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Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!
SCA Client News Brief
By Cheryl YoungFeb 01, 2022

Smart Brevity™ count: 3.5 mins... 903 words

Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!

What’s Up with WhatsApp?

Whatsapp icon (Logo) — in 3D. More 3D app icons like these are coming soon. You can find my 3D work in the collection called "3D Design".

What’s new: The SEC enforcement action against JP Morgan for record-keeping violations associated with the use of personal emails, texts, and WhatsApp resulted in a fine of $125 million.

Employees and their supervisors were using WhatsApp and personal emails and texts to communicate on business matters. When the SEC requested documents, the firm did not hand over all requested documents because they were deleted or retained on employees’ personal devices, which were not searched. The SEC discovered the non-compliant communications through third party communications.

Why it matters: The SEC indicated it will pursue additional cases of record preservation of electronic communications and encouraged firms to self- report if they find their practices don’t comply with record-keeping rules.

We encourage our clients to review their policies and procedures covering the use of personal devices and apps that are not approved for use in business related communications. In the JP Morgan case, the fact that the firm was using training and attestations to mitigate the risk of non-compliance did not save them.

What they're saying: The SEC risk alert on electronic messaging provides guidance on this issue. Some of the highlights are:

  • Specifically prohibiting the business use of technologies that allow for automatic destruction of messages or prohibit back-up or third party viewing. (Note there are vendors able to capture apps such as WhatsApp)

  • If the firm permits the use of personally owned mobile devices for business purposes, require personnel to obtain prior approval before accessing firm email servers or other business apps from personal devices.

  • Load security apps on company-issued or personally owned devices that would allow monitoring for prohibited apps and cyber controls.

The bottom line: If employees have business related e-communications that are not being captured and monitored, the use of attestations and training may not be adequate to mitigate the risk of non-compliance. It may be necessary to employ technology solutions to augment these controls.

SEC’s Latest Warning Shot to PF Managers

Stay safe.  One of the many street signs that have appeared, to warn people, during the current pandemic.  This one was in the high street of Shaftesbury, which has now been pedestrianised.

What’s New: The SEC released its second risk alert on Private Fund Advisers on January 27th. This alert covers an alarming number of deficiencies in PF adviser examinations. We urge PF advisers to review this alert right away. This is not a good look for the industry.

Why it matters: This alert gives PF advisers a roadmap on what the SEC focus will be during an examination. This also gives investors information on PF deficiencies for due diligence purposes.

The deficiencies cover (1) disclosures, (2) due diligence, and (3) hedge clauses.

  • The largest number of deficiencies are in the disclosures category.

  • Advisers were not following their own disclosures in limited partnership agreements, operating agreements, private placement memoranda, due diligence questionnaires, side letters, and other fund disclosures.

  • Problems with disclosures regarding performance and marketing cover misleading statements and non-compliance with record-keeping requirements to support performance (e.g. predecessor performance).

  • Due diligence issues concerned due diligence failures on underlying investments and service providers.

  • Agreements and disclosure limiting the PF adviser’s liability (hedge clauses) were potentially misleading.

In summary: PF advisers need to get ahead of this by carefully reviewing the latest risk alert and taking action to make sure these and similar deficiencies don’t show up in their SEC exam. Review practices against all relevant disclosures, take a look at your investment due diligence, and make sure hedge clauses are not misleading.

Reminder on Compliance Dates for PTE 2020-02 on Retirement Plan Rollovers

Sticky note reminder "Don't forget"

Remember this: We remind those of you that may recommend a rollover of a retirement plan into an IRA that on February 1 new DOL requirements (PTE 2020-02) kick in. If you are a discretionary adviser to retirement plans, the recommendation to rollover the assets is the only area where you are impacted. Ongoing discretionary management is covered by other exemptions.

Why it matters: If you make a recommendation for a rollover and receive compensation for the recommendation, the ongoing relationship, or any other form of additional compensation, the transaction is considered to be prohibited by the Department of Labor. This could result in severe monetary sanctions. The way to avoid this is through compliance with prohibited transaction exemption (PTE) 2020-02 which requires:

  • Providing advice according to impartial conduct standards

  • Providing certain disclosures on fiduciary status, conflicts of interest, and scope of services before engaging in the transaction

  • Establishing and maintaining written policies and procedures to comply with the impartial conduct standards; and

  • Through a senior executive officer, engage in an annual retrospective review of compliance with PTE 2020-02.

What's next: No later than July 1, 2022, retirement investors must receive documentation justifying the rollover recommendation.

We hope you found this news brief helpful. Please let us know if there is a topic you would like for us to cover by contacting cyoung@secadvisors.com.

The information in this newsletter is for general guidance, only. It does not constitute the provision of legal or tax advice, or professional consulting of any kind.

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