The SEC and the CFTC have proposed a new rule requiring certain entities to address identity theft (the “Rule”).  Like the FTC’s Red Flags Rules, the Rule would require certain firms to develop and implement a written identity theft prevention program designed to detect, prevent, and mitigate identity theft.  The Rule is proposed due to mandate in the Dodd-Frank Act.

The SEC acknowledged in the Rule proposal that most entities that would be required to comply with the Rule are most likely already required to comply with the FTC’s Red Flags Rule.  Furthermore, the Rule, if adopted, would not contain any new requirements that are not already in the FTC’s final rules, nor would they expand the scope of those rules to include new entities that are not already previously covered by those rules.  The SEC believes, however, that because of industry specific guidance and examples given in the Rule proposal, financial services firms may better be able to discern whether the rules apply to them.

The SEC’s Rule would apply to “financial institutions” and “creditors.”  The SEC does include investment advisers as a type of entity that may be subject to the Rule.  However, the Rule defines the term “financial institution” to include certain banks and credit unions, as well as “any other person that, directly or indirectly, holds a transaction account belonging to a consumer.”  While a “transaction account” is defined as “a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third parties or others.”

The SEC specifically recognized that most registered investment advisers are unlikely to hold transaction accounts and thus would not qualify as financial institutions.  The SEC is, however, soliciting comment on their proposed definition of “financial institution.”  Specifically, the SEC acts if the Rule should omit investment advisers or any other type of entity from the list of entities that may be covered by the Rule.

Regarding the term “creditor” the SEC announced that it will follow the guidance of the FTC’s Red Flags Rules.  That legislative history of that definition indicates that it was intended to ensure that business that may “advance funds … or that may bill in arrears for services provided, should not be considered creditors.”  The SEC Rule proposal would therefore not include investment advisers because they bill in arrears.

In summary, it does not appear that this new set of Red Flags Rules will impact many investment advisers.

The SEC released an alert to help firms prevent and detect unauthorized trading in brokerage and advisory accounts.

“Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” said Carlo di Florio, Director of OCIE. “We hope that the observations shared in the Risk Alert will be helpful for firms as they review their compliance and supervisory controls to detect and deter unauthorized trading.”

The alert notes that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny.

RIA Biz is reporting that Raymond James is hoping to capture more of the RIA market by creating a separate division that will be headed by Bill Van Law.  Previously, the RIA custody division was a subunit of the company’s independent broker-dealer.

According to the article, Raymond James plans to invest heavily in upgrading technology, the transition process and publicizing its services.  The article further explains that Raymond James did intensive research, including studying wirehouse brokers who considered Raymond James but chose another custodian, hiring an outside consultant, and reviewing Cerulli Associates reports (which showed the full service model is shrinking, independent broker-dealers are static, and the RIA market is growing).

Raymond James currently has about $7 billion under custody from about 100 RIA firms. It typically seeks RIAs with at least $100 million in assets, but Van Law says he will be careful not to cherry pick.

On February 6, 2012, IA Watch reported on the sudden dismissal of the SEC’s case against Ted Urban, the former general counsel at Ferris Baker Watts.  The case, which began in 2007, was dismissed on January 26, 2012, a few weeks before an appeal to a 2010 ALJ decision was to be heard before the full Commission.  The case alleged that Urban failed to supervise a troubled broker.  Urban contended that he was never a supervisor to the broker or the broker’s line supervisors.  In the  2010 ALJ decision that was on appeal, the ALJ dismissed the failure to supervise charge against Urban, but not before finding Urban was in fact a supervisor and endorsing the Gutfreund legal precedent, which broadly held that someone is a supervisor if “the person has the responsibility, ability, or authority to affect the conduct of the employee whose behavior is at issue.”  The broad supervisor standard, and the ALJ’s decision support the contention that compliance officers and general counsel could be labeled as supervisors and face liability when fraud occurs under their watch.  None of the 5 commissioners or anyone within the Enforcement Division commented on the dismissal.

On February 15, 2012, the SEC released a final rule implementing changes to the definition of “Qualified Client” under the Investment Advisers Act of 1940.  The primary changes are:

1)  The qualification for assets under management with the adviser has been increased from $750,000 to $1,000,000.

2)  The qualification for net worth has been increased from $1,500,000 to $2,000,000.  In addition, a person’s primary residence must be excluded from their net worth.

In addition, Rule 205-3 now states that the SEC will issue an order every five years adjusting the dollar amounts above for inflation.

The “Qualified Client” definition is important to advisers in two ways:

1)  Advisers can only accept performance-based compensation from Qualified Clients.

2)  The SEC defines “high net worth” clients as Qualified Clients.  This is important for disclosures on Form ADV Part 1, as well as for those advisers that have not registered certain investment adviser representatives due to working with high net worth clients.

The SEC did provide a grandfathering clause in the Rule amendment.  If the adviser entered into a contract with someone that satisfied the Qualified Client requirements at that time, the increased thresholds are not required.

According to an article in Compliance Week,  a London-based investment company called Centaur that had launched “Galileo,” the first-ever Managed Sports Fund., has advised investors that it was going into liquidation and there was no money left.  Galileo investors lost approximately $2.5 million.

Galileo sought to generate returns through sports betting, which was similar to an idea that Mark Cuban had presented on his blog in 2004 (but never launched). The intention of the fund was to bet on soccer, tennis, cricket, horse racing and golf, and then to expand to the NFL and baseball. in April 2010, one of Centaur’s managing directors projected a 15-25% rate of return, using a unique software that “ensures we purely trade on statistics and probabilities.”

On February 2, 2012, the Department of Labor (DOL) released the final service provider fee disclosure rules—also known as the 408(b)(2) rules—which will become effective on July 1, 2012. The following webinar provided by AllianceBernstein provides an overview of these disclosure rules.  I encourage you to listen to it at your convenience, as I believe it provides relevant, valuable information in a plain english format.

You may access a replay of the presentation by clicking on the replay link below:

REPLAY
Recording ID: Disclosure Rules
Recording Key: (Leave Blank)

Advisor One reported on a Aite Group study that projects the radical industry changes that began in 2008 will continue into 2012.  The report warns that many of these trends will afffect  business models, profitability pressures, investor requirements and more.  The Top 10 Trends the report cites are:

1. Market Reshuffle, Continued - Breakway brokers, acquistions by broker-dealers and private equity firms and changes in how advisors and investors approach control over their money.

2. Profitability Pressure – Competition, outsourcing, need for economies of scale and regulatory changes will continue to pressure wealth managers.

3. Wealth Management Revenue for Banks – Banks are retooling to serve high and ultra-high net worth clients as asset share held by mass-market and mass-affluent investors has fallen.

4. Business Model Changes - Triggered by changes in investor behavior, upcoming fiduciary standard and technology changes.

5. Self-Directed Investing – Client desire to control their own investments.

6. A Less Than Ideal Investment Climate - Investor disillution with conventional investing.

7. Copy Trading - Increase in allowing retail investors to tag along with experience traders who are trading for their own account.

8. Mass Affluent Retirement-Income Initiatives  – With people working longer and deferring retirement, opportunities abound to provide planing and roll-over opportunites for them.

9. Advisors Seeking More Control  – Firms supporting advisor’s practices and their more independent business models will find more opportunity as AUM fee models increase.

10. Mobile Initiatives – mobile applications becoming much more popular lead by the leading on-line brokerage firms.

The Wall Street Journal is reporting that the battle over a broker’s fiduciary duty is moving in a new direction.  According to the article, the push to hold brokers to the same standard of care as investment advisers seemed to be close to success a year ago but the SEC never voted to change the rules. Now the SEC is saying that it won’t write any new rules until it studies how much it might cost the industry.  The change is due to a case from last year in which the US Court of Appeals for the District of Columbia struck down a proxy access rule on the grounds that the SEC hadn’t done a thorough review of the rule’s potential costs.  The ruling changed the climate for all future SEC rule making, says David Tittsworth, executive director of the Investment Advisor Association.  He stated, ”The SEC doesn’t want to be proposing rules that will just be struck down.”  SEC Chairman, Mary Shapiro, wrote to Congress in January to confirm that three staff economists were studying the issue and drafting another request for data on the market for retail financial advice.

The Wall Street Journal is reporting that the battle over a broker’s fiduciary duty is moving in a new direction.  According to the article, the push to hold brokers to the same standard of care as investment advisers seemed to be close to success a year ago but the SEC never voted to change the rules. Now the SEC is saying that it won’t write any new rules until it studies how much it might cost the industry.  The change is due to a case from last year in which the US Court of Appeals for the District of Columbia struck down a proxy access rule on the grounds that the SEC hadn’t done a thorough review of the rule’s potential costs.  The ruling changed the climate for all future SEC rule making, says David Tittsworth, executive director of the Investment Advisor Association.  He stated, ”The SEC doesn’t want to be proposing rules that will just be struck down.”  SEC Chairman, Mary Shapiro, wrote to Congress in January to confirm that three staff economists were studying the issue and drafting another request for data on the market for retail financial advice.