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SEC Calls Out Weak Advisor MNPI & Code of Ethics Practices, More States Require IARs to Take CE, FINRA Addresses Sales Practices for Alternative Investment Funds, and Archegos Case Offers Cautionary Tale: Regulatory Update for May 2022 | Foreside


For Investment Advisors and Broker-Dealers

  • FINRA 2022 Entitlement User Account Certification Period Announced. Firms that use the Investment Adviser Registration Depository (IARD) and FINRA to make electronic filings need to review their accounts and certify their authorized users. This year’s certification period runs from 6/1/2022 through 8/31/2022. The firm’s Super Account Administrator (“SAA”) must perform this certification. As a reminder, SAAs will receive an email that includes the start and due date of the certification. Failure to complete the certification by 8/31 will result in all associated user accounts being suspended until the certification is complete. For detailed instructions regarding how to complete the certification, please refer to FINRA’s Entitlement Program FAQ. Contributed by Rochelle Truzzi, Senior Director.

For Investment Advisors

  • SEC Cautions Advisors to Update Policies on Handling Material Non-Public Information. The SEC’s Division of Examinations (“EXAMS”) recently released a risk alert focused on investment advisor code of ethics issues, with specific attention placed on how advisors handle material non-public information (“MNPI”). Foreside’s Todd Cipperman also analyzed the release in this article available on the Foreside Knowledge Center.

    While the risk alert framed its findings as weaknesses, advisors may wish to consider them as opportunities to confirm their policies and procedures are adequate. The alert’s findings fall into two categories:

  1. Specific activities with the potential for increased exposure to MNPI:
  • Alternative data providers1: Firms should establish clear procedures regarding their use of alternative data providers, including robust and consistent documentation of due diligence and ongoing reviews.
  • Value-added investors: Procedures should address how the firm consistently identifies “value-added investors,” i.e., clients or fund investors who are corporate executives or financial professional investors possessing MNPI and manages the associated risk of exposure to MNPI.
  • Expert Networks: The alert largely reiterates previous guidance encouraging firms to implement best practices such as logging and tracking calls and reviewing detailed call notes. EXAMS also shared a new recommendation for firms to review trading activity in similar industries as consultations. While this may be connected with the SEC’s ongoing insider trading action against Matthew Panuwat2, practically speaking this may be a challenge for some firms to implement efficiently.
  1. Basic Code of Ethics blocking and tackling – Within this category, the alert noted commonly cited deficiencies. Firms are again reminded to consider how they (a) identify access persons, (b) handle preclearance violations, (c) evidence review of holdings and transaction reports, and (d) obtain code acknowledgements from employees. Additionally, firms should consider controls to prevent CCOs from reviewing their own transactions. Other best practices include maintaining a restricted securities list where the firm possesses MNPI and ensuring that investment opportunities are first offered to clients before the firm or any employee.

    Most of these findings are not new, however, the fact the SEC issued this alert shows that firms continue to struggle in this area. Firms can take this opportunity to tighten their belts and suspenders and consider whether they are doing enough to test and monitor these activities and document those reviews. Several scalable technology solutions also exist to help firms streamline and automate these workflows. Contributed by Cari Hopfensperger, Senior Director.

  • More States Adopt Investment Adviser Representative Continuing Education Requirements. The following table summarizes the current status of state investment adviser representative (“IAR”) continuing education (“CE”) requirements. Kentucky, Michigan, and Wisconsin adopted these requirements for 2023, and Arkansas and Washington D.C. join Nevada with pending proposals. Note that CE requirements apply to any IAR registered in an affected state – whether they are associated with a state-registered or SEC-registered advisor. Contributed by Cari Hopfensperger, Senior Director.

For Broker-Dealers

  • What are Your Sales Practice Obligations When it Comes to Alternative Mutual Funds? FINRA Notice 22-11 provides guidance to firms that offer mutual funds that “seek to achieve their objectives through investments in non-traditional investments or asset classes.” Examples include mutual funds investing in digital assets or gold, or funds that implement complex investment strategies. FINRA’s Notice cites common weaknesses that have led to enforcement actions, including inadequate written supervisory procedures, insufficient due diligence processes, lack of oversight of suitability recommendations, and incomplete and unbalanced communications with the public. More importantly, the Notice provides a list of FINRA resources firms should revisit along with a discussion of effective practices for enhancing their supervisory program. The information provided is intended to assist firms in the development of policies and procedures for alternative funds that are designed to comply with the care and compliance obligations under Regulation Best Interest (“Reg BI”). Contributed by Rochelle Truzzi, Senior Director.

1 Footnote 9 of the risk alert notes that “’Alternative data’ refers to many different types of information increasingly used in financial analysis, beyond traditional financial statements, company filings, and press releases. Alternative data does not necessarily contain MNPI. Examples of “alternative data” include information gleaned from satellite and drone imagery of crop fields and retailers’ parking lots, analyses of aggregate credit card transactions, social media and internet search data, geolocation data from consumers’ mobile phones, and email data obtained from apps and tools that consumers may utilize.” https://www.sec.gov/files/code-ethics-risk-alert.pdf.

2 “In SEC v. Panuwat, the SEC alleged that Matthew Panuwat used confidential information regarding the acquisition of Medivation, his employer, to buy stock options in another industry participant, Incyte. The court ruled that the SEC alleged facts sufficient to state a claim under the “misappropriation” theory of insider trading for violations of §10(b) of the 1934 Securities Exchange Act and SEC Rule 10b-5 promulgated thereunder.” See “Shadow Trading” and “SEC v. Panuwat”: An Expansive Trend in Insider Trading Enforcement”? David I. Miller, Robert A. Horowitz, Charles J. Berk, of GreenbergTraurig. March 2, 2022. The New York Law Journal. https://www.gtlaw.com/en/insights/2022/3/published-articles/shadow-trading-and-sec-v-panuwat-an-expansive-trend-in-insider-trading-enforcement

Photo Credit: Photo by Alisa Anton on Unsplash.

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