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  • Preparing for Your Form ADV Part 1 Annual Amendment

    Registered investment advisers are required to file an annual amendment to their Form ADV Part 1 within 90 days of their fiscal year end. For advisers whose fiscal year end is December 31, the annual deadline is March 31 (or March 30 in leap years). Here are some helpful tips for completing sections of the ADV Part 1 that often present questions. Websites and Social Media Channels Review the sites that are currently included in Item 1.I. to make sure the list is up-to-date and accurate. When conducting an examination of your business, regulators will look at your ADV Part 1, and you can be pretty sure that they will be looking at your website and social media channels listed here. They will sometimes also do Google searches to see where your name pops up. Regulatory deficiency letters often note discrepancies in this area. For example, noting that the website includes links to social media channels that aren't listed on the ADV, or indicating that an Internet search turned up a site that isn't listed here. Location of Books and Records Item 1.L. of ADV Part 1 asks for information regarding the location of your books and records, outside of your principal office. In today's electronic document storage environment, what do you need to include here? Think of this in terms of what third-party service providers you would rely on to obtain records in the case of a regulatory exam or to recover records in the event of a disaster. Common providers would include your electronic cloud storage provider (e.g., Amazon Web Services, Google Workplace, Microsoft), your custodian, or web-based software applications used to provide advisory services (e.g., financial planning software, portfolio management software). Counting Clients In Item 5.D., you are asked to parse your clients by client type, and provide the number of clients and AUM for each category. For purposes of completing the ADV Part 1 (as well as for registration purposes), you should generally consider a "client" as a "household." Count as one client an individual and: (a) any minor child, regardless of residence; (b) any spouse, relative, or relative of the spouse that resides at the same address; (c) all accounts of which the individual and/or the persons included and (a) or (b) are the only primary beneficiaries; and (d) all trusts of which the individual and/or the persons included in (a) or (b) are the only primary beneficiaries. As you are counting clients, take a moment to also check the state residences of your clients to see if it's necessary to register (or notice-file, for SEC-registered advisers) in other states where you're approaching the de minimis threshold. Who is High Net Worth? Also related to Item 5.D. is the question of how you determine who is a high net worth client. This is defined as a client who (a) has at least $1.1 million in investment assets under management, or (b) has a net worth of at least $2.2 million, excluding their primary residence. It's pretty easy to substantiate (a), but determining (b) may be more difficult. If a client does not have AUM of $1.1 million or more, I would recommend not including them in the count of HNW clients, unless you can reasonably substantiate their net worth. For example, if you provide financial planning services and have evidence of their assets that show a net worth of $2.2 million or more, then they can be considered HNW. But if you just have a vague inkling that the client may have a significant net worth, I'd leave them off the HNW list. A high net worth client is generally considered more sophisticated than an individual client, so it's more conservative to understate your HNW clients than to understate your individual clients. Calculating Assets Under Management Items 5.D., 5.F., 5.I., and 5.K. ask for data regarding your AUM. This can be a tricky area, so here are some important things to remember: Regulatory Assets Under Management (RAUM) are those over which you (a) provide continuous and regular supervisory or management services, and (b) have trading authority. This is dependent on the terms of your advisory agreement with the client. Does it state that you provide ongoing monitoring of assets? Does the client grant you trading discretion? Discretionary RAUM include assets for which you have the discretion to make investment decisions and implement transactions without prior client approval. Non-Discretionary RAUM includes assets for which you can implement transactions after you have obtained the client's approval to do so. If you provide advice on assets for which the client is responsible for implementing the transactions (e.g., held-away 401k accounts), these cannot be counted as RAUM and are not reflected on ADV Part 1. However, if you wanted to show these assets as part of your business, you could include a description of them in Item 4 of your ADV Part 2A. How you reflect assets that are managed by third-party asset managers (outside managers, sub-advisers, TAMPs) depends on the circumstances of the engagement. If you engage with the third party and have the discretion over the hiring, modification, or replacement of its services, then the assets can be included in your RAUM. However, if the client is the party that engages with the third party, typically the third party will have discretion and will claim the AUM on its ADV. Be aware that your total AUM in Item 5.D. needs to match the total AUM in 5.F. exactly, or you will get an annoying error message that prevents you from completing your filing. Sometimes the discrepancy is a dollar or two due to rounding errors, so check your math and adjust accordingly. Categorizing Asset Types In Section 5.K., you are required to provide information regarding your AUM by asset type. Previously, there wasn't published guidance on the definitions of the categories listed here, and there has been some confusion, particularly around how to categorize exchange-traded funds. Are they "(i) Exchange-Traded Equity Securities" or "(x) Securities Issued by Pooled Investment Vehicles"? I have always advised that ETFs be placed in (x) because their risk profile is typically more similar to a mutual fund than an individual security. But there have been differing opinions on this point. Fortunately, in October, the SEC published some updates to its FAQs on Form ADV which provided clarification that ETFs should be listed in category (x) as a pooled investment vehicle. (See the last question under the topic for Item 5.K.) If you haven't done so in the past, please be sure that you update your processes this year to put them in the right place. Questions often arise regarding Item 5.C.(1) ("Number of clients who receive advisory services for whom you did not have AUM") and Item 5.H. ("Number of clients who received financial planning services during the last fiscal year"). Advisers often ask, "Aren't these the same thing?" Possibly. If you only offer investment management and financial planning services, then essentially the answer would be the same for both 5.C.(1) and 5.H. However, 5.C.(1) could also include clients who receive other non-asset management services, such as plan sponsors who receive non-discretionary advice. Note that accounting clients are not considered advisory clients, though. Also note that the number of clients in 5.D. should include the number of clients for whom you do not have regulatory assets under management. (See the topic for Item 5.C.(1) and 5.D. in SEC's FAQs on Form ADV linked above for further information.) So financial planning clients may increase the number of clients, but not the AUM.

  • Coming Soon: Beneficial Ownership Information Reporting

    A new Beneficial Ownership Information (BOI) reporting requirement by the Financial Crimes Enforcement Network (FinCEN) will be going into effect January 1, 2024. Companies operating in the United States will need to provide information to FinCEN regarding the beneficial owners of their entities, unless they meet one of the exemptions provided. Investment advisers are granted an exemption to the reporting requirement, but this exemption only applies to SEC-registered advisers. (See page 7 of the Small Entity Compliance Guide.) The reason for this, as stated in the release notes of the final rule, is "With respect to state-registered investment advisers, the extent of state supervision varies significantly, and FinCEN accordingly does not believe that seeking a blanket exemption for state-registered entities is warranted at this time." So that makes it clear that state-registered advisers will need to comply with the reporting requirements. Still unknown: HOW to fulfill the reporting requirements. The platform is still being built and has not been released. The anticipated ETA is January. So we'll need to take a look at this again after the first of the year. I've added it to the 1/4 meeting agenda. Not sure if we'll know anything then, but just making sure it stays on our compliance minds. The good news is that for existing entities, the deadline to complete the reporting is 12/31/2024. If you are a state-registered investment adviser, you'll need to comply with the reporting requirements. In addition, if you have clients that operate business entities, you may wish to alert them of this new requirement as well. Additional information can be found on the FinCEN website.

  • Artificial Intelligence for Investment Advisers

    Artificial Intelligence. It's a hot topic that seems to be on everyone's tongues these days. President Biden recently issued an Executive Order requiring federal agencies to use AI safely and responsibly, and encouraging private sector entities to do the same. The EO focuses on protection of privacy, intellectual property, and national security. Back in July, the SEC issued a proposed rule on how broker-dealers and investment advisers can use AI (not finalized or adopted yet). The regulators' concerns are primarily focused on how financial service entities may use AI in generating advice. Mike Kitces recently authored a Nerd's Eye View article about how advisers might use ChatGPT in their practices. As with any new technology, the initial reactions range between fear of the unknown and excitement of how it will make our lives better. Depending on how old you are, you can probably recall when social media, email, or even the Internet first burst onto the scene. There were similar questions, fear, and excitement. But now these things have become part of our daily lives, and are taken for granted. And as with any new technology, the regulators will grapple with what AI means to the industry, and what parameters they will put around how it can be used, so that investors and financial markets are protected. Expect regulations to be coming at some point, but with regulators, it can be a slow roll. I've been receiving questions from advisers about the use of AI in their businesses. For now, my compliance advice is that it makes sense to test it out to see how it might be used in your practice for non-advice related tasks. I don't think we know enough about it yet -- or more importantly, what restrictions regulators might place on using it -- to rely on AI to pick investments or build portfolios. But I do see the value in using AI to help increase your operational efficiencies (such as taking notes in meetings or automating tasks), or to help develop creative content (like marketing content, or client communications). But keep in mind that you will still need to review any AI output to be sure it is complete, and accurate. In that regard, you should have sufficient expertise to know whether AI is correct. You could ask ChatGPT to write a blog post for you about a complex financial topic -- for example, Roth backdoor conversions -- but if you aren't confident about the rules and tax implications yourself, you can't be 100% certain that the blog output is accurate. You should probably verify facts against another resource if you aren't certain. If using AI for notetaking, you'll still need to review the output and correct it as necessary, ideally while the meeting is still fresh in your mind. And if using it for automating tasks, you'll need to periodically verify that all the steps are functioning correctly. Ultimately, you are responsible for the advisory services, information, and content you provide, regardless of whether you are providing it directly or through a service provider, software, web application, or AI. So, as with any tool you use, make sure it's working right for you. If you decide to allow AI to be used in your practice, I recommend that you include some guidelines in your compliance manual on how it can be used. I suggest taking the approach of implementing its use in phases over time, to assess how it is being used, to see how effective and accurate it is, to consider how clients may receive it, and to give the industry time to catch up. I'll be working on some suggested policy language for the compliance manual, so let me know if you're interested in seeing that.

  • 2024 Annual Renewal: Step-by-Step Guide

    On an annual basis, registered investment advisers (RIAs) are required to renew the registrations for their firms and all associated investment adviser representatives (IARs) by paying the renewal fees through their FINRA Gateway IARD/CRD account. FINRA assists with the invoicing and collection of renewal fees and disburses the fees to the various jurisdictions for both SEC- and state-registered RIAs. Information regarding the renewal program is posted at The renewal program is a two-stage process: First, Preliminary Statements are issued on November 6, 2023. Fees for the Preliminary Statement are based on registrations in effect as of November 4, and are due on or before December 11, 2023. Second, Final Statements are issued on January 1, 2024. The Final Statements will reflect fees due for any changes to registration made between November 4 (when Preliminary Statements are created) and December 31, 2023. If you have not added or terminated any firm or IAR registrations during this time period, your Final Statement should reflect no balance due. If your Final Statement does reflect a balance due, this balance is due and payable by January 26, 2024. Following are step-by-step instructions for retrieving your statements from your IARD/CRD account, and making necessary payments for your renewal fees. PHASE 1: PRELIMINARY STATEMENT Promptly after the November 6, navigate to to log in to your IARD/CRD account. From the Dashboard Quick Links, select the E-Bill module. On the E-Bill Overview tab, you should see two sections: Flex-Funding Account and Renewal Account. (Note: The Renewal section only appears during the annual renewal period from November through January. It does not appear on the E-Bill page during the rest of the year.) On the Flex-Funding Account, note the current estimated balance. On the Renewal Account, note the renewal fees on the left. Select the blue “View Statement” button to view and download your Preliminary Statement. I recommend reviewing this statement to be sure that the listed registrations for the firm and IARs appear to be accurate. Note that fees are due on or before December 11. When you are ready to pay the fees, you have a few options: If you already have sufficient funds in the Flex-Funding Account to cover the renewal fees, under the Renewal Account section you can fill in the Payment Amount box (equal to the renewal fees due), then click the “Payment Options” box. Select the option to transfer funds from the Flex-Funding Account. The funds will be transferred from the Flex-Funding Account to the Renewal Account, and your renewal fees will be marked as paid. If the funds in your Flex-Funding Account will partially cover the fees, you can select the blue “Add Funds” button at the top of the Flex-Funding Account section to deposit additional funds in the Flex-Funding Account. Deposits process overnight and are available the next business day. Once there are sufficient funds in the Flex-Funding Account, you can follow the process outlined in Step 4.a. above to pay the renewal fees from the Flex-Funding Account. You can pay the renewal fees directly from the Renewal Account without transferring funds from the Flex-Funding Account. Under the Renewal Account section you can fill in the Payment Amount box (equal to the renewal fees due), then click the “Payment Options” box. Select the option to add funds from an external source (bank account or credit card), then just follow the instructions to add the necessary funds to pay the renewal fees. Transactions may process overnight. Regardless of which option you choose in Step 4 above, I recommend logging back into the account again in a day or two to verify that the Renewal Account reflects that no fees are owed. (Sometimes there are glitches, so it’s a good idea to double check this.) If your fees are not paid in full by the December 11 deadline, a late fee will be assessed so it is important to verify this. PHASE 2: FINAL STATEMENT Promptly after January 2, navigate to to log in to your IARD/CRD account. From the Dashboard, navigate again to the E-Bill module. Check the Renewal Account to see if any additional fees are due. Select the blue “View Statement” button to view and download your Final Statement. The Final Statement will reflect fees due for any changes to registrations made between November 4 (when Preliminary Statements are created) and December 31, 2023. If you have not added or terminated any firm or IAR registrations during this time period, your Final Statement should reflect no balance due. If your Final Statement does reflect a balance due, verify that charges reflected on the Final Statement are accurate. If a balance is due on your Final Statement, note that this balance is due and payable by January 26, 2024. You can follow steps outlined in Step 4 under Phase 1 above to pay the remaining fees. I again recommend logging back into the account in a day or two to verify that the Renewal Account reflects that the payment has been applied and no fees are owed.

  • Cybersecurity Awareness

    I know I'm a little late in posting this, seeing as October was Cybersecurity Awareness Month and it's now Thanksgiving Month. But I've seen a recent uptick in attempts at cyber attacks against financial service companies, so I thought it was a good time for another reminder about how to protect yourself, your office, your coworkers, and your clients from cyber attacks. It all comes down to practicing good cyber hygiene with your email, text messages, and social media accounts to prevent malware and viruses from being introduced to your devices in the first place. An ounce of prevention is worth ... well, potentially tens of thousands of dollars spent to try to correct the damage from a cybersecurity attack. A significant source of cyber attacks is from phishing emails. Hackers are getting increasingly savvy about creating convincing looking logos, content, and website links to further their attempts to trick you, using reputable and widely-used names like Microsoft, Amazon, DocuSign, Apple, and Facebook. So, here are some reminders about how to spot red flags in your email inbox: Hover over the sender's email address to be sure it's legitimate. Hackers will often spoof sender names and make slight adjustments to the email address that you might not notice. For example, the email sender may say "Amazon Business Services," but the email address might be something different, like "" Hacker emails will often convey a sense of urgency asking you to act immediately, or include a threat of adverse action, such as freezing your account or disabling access to critical applications. Don't fall prey to this fear mongering. Slow down, take a breath, and then access the account or service directly to check on the status, rather than clicking on any links in the email. If an email includes a link, hover over the link to see if it seems legitimate. If it seems different from the URL you would normally use to access your account, don't click it. Instead, type in the correct URL you normally use to go to the alleged sender's website. Don't download any attachments unless the email is from someone you know. And even then, if you weren't expecting a document from that sender, think twice before downloading, or check with the sender to be sure it's safe. Even your friends, family, and clients can get hacked, and their emails can be used to spread malicious code through attachments. Check to see the time that the email was sent. Emails sent outside of normal business hours may be suspicious (i.e., sent from overseas). Of course, with many customer service centers operating 24/7, just because a message is outside of normal business hours doesn't automatically make it spam. Here is a quick, cute video on YouTube that provides some helpful reminders. (Don't worry, this link is legit. I'm not trying to trick you.) Take a couple minutes to review this. And as always, please let me know if you have any questions.

  • Anatomy of a Regulatory Exam

    The SEC issued a Risk Alert earlier this month that provides some interesting insight into how the SEC conducts its exams. The Risk Alert discusses the SEC's risk-based exam approach, how it selects firms to examine, and how it determines the scope of the exam. Bonus: The Risk Alert includes an addendum that outlines the documents that are typically requested in a regulatory exam. Although this Risk Alert solely covers the SEC's processes, many states will follow similar processes. And the list of documents is relevant regardless of whether you are SEC- or state-registered. I suggest using this document list to perform a quick review of your books and records to ensure you are retaining all relevant records, and would be able to produce them in the event of an exam.

  • Are You Neglecting Your Form U4?

    The Nerd's Eye View published a good article by Chris Stanley earlier this month about common mistakes regarding the Form U4. I typically recommend that advisers review their firm registrations and IAR registrations (including both the ADV Part 2B and Form U4) in October, in advance of the annual renewal process beginning in November, to ensure the firm and its IARs are properly registered in the right jurisdictions. But, as this article points out, the Form U4 is often overlooked. Unlike the ADV Part 2A and 2B, you don't have to give the Form U4 to clients, so you kind of forget that it's hanging around out there. Things that are commonly missed are updates to residential address and outside business activities. The article provides a nice summary and overview of the Form U4. Just for kicks, you can log in to your FinPro account (if you have one), or go to the IAPD website and search for your record to see if your information is accurate.

  • You Need to Document Your CCO Annual Review

    In August, the SEC adopted some final rules pertaining to Private Funds. But wait ... before you think, "Oh, I don't have a private fund, this doesn't apply to me," keep reading. Buried within the release of these rules was an amendment to Rule 206(4)-7 of the Investment Advisers Act, commonly known as the Compliance Rule. This rule was first enacted about 20 years ago, and it is the rule that states that all investment advisers need to have a CCO, have written policies and procedures, and conduct an annual exam. But the rule has been tweaked just a bit to now state that the annual compliance review must be documented in writing. The rule becomes effective November 13, 2023, so all annual reviewed conducted by the CCO after that date will need to be documented in writing. The rule doesn't specify how the annual review needs to be documented, so there is still some flexibility on how can be accomplished, depending on your business model. You can opt for a formal once-a-year compliance report, or otherwise document various reviews that are conducted throughout the year.

  • Protecting Seniors and Vulnerable Clients

    We often hear on the news about how seniors are the victims of fraud and financial exploitation. I recently read an article on by Richard Eisenberg, How to Fix America's Elder Justice Problem, which reminds us that every year, "roughly 10% of Americans aged 60 and older experience elder abuse, and elder financial abuse is on the rise. Victims over 60 lose over $28 billion annually to elder financial exploitation, according to a recent AARP study." The article discusses the difficulties of addressing elder abuse. But I think it's important to also mention that vulnerable clients may not be limited to those over 60. Sometimes developmental or emotional issues may not be as readily apparent as grey hair and wrinkles. Struggling with cognitive issues or trying to cope with extreme stress, grief, or depression can also make an individual susceptible to financial exploitation. As a financial adviser, in interacting with your clients, you may become aware of suspected or potential incidents of abuse or financial exploitation with your vulnerable clients. Your compliance manual should include information on how to identify potential issues, and what to do if you suspect your client is a victim. Check your compliance manual to see if you need to add or update your policies regarding vulnerable clients. Some states (such as Washington) also require that all RIA supervised persons receive annual training regarding vulnerable clients. Make sure you are fulfilling those requirements.

  • Best Execution Review

    As a fiduciary, a registered investment adviser has an obligation to ensure best execution. But what does that mean, exactly? "Best execution" refers to the regulatory obligation for financial institutions to execute client trades at the most favorable terms reasonably available under the circumstances. Many advisers will align their firms with just one or maybe two qualified custodians (such as Schwab or Fidelity, for example). These firms offer programs for advisers that include providing custody of client accounts as well as providing brokerage services for client transactions. These programs will also offer access to other benefits, such as: technology to facilitate account applications and client service requests; ability to view client statements and tax documents; an electronic trading platform, with electronic confirmations and trade blotter; a dedicated service team to handle requests; informational resources, such as seminars or conferences; or discounts on products or services from strategic partners. When you use one of these adviser programs, all client transactions are executed through the custodian or a broker-dealer affiliated with the custodian. You aren’t out shopping around for a broker to give you the best execution price for each trade you make. Once you align your practice with a custodian, it’s not easy to switch to another custodian due to the administrative tasks involved, such as communicating with clients, repapering all the client accounts, updating your disclosure documents and advisory agreements, and changing your policies and procedures. You have to have a pretty darn good reason to put yourself and your clients through that heartache. So how on earth do you fulfill your fiduciary obligation of best execution, if you're only executing trades through one broker? The good news is that broker-dealers also have best execution requirements and standards they must uphold. Brokers are required to report to the SEC information about order routing on a quarterly basis (Rule 606 reports), and provide monthly reports on execution quality. Therefore, as an investment adviser who uses a custodian’s advisory program, it is reasonably safe to assume you can rely on the best execution policies of your custodian to fulfill your fiduciary responsibilities. However, regulators will still ask you about your best execution policies, so you should still demonstrate that you are reviewing best execution at least annually. Basically, this is an annual due diligence review of your custodian. Some things you can do to document your annual review include: Review the custodian/broker-dealer best execution information. This information is usually available on the custodian’s website. Download a copy of the information and save it in hard copy or electronically. The best execution information for some common custodians can be found in the links below. (If you use a different custodian, you can usually find the information pretty easily by Googling “[custodian name] best execution.”) Charles Schwab Fidelity Altruist Document your reasons for staying with the custodian. Aside from executing trades, what else does the custodian do for you and your clients? Keep a list of the benefits you receive from the custodian (see examples in the bulleted list above) that make the relationship beneficial to you as well as in the best interest of your clients. Work with your custodian to improve services. Schedule an annual call with your service team to discuss any customer service issues and what can be done to improve communications and services you receive. Ask what the custodian is doing to provide best execution. In addition to this annual review, I suggest periodically comparing the services of other custodians to make sure that your custodian is still the best fit for you and your clients. This can be a time-consuming task, so it's probably not something you want to do every year, but maybe every 3-5 years. As I already mentioned, it is difficult to change custodians, but if you have ongoing concerns with customer service issues, trade errors caused by the broker, or the value received for the cost of service, at some point you may need to weigh your options to see if it’s worth the effort to transition to another provider. The SEC issued a Risk Alert in July 2018 regarding common best execution issues. This Risk Alert is worth a read. Common issues found by regulators during examinations included: Not performing annual reviews. Not having adequate policies and procedures. Not doing what the policies and procedures said. Not comparing information from other broker-dealers. Take some time this month to review your best execution policies and procedures, and document your review of your custodian's best execution practices.

  • Whistleblowing Policies

    In April, Washington became the fifth state (following Indiana, Montana, Utah, and Vermont) to enact a whistleblower policy, based on the NASAA model act. The policy becomes effective July 23 of this year, and outlines the terms under which awards and protections will be provided to someone who reports violations of any federal or state securities laws. The policy also prohibits the whistleblower's employer from any retaliatory actions against the whistleblower. Whistleblower policies aren't new; in 2011, the Dodd-Frank Act enacted "Whistleblower Incentives and Protection." You've undoubtedly heard news stories about whistleblowers receiving sizable awards. The NASAA model act establishes a state-level program with provisions similar to Dodd-Frank's provisions. If you are a solo-practitioner, a whistleblower policy probably isn't necessary; you're not likely to blow the whistle on yourself. However, if you have employees, you may wish to consider stating in your compliance manual that employees may report violations to you as CCO, or directly to regulators, and affirmatively state that it is the firm's policy not to retaliate against any employee for reporting a violation. As an example of what not to do, see this 2021 administrative proceeding against Guggenheim Securities. The SEC slapped the firm with a penalty in excess of $200,000 because its policies strictly prohibited employees from speaking with regulators.

  • SEC Standards of Conduct Guidance

    The SEC staff has published a lengthy “FAQ”-styled Bulletin “[r]eiterating the standards of conduct for broker-dealers and investment advisers in addressing their care obligations when they are providing investment advice and recommendations to retail investors.” This is the fourth interpretive guidance issued by the SEC staff since the agency adopted the standards of conduct rulemaking package in 2019 that included the Fiduciary Duty Interpretation for advisers (including the duty of care) and Regulation Best Interest for broker-dealers (Reg BI). Prior staff guidance addressed: Adviser Consideration of DEI Factors Account Recommendations for Retail Investors Conflicts of Interest There's a lot to digest in the links above, but they are worth a read if you have some spare time.

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