United States: New Investment-Related Rules Announced

New Investment-Related Rules Announced

A number of investment-related rules were recently announced or are imminent. They include such non-enforcement matters as the U.S. Securities and Exchange Commission's (SEC) proposed requirements for maintaining electronic records; a court ruling regarding the duty of financial institutions to disclose internal incentive programs; The Financial Industry Regulatory Authority, Inc. (FINRA) requirements of arbitrators to make client-requested disclosures of their decisions; FinCen's withdrawal of anti-money laundering rule proposals for investment advisers; and the SEC's disclosure of required information in routine on-site examinations of investment advisers. One enforcement action involved the SEC's penalizing a company's vice president for violation of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940.


Advisers' Books and Records to Be Kept Electronically

The Division of Investment Management for the SEC is drafting an amended Rule 204-2 to require investment advisers to keep electronic records. The SEC promulgated Rule 204-2 after the passage of the 1960 amendments to the Investment Advisers Act of 1940. The 1960 amendments provided, in part, that investment advisers must maintain certain records. Since SEC promulgated Rule 204-2 in 1961, the Rule has been amended to provide the option for registered investment advisers to maintain records in a prescribed electronic format.

Although the amended Rule has not yet been drafted, the director of the SEC's Division of Investment Management, Andrew Donohue, indicated that it would likely require investment advisers to maintain records in electronic format. It also is being contemplated that the electronic format will allow searchable and sortable records of managed accounts, client lists, and ethical breaches.

No Duty to Disclose Internal Incentives

The U.S. District Court for the Southern District of New York recently held that UBS did not violate its disclosure duties when it did not disclose to its customers its internal incentive programs that benefitted certain mutual funds. UBS used a tier system for the mutual funds it offered. According to a putative class of plaintiffs, mutual funds were only placed in the most desirable tier, Tier 1, if the mutual fund families struck a revenue-sharing arrangement with UBS. Financial advisers at UBS then directed clients to invest in Tier 1 funds.

The plaintiffs averred that UBS breached its disclosure duties by failing to disclose this alleged internal incentive program to its customers. Additionally, the plaintiffs maintained that UBS failed to fill out its SEC Form N-1A properly, which requires disclosure if the selection of brokers will be influenced by anything other than receipt of brokerage or research services.

The District Court held UBS had no obligation to disclose the internal incentives program to its customers. Moreover, the District Court held that UBS did not run afoul of its duties under Form N-1A, since it disclosed in its prospectuses that it "might" enter into shelf-space agreements, like the ones alleged to have happened in this case.

Arbitrators Must Explain Decisions Under Proposed FINRA Rule

FINRA recently proposed a rule change that would require arbitrators to complete a detailed description of their decisions upon the request of all parties to the arbitration. Under current rules, the arbitrator is not under any obligation to produce a written explanation of his or her decision. If the SEC adopts the rule change proposed by FINRA, the arbitrator will only have that increased responsibility if so requested by each of the parties involved.

The text of the proposed rule is available online at: http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p117215.pdf.

FinCen Withdraws Anti-Money Laundering Rule Proposals for Investment Advisers

The Financial Crimes Enforcement Network (FinCen) recently announced that it has withdrawn its proposed anti-money laundering rules for certain unregistered investment companies (including many hedge funds), investment advisers, and commodity trading advisors. The proposed rules were first introduced by FinCen for possible adoption in 2002 under the Banking Secrecy Act (BSA). The BSA requires most financial institutions to put anti-money laundering procedures in place.

Until further notice, investment advisers, unregistered investment companies, and commodity trading advisers will not have to establish such procedures.

However, some of these parties already have implemented anti-money laundering provisions, anticipating that FinCen would finalize its rules. Such parties may want to consider maintaining the anti-money laundering procedures if the parties with which it does business (such as broker-dealers, banks, futures commissions, and so forth) require the entity to have anti-money laundering provisions in place as a condition of doing business with or through them.

SEC Provides Insight Into Staff Initial Request for Information in Connection with Investment Adviser Examinations

The SEC's Office of Compliance Inspections and Examinations (OCIE) recently provided a description of the types of information its staff will request prior to conducting routine on-site examinations of investment advisers. The purpose of providing this information is to inform advisers of the core set of documents the staff will request to understand the adviser's business, registered compliance risks, and the effectiveness of the adviser's compliance systems.

The categories of information that the staff includes in its initial request are as follows:

  • Information about the adviser's business, investment activities, organizational charts, client lists, trade blotter, and description of any litigation or arbitrations
  • Information about the adviser's compliance program, risk management, internal controls, evidence of the adviser's self-assessment of its compliance risks, the adviser's written policies and procedures for addressing those risks, internal audits, and correspondence
  • Documentation of the results of periodic testing performed by the adviser, including forensic and quality control testing results, portfolio management procedures, brokerage arrangements, and procedures for addressing insider trading and conflicts of interest
  • Documentation of actions by the adviser with respect to shortfalls or breaches of its compliance program
  • Information about performance advertising, custody, and financial records

The full text of the SEC's notice can be viewed at http://sec.gov/info/cco/requestlistcore1108.htm.

Enforcement Actions

Failure to Blow Whistle Resulted in SEC Enforcement

The SEC recently found Wayne Cassaday in violation of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Mr. Cassaday served as the president and chief compliance officer of Battery Wealth Management, Inc. (Battery). Albert Parish was a vice president and partial owner of Battery. Mr. Parish fabricated account statements for Battery, borrowed funds from the IRA accounts of Battery's clients, and issued "IOUs" to Battery's Loan Pool.

Although Mr. Cassaday was not accused of actively violating the law in the manner that Mr. Parish did, the SEC found that Mr. Cassaday should have realized Mr. Parish was violating the law and causing Battery to violate the law. In fact, Mr. Cassaday was responsible for producing a compliance manual that prevents conflicts of interest like those arising due to Mr. Parish's actions. Given Mr. Cassaday's knowledge, he had a duty to act due to his position as chief compliance officer. Mr. Cassaday, however, did not act to prevent Mr. Parish or Battery from violating the law. Mr. Cassaday's failure to act was, in and of itself, a violation of the Advisers Act. As a result, Mr. Cassaday was personally required to pay a disgorgement of $6,731 and a civil penalty of $40,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions