SEC Report on Examination of Certain Structured Securities Products Sold to Investors

The Securities and Exchange Commission staff has issued a report summarizing the results of a sweep examination of the retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry. The report identifies common weaknesses seen in sales of structured securities products and describes measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.
The report can be viewed at http://www.sec.gov/news/studies/2011/ssp-study.pdf

ENHANCING CCO EFFECTIVENESS: SEVEN THINGS CCOs SHOULD REMEMBER

Prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the kind of work CCOs perform.  Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO functions, even though they routinely show up in canned written compliance policies and procedures that are passed out to adviser personnel.

As a reminder, periodically, we’ll post rules CCOs should never forget even as they comply with all the other rules that apply to investment advisers. We start with the first two below:       

Rule Number One: Your Job is to “Administer” the Compliance Program:  The CCO’s job function as mandated by Rule 206(4)-7 (the “rule”) is limited to“administering” the investment adviser’s compliance policies and procedures.  While the rule contains no explicit definition for what the term administering means, the rule makes one thing clear, it is the adviser who is legally required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Investment Advisers Act of 1940.  What this means is that you are not the guarantor that your adviser will not experience a compliance failure.  Nor is it necessarily true, from a supervisory perspective, that you are responsible for the compliance failures of others in the firm.  To the contrary, the failure of a compliance program to find and remedy compliance problems can just as easily be viewed as evidence that the adviser’s compliance program, including its policies and procedures, are not effective.

This doesn’t mean that compliance personnel of an adviser can’t be sanctioned for not properly supervising employees.  Of course, they can be and are sanctioned.  However, the fact that you are a CCO does not, in and of itself, give you supervisory responsibility over your adviser’s personnel.  In short, if you’re not supervising other advisory personnel, and you limit supervisory responsibility to persons who are part of the compliance staff, the Adopting Release to the rule makes clear that you aren’t necessarily liable for the supervisory lapses of your adviser.  This leads to our second rule.       

Rule Number Two: Consider avoiding taking on roles that give the appearance that you supervise personnel outside of administering the compliance function:  Such advice may be particularly hard to follow with smaller advisers or in other instances where the adviser’s overall management structure is fairly narrow (e.g. the president and CCO are one and the same).  However, for most others, taking on management responsibilities outside the compliance program can be a recipe for trouble.  One such problem is that it places you in a supervisory role, when the very title of chief compliance officer does not carry with it supervisory responsibility.  The SEC made this clear when it adopted the rule.  In short, if you do supervise others outside the compliance staff, remember using, among other rules and Investment Advisers Act §203(f), the SEC has brought cases showing you can be sanctioned for not properly supervising investment adviser representatives and others.  

FINRA's New Q&A Guidance on Reporting Customer Complaint Information

Under FINRA Rule 4530 that became effective on July 1, 2011 governing reporting requirements for customer complaints, FINRA issued Regulatory Notice 11-10 reminding member firms of the requirement that they electronically report specified events and quarterly customer complaint information.  

Member firm are also required to file with FINRA copies of certain criminal actions, civil complaints and arbitration claims.  The Notice also provided guidance on automated reporting under the new rule.  To assist member firms with implementation, in new Notice 11-32, FINRA has provided questions and answers regarding the application of the new rule.  FINRA has said it will use the information for regulatory purposes to identify and initiate investigations of member firms, offices and associated persons that it believes might pose a risk. View  Notice.

Effective July 21, 2011, Advisers to Hedge Funds and Private Equity Funds Face Registration

Under Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, effective July 21, 2011, changes to the registration and reporting and recordkeeping requirements of the Investment Advisers Act of 1940 require advisers to private funds (hedge funds and private equity funds) to register with the SEC.  In the past, many of these advisers relied on the so-called “private adviser” exemption to avoid registration. Under Section 403 of the Dodd-Frank Act, now some of these same advisers that exclusively advise venture capital funds and private fund advisers with less than $150 million in assets under management in the United States, face narrower exemptions for adviser registration.  However, foreign private advisers and advisers to licensed small business investment companies are exempted.

Under the Dodd-Frank Act, the SEC will also have the authority to collect data from investment advisers about their private funds for the purposes of the assessment of systemic risk by the Financial Stability Oversight Council.  Finally, the Dodd-Frank Act modifies the allocation of regulatory responsibility for mid-sized advisers between state regulators and the SEC. here.