NJ Joins Other States to Protect Seniors, NASAA Warns Smaller Advisers about Cybersecurity Risks: Regulatory Update for June 2020

For Investment Advisers and Broker Dealers

New Jersey Adopts Its Own Senior Safe Legislation. New Jersey recently joined Congress, more than 25 other states and FINRA by enacting a new financial exploitation law designed to protect its vulnerable adult population from financial fraud. The New Jersey statute became effective on April 12, 2020.

The “Safeguarding Against Financial Exploitation Act” requires broker-dealers and investment advisers, through their qualifying personnel, to promptly report suspected financial exploitation of a vulnerable adult or senior citizen to the New Jersey Bureau of Securities and applicable local level adult protective services. Moreover, the law calls for a broker-dealer, agent, investment adviser, investment adviser representative, or person who serves in a supervisory, compliance, legal, or senior investor protection capacity to also notify a trusted contact or third party previously designated by the vulnerable adult about suspected exploitation against the account holder (so long as the trusted contact is not a suspected perpetrator). In New Jersey, a firm may temporarily hold disbursements or transactions from a vulnerable client’s account for up to fifteen business days, and potentially longer, under direction from the Bureau of Securities, a county protective services’ provider, or court order.

New Jersey joins California, Texas, Ohio, and other states with significant populations in the fight to protect their senior and vulnerable adult populations at personalized, local levels. Refer to the NJ Bureau of Securities for more details about this legislation and how to comply with it. Contributed by Carolyn W. Mendelson, Senior Compliance Consultant.

For Investment Advisers

NASAA 2020 Investment Adviser Section Annual Report. North American Securities Administrators Association (NASAA) issued its Investment Adviser Section Annual Report that includes statistics about state-registered investment advisers and results of examinations. NASAA compiled results of 1,078 state examinations from the first six months of 2019. Although books and records issues topped the list of deficiencies (59% of deficiencies), NASAA was most concerned about cybersecurity, which ranked fourth (26% of deficiencies). According to the report, “[s]maller companies are low hanging fruit for cybercriminals, and when you consider that more than three-fourths of the nearly 18,000 state-registered investment advisers are 1- to 2-person shops, it is clear how important cybersecurity should be for these small businesses as well.” To help these smaller advisers, NASAA developed a Cybersecurity Checklist and guidance on understanding how to use it. Another great resource for smaller advisers is the list of Recommended Best Practices for Investment Advisers discussed on page 5 of the report. The 11 practices cited are an excellent starting point for a compliance program. Contributed by Jaqueline M. Hummel, Partner and Managing Director.

For Hedge Fund Managers: NFA Actions

Notice to Members I-20-20: Coronavirus Update – Relief from Fingerprinting Requirements. COVID-19 concerns led NFA to suspend its fingerprinting services temporarily in March. In April, the CFTC granted corresponding temporary no-action relief from its fingerprinting requirements for natural person principals and associated persons (APs). Other background check-related requirements still apply, and all persons relying on the relief will be required to submit fingerprints within 30 days of NFA’s announcement that fingerprint processing will resume. Contributed by Mark L. Silvester, Compliance Associate.

Notice to Members I-20-18: Amendments to NFA Compliance Rule 2-29 and Related Interpretive Notice Now Effective. The NFA amended Compliance Rule 2-29 and Interpretive Notice 9003 to allow CTA Members who are also SEC-registered investment advisers (RIAs) flexibility in their use of past performance in promotional materials. A previous update to this rule and Interpretive Notice required CTA Members to present past performance returns net of all commissions, fees and other expenses. However, RIAs may otherwise present gross-of-fees returns to sophisticated parties in one-on-one presentations in reliance on SEC no-action relief issued to the Investment Company Institute (No-Action Letter 88-330-CC, 9/23/88). These amendments codify similar relief. Namely, CTA Member RIA firms may present past performance to eligible contract participants (ECPs) on a gross-of-fees basis in non-public, one-on-one presentations with proper disclosure. CTA’s doing so must also offer to provide the ECP client with net-of-fee returns agreed upon by the firm and the ECP client at the time of or before exercising discretion over the account. The amendments are effective immediately. The amendments are effective immediately. Contributed by Mark L. Silvester, Compliance Associate.

Photo Credits: Photo by Domenico Loia on Unsplash.

Written by:

Hardin Compliance Consulting LLC

Hardin Compliance Consulting LLC on:

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