As the second quarter of 2017 draws to a close we’ve put graduations behind us and for some of us, we eagerly await the start of summer camp, others plan day trips to the beach (raise your hand if you are going to the Jersey shore), invite friends for the inevitable BBQs that, for some, may result in burnt veggies and burgers… don’t tell my husband I said that.

Amidst the start of our summer fun let’s not forget our federal filing obligations due in the third quarter (sorry to quash your summer dreams). The sooner you start gathering the data required for these filings the easier it will be for you when the filings are due.

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For guidelines on the 2017 Q3 federal filing requirements download Lilian Colpas' Summer Fun and Q3 Federal Filings for Investment Advisers:

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ABOUT LILIAN COLPAS
Lilian Colpas is an accomplished compliance professional with over 12 years of global compliance experience. Lilian provides consulting services to SEC and state-registered investment advisers and conducts AML independent reviews for broker/dealers. Previously, Lilian held roles as a compliance officer for Davidson Kempner, Harding Loevner and AIG Global Investments (now PineBridge).

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BULLETIN: The Department of Labor (DOL) Fiduciary Rule

Spotlight On Talent: Scott Brown, Senior Consultant at Compliance Risk Concepts
The Department of Labor (DOL) Fiduciary Rule, was originally scheduled to be phased in over the period encompassing April 10, 2017 – January 1, 2018, but is now to be phased in starting June 9, 2017 including a transition period for the applicability of certain exemptions to the rule extending through Jan. 1, 2018.

In his compliance bulletin WTF? Why are You Such A Fiduciary?, Scott Brown discusses who is defined as a fiduciary, the sort of investments the rule impacts and best practices during the transition period (June 9, 2017 to January 1, 2018).

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To stay on top of the Department of Labor (DOL) Fiduciary Rule, enter your information below to download your complimentary copy of Scott Brown's WTF? Why are You Such a Fiduciary?.

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ABOUT SCOTT BROWN

Prior to joining Compliance Risk Concepts, Mr. Brown was employed as a Principal Examiner at FINRA from 2005 to 2016. Mr. Brown’s responsibilities at FINRA included sales practice and financial examinations of member firms. Sales practice examinations entailed detailed reviews of member firms’ systems of supervision and control, reviews of policies governing marketing and sales of financial products and services (equities, mutual funds, corporate and municipal debt), and detailed reviews of broker-dealers’ anti-money laundering compliance programs. Financial Examinations involved verification of the accuracy of General Ledgers, Trial Balances, Income Statements, Balance Sheets, Net Capital Computations and FOCUS Filings for a diverse universe of broker-dealers.

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Examining matters of importance to retail investors

Spotlight On Talent: Portia Amato, Compliance Officer 

By now, every CCO and their team have asked themselves this question, and if you have not already, this is the time to do so, especially if you have not been the lucky host to a SEC Audit in some time.

The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) has released their list of priorities for the year and it is covering a lot of ground. They did break it down into three focus areas:

1) Examining matters of importance to retail investors
2) Focusing on risks specific to elderly and retiring investors
3) Assessing market-wide risks

In this first part of a three-part series, Portia Amato reviews the first focus area, Examining Matters of Importance to Retail Investors, including the subtopics and how Registered Investment Advisors (RIA’s) and Broker Dealers (BD’s) alike can tackle these matters should the SEC pay a visit.

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ABOUT PORTIA AMATO
Portia Amato is a seasoned Compliance Officer, having over 18 years of investment management experience. Over the course of her career, Portia has specialized in compliance, operations and client services for investment advisors and top tier investment banks. Portia also successfully helped to launched two wrap-fee programs for New York Life Investment Management and US Trust

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COMPLIANCE BULLETIN: OUT WITH THE OLD...IN WITH THE NEW
Spotlight On Talent: Lilian Colpas, Senior Compliance Consultant

Why is January 1 different from all other days of the year? After all, nothing fundamentally really changes. Nevertheless, most of us see January 1 as a new beginning in which we resolve to renew ourselves and discard undesirable traits. As you return to work from the long holiday weekend what will you resolve for 2017?

As an adviser, the annual compliance review requirement imposed by Rule 206(4)7, or the “compliance rule”, should be a fundamental part of your New Year’s resolution. The goal of 206(4)7 is to ensure your policies and procedures are adequate for your business model, therefore, you should assess each policy ever year to identify what is working and what is not working.

In this bulletin, Lilian Colpas discusses the importance of the annual compliance review and the SEC’s recommended topics that advisers should be addressing as part of their compliance program.

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ABOUT LILIAN COLPAS
Lilian Colpas is an accomplished compliance professional with over 12 years of global compliance experience, most recently as compliance officer for Harding Loevner in Bridgewater, NJ. Previously, Lilian held roles as a compliance officer for Davidson Kempner Capital Management and AIG Global Investments (now PineBridge Investments). Lilian also worked as a paralegal for Sidley Austin Brown and Wood and AIG.

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COMPLIANCE BULLETIN: SEC WHISTLEBLOWER REGULATIONS
Spotlight On Talent: Lilian Colpas, Senior Compliance Consultant

The most recent SEC announcement by OCIE correlates to the point that whistleblowers have an incentive to earn millions of dollars from your ineffective compliance program. The SEC has monetary incentives to draw out these employees and expose the trials and tribulations of your firm. If your firm is not in compliance with the SEC’s whistleblower regulations, Rule 21F-17, you could face enforcement action.

Lilian Colpas, examines the current rhetoric surrounding SEC’s whistleblower regulations and the SEC’s expectation of registered advisers and their compliance with the whistleblower rule.

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Enter your information below to download your complimentary copy of Lilian Colpas' Compliance Bulletin: You’ve Established The Tone At The Top –  Do You Know The Mood In The Middle?.

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ABOUT LILIAN COLPAS
Lilian Colpas is an accomplished compliance professional with over 12 years of global compliance experience, most recently as compliance officer for Harding Loevner in Bridgewater, NJ. Previously, Lilian held roles as a compliance officer for Davidson Kempner Capital Management and AIG Global Investments (now PineBridge Investments). Lilian also worked as a paralegal for Sidley Austin Brown and Wood and AIG.

The post You’ve Established The Tone At The Top – Do You Know The Mood In The Middle? appeared first on Compliance Risk Concepts.

by Dan Dorsky, Principal, Anti-Corruption and Ethics Practice.

An enforcement action jarring the financial services sector has been resolved. Och-Ziff Capital Management Group LLC agreed to pay a combined penalty of $412 million towards its settlement with the Department of Justice (“DOJ”) and Securities & Exchange Commission (“SEC”) related to the agencies’ Foreign Corrupt Practices Act (“FCPA”) investigation into bribery activity in Africa. It is a criminal violation of the FCPA to provide anything of value to a non-U.S. government official in exchange for a business advantage. According to Och-Ziff’s August Form 10-Q, this resolution “could have a material adverse effect on the Company’s business, financial condition or results of operations.”

The settlement, announced on September 29, 2016, represents the culmination of a long-simmering investigation launched in 2011. At that time, the SEC began issuing subpoenas into the conduct of multiple financial services businesses concerning their dealings with sovereign wealth funds. In other words, the government appears to have been concerned that banks, investment firms, private equity and/or hedge funds may have provided benefits to employees of these sovereign wealth funds in exchange for business.

Dan Dorsky, examines the SEC's order in the matter of Och-Ziff Capital Management Group LLC and discusses what this settlement means to the hedge fund giant and the industry.

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ABOUT DAN DORSKY

Mr. Dorsky’s background combines public service in the Department of Justice and work in the corporate sector as well as service in private practice and in the nonprofit sector. He has represented companies in dealings with the DOJ and the Securities and Exchange Commission in arriving at favorable resolutions.

Mr. Dorsky served as Senior Compliance Counsel at Tyco where, as part of the post-Dennis Kozlowski clean-up effort over a five-year period, he developed and implemented global compliance with the Foreign Corrupt Practices Act (FCPA). The company’s highly successful resolution with the Department of Justice and the Securities and Exchange Commission resulted in a Non-Prosecution agreement and no monitor. After the merger of Tyco’s Flow Control Division with Pentair, Mr. Dorsky most recently served as Pentair’s Vice President and Chief Compliance Officer, where he brought its Flow Control division to a successful resolution of its three-year period of self-reporting to the DOJ under Tyco’s FCPA settlement.

At Tyco, he led and oversaw global investigations, and helped conceive and drive the implementation of state-of-the-art compliance initiatives, such as Tyco’s groundbreaking Third Party Management Program. Click here to learn more about Mr. Dorsky.

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COMPLIANCE BULLETIN: DOL FIDUCIARY RULE Spotlight On Talent: David Amster, Principal and Head of Fund and Dealer Advisory The United States Department of Labor (“DOL”) recently finalized rules that require financial institutions that offer retirement advice to address conflicts of interest (“COIs”) that arise as a result of offering such advice (the “Fiduciary Rule”). The effective date is April 10, 2017. As one would expect with any new rule of this magnitude, there are potential minefields everywhere. David Amster, examines these minefields and discusses what you need to know about the DOL Fiduciary Rule to stay ahead of the game.

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ABOUT DAVID AMSTER David Amster, Principal and Head of Fund and Dealer Advisory, is responsible for CRC’s business development, client relationship management and for supervising the execution of strategic engagements. David joined CRC in September 2016 from CRT Capital Group LLC, where he served for more than 15 years as Managing Director and Chief Compliance Officer.

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Several times over the past decade FINRA has indicated they may be considering making it a requirement for broker-dealers to maintain errors and omission insurance (E&O) to cover the payment of arbitration awards to investors. A 2013 article in the Wall Street Journal indicated that FINRA was “frustrated” over nonpayment of arbitration awards to investors whose retirement savings were eviscerated by financial advisor malpractice. FINRA has reported that $51 million of arbitration awards granted in 2011 were not paid – this was 11% of all awards against broker-dealers, which was up from 4% in 2010.FINRA has not yet enacted that requirement. However, it is a very good idea for all participants in the financial services industry to maintain some sort of insurance coverage to protect from arbitration awards and court litigation related to the professional services.

At CRC, we have seen instances of investor awards against broker-dealers and registered representatives that ruined both. A simple mistake could spell disaster for even the most careful practitioner and his/her employer. There are numerous reasons to purchase E&O insurance. But, to put it bluntly, the primary reason is that everyone makes mistakes. Even the most experienced representatives, and the best supervision and operations departments, mistakes will be made. No one is perfect.

In one recent case, a representative made a mistake in calculating the taxes associated with a 1031 real estate exchange for a 30-unit apartment complex. His former client has initiated litigation against him alleging over $1 million in damages. Just the attorneys’ fees alone will cost him several hundreds of thousands of dollars. The representative had been with his broker-dealer for over 20 years, did not have a single mark on his U4/U5, had never had a grievance lodged against him. Nonetheless, it appears he made a mistake in calculating the tax liability for his client. However, the bigger mistake he made, which he shares with his broker-dealer, is that they did not have E&O insurance coverage.

With all that said, understanding E&O insurance is difficult. How much overage do you need? What exclusions and endorsements are appropriate? What does the “Covering Clause” of the insurance policy actually mean? Does my E&O policy cover all of the products available on the Broker-Dealer’s platform? Will you policy cover losses other than damage awards, such as attorneys’ fees, litigation/arbitration expenses, subpoena costs, regulatory investigation expenses? Just asking these questions is the right start in finding and purchasing E&O insurance.

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Give us a call (646)346-2468 to review your current E&O insurance policy status or use the form below to learn more about an E&O Tune-up:

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The post E&O: Are You In The Know? appeared first on Compliance Risk Concepts.

Whether you are a small-town doctor or a powerful hedge fund manager - the SEC doesn’t discriminate! If you are abusing your fiduciary duty and use material, non-public information to trade securities - you will be caught and you will be charged with insider trading.

Combat insider trading within your firm by learning the right questions to ask and developing the right internal controls and processes to mitigate this risk.

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The State of New York recently passed legislation requiring those transacting in virtual currency to become licensed. The new rules mirror much of what is already in place for many broker-dealers, banks, and other financial institutions. However, there are some important parts of the legislation that may change written policies or require new policies be written and implemented.

While the new rules do not go into effect immediately – there is a 45-day comment period starting on July 23 – we summarize the legislation in anticipation of it being put into place without major changes.

Most poignantly, the New York Virtual Currency Regulation (VCR) requires, with few exceptions, all companies that store, control, buy, sell, transfer, or exchange Bitcoins (or other cryptocurrency) to become licensed with the New York State Department of Financial Services (NYDFS). In order to obtain a license, an application must be completed providing: (1) identifying information about the applicant and its individual and entity affiliates, (2) a background report prepared by an independent investigatory agency, (3) fingerprints, (4) photographs, (5) organization charts, (6) current financial statements, (7) business plans, (8) details of banking arrangements, (10) copies of written VCR policies and procedures, (11) copies of insurance policies, (12) an explanation of the methodology used to calculate the value of the virtual currency into traditional currency and(13) verification from the New York State Department of Taxation and Finance.

Since the DFS has 90 days to approve or deny your application, presumably, the NYDFS will be supplying forms to assist in the application process; if for no other reason, to provide itself the consistency necessary to process the applications it will receive.
Importantly, the non-refundable license fee required under the VCR is $5,000. You may also have to submit other fees to process additional paperwork related to the license, if the NYDFS requires. In other words, if you apply and are rejected for a license, the Department of Financial Services keeps your $5,000. Thus, it will be important that you follow the steps necessary to properly provide all required information with your application. CRC can assist in this regard.

There are capital requirements that must be maintained at all times and each licensee must maintain a surety bond. The capital requirements and the amount of the surety bond have not yet been set by the NYDFS. In addition, if a licensee undergoes a change of control or engages in a merger, the NYDFS must be given prior notice and a written application must be completed providing the detailed information about the new control group identified above. The NYDFS has authority to stop any change in control or merger if the new control group does not pass licensing requirements.

Some important items each licensee must be aware of and implement with its Virtual Currency License are:

1) Designation of a Digital Currency Compliance Officer
2) Maintenance of a Digital Currency compliance policy covering items relating to anti-money laundering, cyber security, privacy, and information security.
3) Books Records policies similar to current securities and banking books and records requirements.

The AML requirements are very similar to current AML requirements from FINRA and the Bank Secrecy Act. However, the VCR’s AML requirements require each licensee’s AML program to maintain a customer identification program. This requirement is antithetical to the nature and spirit of the origins relating to the anonymity of digital currency. However, a robust AML program combined with an even more robust privacy and information program may be a point of differentiation for you with your competitors and could be a way to encourage customers to use your services who desire to maintain their anonymity.

The VCR’s cyber security mandates mirror current regulations such as the Gramm-Leach Bliley Act and the Federal Information Security Act. Every licensee must create and enforce a cyber security written policy and designate a Chief Information Security Officer (CISO). The cyber security program requirements under the VCR include identifying risks, protecting electronic systems, detecting intrusions, recovering and restoring operations and systems. There are also annual reporting and auditing requirements that may necessitate substantial administrative work by the CISO.

The VCR requires each licensee to provide quarterly and annual financial disclosures and reports to the NYDFS. These disclosure and reports are standard types of information, but will add another regulatory requirement to the already heavy regulatory requirements of many broker-dealers, banks, and other financial institutions.

Lastly, there are disclosure requirements and advertising/marketing limitations under the new laws. The disclosure requirements are specific to virtual currency transactions and involve adding language to account applications “in clear, conspicuous and legible writing in the English language and in any other predominant language spoken by the customers of the licensee.” The list of disclosures in the legislation is extensive and will likely lengthen already long account applications. However, it may be a good idea to review your current account applications with a representative from CRC to determine the best was to combine the VCR disclosure requirements with your current regulatory disclosures. The advertising/marketing disclosures merely require each licensee’s advertising to contain the following phrase “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.”

There are other parts of the VCR with which entities and individuals who obtain licensure will have to comply. Ultimately, living within the requirements of the law will require careful consideration of the VCR’s provision for new written policies and internal procedures.
Please contact Compliance Risk Concepts if you would like more information about digital currency regulations or are interested in learning more about compliance issues relating to digital currency issues.

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