Advisers Fall Short on Referral Arrangements, Mutual Fund Exams Planned, Updates to Annual and FOCUS Reports Finalized: Regulatory Update for December 2018

by Hardin Compliance Consulting LLC

For Investment Advisers: SEC Actions

Risk Alert – Investment Adviser Compliance Issues Related to the Cash Solicitation Rule: The Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert with a list of top deficiencies under Rule 206(4)-3 (the “Cash Solicitation Rule”) of the Investment Advisers Act.  The biggest problems?  Failing to have a referral agreement in place, and either failing to give disclosure to clients about the arrangement or failing to have signed proof from clients that they received the disclosure. Check out our blog post for in-depth advice on avoiding Cash Solicitation Rule pitfalls.   Contributed by Jaqueline Hummel, Partner and Managing Director

SEC Enforcement Division Issues Report on FY 2018 Results: The Securities and Exchange Commission’s Enforcement Division issued its Annual Report, stressing the five qualitative principles it uses to assess its performance as well as providing quantitative data results.  They continue to emphasize that protecting retail investors is their highest priority.

The five principles include:

  1. Focus on Main Street Investors- The Division created two initiatives in 2018, the Retail Strategy Task Force and the Share Class Selection on Disclosure Initiative to protect retail investors.
  2. Focus on Individual Accountability- The Commission charged individuals in more than 70% of the stand-alone enforcement actions with a concentration on CEOs and CFOs.
  3. Keep Pace with Technological Change- The Cyber Unit became fully functional in 2018 and became a leader in addressing misconduct relating to digital assets and initial coin offerings.
  4. Impose Remedies that Most Effectively Further Enhancement Goals- The Division used creative techniques to supplement financial remedies to address underlying charges. In one example, the Commission’s settlement stripped a CEO of her super-majority voting control and ensured she would not benefit from a future sale or liquidation until shareholders were made whole.
  5. Constantly Assess the Allocation of Our Resources- The Division shifted its limited resources (headcount is down 10% since 2016) into market segments with emerging risks and was also pragmatic regarding its case selection.

To summarize the quantitative effects of its activity in 2018, the Division issued 821 enforcement actions, returned $794 million to investors, received $3.945 billion in disgorgement and penalties, suspended 280 companies and issued 550 individual bars and suspensions. It’s also worth noting that enforcement actions in Securities Offerings and Investment Advisers /Investment Company led the list at 25% and 22%, respectively.  Contributed by Heather Augustine, Senior Compliance Consultant

For Broker-Dealers:  FINRA Actions 

BDs and RIAs, Mark Your Calendars for December 17, 2018:  Log into your E-Bill account and review your 2019 Preliminary Renewal Statement.  Payment-in-full is due Monday, December 17th!  There are many payment options available.  Late fees will be assessed.   Don’t forget, certain jurisdictions (such as Illinois) may require additional documentation to be submitted directly to their office.  Please refer to the NASAA Regulator directoryContributed by Rochelle Truzzi, Senior Compliance Consultant

SEC Approves Amendments to the Financial Reporting Requirements impact FOCUS and Annual Audit Requirements:  Broker-dealers should be aware that these amendments apply to FOCUS reports and Annual Audit Reports filed for the period ending January 31, 2019 and after.  FOCUS reports have been updated to reflect GAAP requirements. The Statement of Financial Condition and the Statement of Income will include new line items to report details of comprehensive income and will eliminate references to extraordinary gains/losses and the cumulative effect of changes in accounting principles.  The Annual Audit report must contain a Statement of Comprehensive Income, in place of a Statement of Income, where comprehensive income exists in the reporting period.  Contributed by Rochelle Truzzi, Senior Compliance Consultant

Heads-up BDs – Regulation NMS Amended to Require Additional Disclosures on Order Handling:   Beginning in June of 2019, Rule 606 of Regulation NMS will require broker-dealers to provide, at the request of a customer who places not-held orders (firm has price and time discretion), certain individualized disclosures regarding the handling of the customer’s orders.  The new and enhanced disclosures are intended to provide the customer with a better understanding of how their firm routes their orders so that the customer can evaluate the execution quality of such orders.  Exceptions to the Rule are available at both the firm and customer levels.

In addition, the quarterly public reports required under Rule 606 will cover NMS stock orders of any size that are submitted on a held-basis and will require information to be reported in a new manner.  The quarterly public reports on order execution and routing, required by Rules 605 and 606, must be free and posted on a website readily accessible to the public for a period of three years.

Introducing firms should discuss the implementation process with their clearing firms.  The Rule amendments become effective on January 18, 2019, with a compliance date of June 18, 2019.  Contributed by Rochelle Truzzi, Senior Compliance Consultant

For Mutual Funds: SEC Actions 

OCIE Risk-Based Exam Initiatives for Investment Companies:  In a continued focus on retail investors, OCIE announced new exam initiatives applicable to certain investment companies in a Risk Alert.  The alert highlights the types of funds and key areas of interest OCIE will be exploring during these exams.

OCIE is interested in the following types of funds: smaller, low trading volume ETFs; index funds tracking custom indexes; mutual funds with underperformance relative to peer groups or have high allocations to securitized assets (such as certain securitized loans, credit card receivables, or mortgage-backed securities).  OCIE is also looking at advisers that are either new to mutual funds or that provide ‘side-by-side’ advice to mutual funds and private funds. Based on the Risk Alert, funds and advisers selected for examination should expect the Staff to dig into whether risks and conflicts are appropriately reflected within fund and adviser policies and procedures, and disclosed to shareholders and fund boards. OCIE will also be reviewing the evaluation and oversight processes used by funds, advisers and fund boards to mitigate their risks and conflicts.

Finally, OCIE proactively shared what it views as the material risks and key areas of exam focus unique to each type of fund in scope – with emphasis again placed on the potential for harm to retail investors.  Advisers to mutual funds cited in the alert should address the conflicts discussed in the Risk Alert as part of the firm’s annual compliance program review, risk assessment and testing program.  Contributed by Cari Hopfensperger, Senior Compliance Consultant

Investment Company Reporting Modernization Frequently Asked Questions:  The SEC recently updated its FAQs related to the Investment Company Reporting Modernization Act reforms.  Most relevant to advisers will be information related to Form N-PORT and N-CEN, though the FAQ also addresses Regulation S-X.  Given the phased approach to implementation and the amendments adopted, funds are encouraged to use this resource to help interpret and understand the requirements and timelines that apply to their specific circumstances.  Contributed by Cari Hopfensperger, Senior Compliance Consultant

Save some Trees!  Optional Internet Availability of Investment Company Shareholder Reports:  Funds interested in taking advantage of the new option for internet delivery of mutual fund shareholder reports under the SEC’s Rule 30e-3 may wish to re-visit our write up on the topic, given the Rule’s effective date of January 1, 2019.  Although the earliest that shareholder reports may be delivered online is January 1, 2021, the Rule requires that funds prominently disclose their intent to pursue online delivery in summary and statutory prospectuses, and the annual and semiannual reports for two years beforehand.  Interested funds and their advisers may wish to raise the topic with fund administrators to evaluate their plans to facilitate this option and the expected costs.  Contributed by Cari Hopfensperger, Senior Compliance Consultant

For Hedge Fund Managers: 

CFIUS Establishes Critical Technology Pilot Program – Impacts on Investment Funds: The Department of Treasury released interim rules in mid-October establishing a pilot program (the “Pilot Program”) that requires parties to notify the Committee on Foreign Investment in the United States (CFIUS), prior to closing, of certain foreign investments in US business involved in “critical technologies” within 27 specified industries.  This is the first mandatory filing requirement imposed by CFIUS.  The rule implements portions of the Foreign Investment Risk Review Modernization Act (FIRRMA), meant to address national security concerns resulting from foreign investments in U.S. companies.  Applicable transactions are subject to mandatory reporting to CFIUS for a review of their potential impact on national security.  The pilot program runs from November 10, 2018 through March 5, 2020, and filings, when warranted, will be required 30-45 days in advance of the transaction, depending on the type of filing being made.

The Pilot Program applies to foreign investments in U.S. businesses that “produce, design, test, manufacture, fabricate or develop one or more critical technologies.”  The program applies to 27 industries identified by their classifications under the North American Industry Classification System Code and includes a wide range of industries including not only those that have obvious national security applications, but many others such as power distribution, battery manufacturing, nanotechnology, biotechnology, and wireless equipment manufacturing.

Investments subject to the pilot program include those where a foreign investor has “(i) access to material nonpublic technical information held by the Pilot Program U.S. Business; (ii) membership or observer rights on the board of directors or similar governing body of the Pilot Program U.S. Business; or (iii) the right to appoint a member of the Pilot Program U.S. Business’ board of directors; or (iv) any involvement, beyond the mere voting of shares, in substantive decision-making regarding the Pilot Program U.S. Business.”  (See text of Interim Rule)

Passive investments by foreign persons in U.S. managed investment funds are generally exempt from requirements of the pilot program, provided that the foreign person does not generally have the ability to control the fund or the investment decisions of the fund manager, or have access to material nonpublic technical information of the U.S. business covered by the Interm Rule.

While the Interim Rule includes practical examples, the applicability of the pilot program to a US fund manager with foreign investors investing in the covered industries depends on several nuanced definitions in the Interim Rule.  Penalties for noncompliance can be steep and include a civil monetary penalty up to the value of the transaction, or require the unwinding of the transaction.  See the decision flowchart in this informative article and the CFIUS Critical Technology Pilot Program Fact Sheet for additional details.  Contributed by Cari Hopfensperger, Senior Compliance Consultant

Written by:

Hardin Compliance Consulting LLC

Hardin Compliance Consulting LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.