

By Robert R. Boeche

At the end of every fiscal year,[1] U.S. registered investment advisers (“RIAs”) have regulatory compliance tasks and obligations, which range from performing an annual review of the RIA’s compliance function to submitting annual update filings to the U.S. Securities and Exchange Commission (“SEC”) or state regulators. In some years – including 2022 – there are important industry developments that require advance planning based on changes to laws affecting RIAs. While not an exhaustive list, what follows is an overview of year-end steps that RIAs should consider as we approach the end of 2021.

• Annual Registration Fees.  Every year, FINRA’s IARD system facilitates the annual registration renewal process for RIA firms and their investment professionals (“IARs”). Preliminary renewal statements are available on the E-Bill System in mid-November and show the renewal fees and annual system processing fees due. This year, full payment should be submitted in IARD by no later than December 13, 2021. The last day that the IARD system will accept form filings or renewal payments prior to year-end is December 26, 2021. Firms that fail to satisfy renewal fees payments on time can face penalties, including the loss of their adviser registration status.
• Form ADV and Form CRS.  RIAs must file updates to their Form ADV disclosure documents annually following the close of their fiscal year.[2] Firms must file annual ADV updates within 90 days (for firms with a December 31 fiscal year end, the deadline for ADV submission is March 31, 2022) and deliver the new brochure to clients within 120 days of fiscal year end (April 30, 2022). Each of the following must be updated accordingly:[3]
  • Form ADV Part 1.  Information about the firm is communicated via the ADV Part 1, such as its identifying details and representations regarding its registration status.
  • Form ADV Part 2A.  The ADV Part 2A is provided to each new client before signing an investment advisory agreement and contains the information potential clients might need to select a firm as their investment adviser.
  • Form ADV Part 2B.  Firms that have supervised persons providing advisory services to clients may need to update ADV Part 2B if details change.
  • Form CRS.  Also known as the ADV Part 3, this document provides a summary of an RIA’s business, including information regarding services, conflicts of interest, fees, and costs. Form CRS is required of SEC-registered RIAS (and broker-dealers) that provide services to retail investors.

  If you need consultation regarding your upcoming regulatory and filing deadlines, or how the new Marketing Rule may apply to your firm, we are ready to help.
  Shustak Reynolds and Partners regularly advises investment advisory and broker-dealer firms on the impact of applicable state and federal rules.

  [1] Most RIAs use a 12/31 fiscal year end.  This article is written with that date in mind and applies generally to other fiscal year end dates as well.

  [2] Generally, only material updates or changes to disciplinary disclosures require an “other than annual” update filing.

  [3] https://www.sec.gov/about/forms/formadv-instructions.pdf.  Note also that the SEC announced forthcoming updates to Form ADV in connection with the new Marketing Rule (discussed below) which will include new sections of ADV for RIAs to complete.

  [4] https://www.sec.gov/divisions/investment/iard/iardfaq.shtml

  [5] https://www.sec.gov/investment/investment-adviser-marketing

  [6] https://www.sec.gov/pdf/form13f.pdf; see also 17 CFR §§ 240.13h-1, 240.13d-101, and 240.13d-102

  [7] https://www.sec.gov/files/formpf.pdf

  [8] We wrote on the qualified client topic previously: https://www.shufirm.com/change-to-definition-of-qualified-client-is-effective; see also 17 CFR § 275.206(4)-7