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The Friday List: 10 Things to Know about the DoL Fiduciary Rule

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Last Monday (May 22), the Department of Labor issued guidance on the implementation of the long-debated Fiduciary Rule.  Most significantly, the DoL did not further delay the basic concept that financial institutions and advisers must apply a best interest standard to advice for IRAs and other retirement accounts.  However, the DoL did back off of some of some of the compliance requirements for the rest of this year and plans to collect more information.  Below is a list of the 10 things you need to know right now about the DoL Fiduciary Rule.

 

10 Things to Know about the DoL Fiduciary Rule

 

  1. Applies to IRAs: The DoL Fiduciary Rule applies to investment advice concerning IRAs, ERISA plans, and plans covered by Section 4975 of the Tax Code.
  2. Best Interest standard starts June 9: Beginning June 9, financial institutions and advisers to covered plans must provide advice in the retirement investor’s “best interest,” which includes a duty of prudence and loyalty.
  3. BIC exemption compliance starts January 1: The extensive compliance requirements of the Best Interest Contract (BIC) exemption, which would apply to non-level fee products, are not required until January 1, 2018.
  4. DoL expects changes by January 1: During the Transition Period (June 9-January 1), the DoL will collect additional information from the industry to determine how compliance practices such as the use of mutual fund “clean shares” should re-shape the Rule.
  5. Proprietary products with commissions permitted: During the Transition Period, firms can recommend proprietary products with commissions so long as they satisfy the best interest standard.
  6. Need policies and procedures: The DoL expects firms to adopt policies and procedures necessary to ensure compliance with the best interest standard.
  7. Robo-advisers can rely on BIC exemption: Robo advisers may rely on the BIC Exemption during the Transition Period to ensure compliance with the Rule.
  8. Investment advice narrowly defined: Investment advice, for purposes of the Rule, does not include plan information or general financial, investment and retirement information.
  9. Can rely on written representations from intermediaries: The Rule does not apply if an independent fiduciary provides written representations (including negative consent) that the fiduciary is a bank, insurance company, BD, RIA, or independent fiduciary managing at least $50 Million.
  10. DoL will focus on compliance over enforcement: The DoL says it will prioritize compliance over enforcement during the Transition Period so long as firms work diligently and in good faith to comply with the Rule.

The Friday List: 10 Factors for Hiring a Compliance Consulting Firm

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Many investment managers and boards struggle with the factors to consider when retaining a compliance consulting firm.  They mistakenly assume that all compliance firms are the same.  However, much like hiring any other professional service that seems inscrutable, compliance services firms can be analyzed by specific and objective characteristics.  Below, we offer some guidance on how to evaluate a compliance consultant.   Also, we offer a form of RFP for retaining a compliance consulting firm.

10 Factors for Hiring a Compliance Consulting Firm

  1. Size:  The sheer size of the firm makes a difference.  A firm with more than 10 consultants will offer more knowledge, experience, depth, and services than a firm of 1-5 people.
  2. Employee Experience:  Is the firm hiring senior professionals or newbies?  Do they focus on former regulators or experienced business people?  Is there a hiring philosophy that you can rely on, or are you just hiring the person in front of you rather than the firm?  Employee turnover is a fact of life, so make sure you hire a firm that will offer consistency notwithstanding a particular employee.
  3. Services:  Some firms offer holistic, ongoing services that may include providing a chief compliance officer.  Some firms only provide mock audits.  Inquire what the firm provides most of its clients.  Also, ask about the testing program.  How much time does the firm spend on testing activities?  What does the report look like?  Does the firm conduct interviews, review documents, engage in forensic testing, and sampling?
  4. Clients:  Does the firm provide services to your industry?  The investment management industry includes mutual fund managers, private equity firms, institutional money managers, family offices, and fintech companies.  Does the compliance consultant have the relevant experience?  How many clients does the firm serve?
  5. SEC Exam Experience:  Don’t assume that every compliance consultant has actually managed an SEC exam.  Also, ask about results.  Most reputable firms will not guarantee a perfect exam, but an experienced firm should be able to describe how it improved possible outcomes.
  6. Service Model:  Compliance consulting is a professional service.  Does the firm offer just one person or a team (which softens the impact of turnover)?  Will they engage proactively without you calling first?  Will they charge for every interaction (like a law firm)?  How often will they come on-site?
  7. Client Turnover:  This can be a red flag if a firm has experienced significant client turnover.  It is always a good idea to ask to speak to a former client as well as a longstanding client.
  8. Ownership: Is the firm employee-owned or part of a large organization?  Is there up-the-ladder accountability?  Does the firm have other businesses (fund administration, accounting, brokerage) that could divert attention?
  9. Tenure: Firms that have been in business more than 5 or 10 years have a demonstrated track record that shows success and continuity.  New consultants may be figuring out their business model, filling time between jobs, or auditioning for a job at your firm.
  10. Insurance Coverage:  Shockingly, many compliance consultants do not carry E&O or professional liability coverage.  We recommend a minimum of $1 Million in coverage.

Top 5 Regulatory Alerts – February 2017

Here are our Top 5 Regulatory Alerts for February 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – February 2017

  1. SEC PUBLISHES LIST OF MOST CITED EXAM DEFICIENCIES (2/9/17)
  2. SEC ISSUES ROBO GUIDANCE ON DISCLOSURES, SUITABILITY, AND COMPLIANCE (2/24/17)
  3. SEC CHAIRMAN ATTACKS “ACCREDITED INVESTOR” CONCEPT (2/28/17)
  4. SEC CHARGES CCO WITH AML FAILURES (2/1/17)
  5. GENERAL COUNSEL AWARDED $7.9 MILLION FOR WRONGFUL WHISTLEBLOWER TERMINATION (2/13/17)

 

Most Read – February 2017

  1. SEC PUBLISHES LIST OF MOST CITED EXAM DEFICIENCIES (2/9/17)
  2. SEC CHAIRMAN ATTACKS “ACCREDITED INVESTOR” CONCEPT (2/28/17)
  3. SEC CHARGES CCO WITH AML FAILURES (2/1/17)
  4. INVESTMENT CONSULTANT LIED ABOUT CODE OF ETHICS COMPLIANCE (2/10/17)
  5. SEC STAFF ALLOWS MORE FLEXIBLE FUND-OF-FUNDS STRUCTURES (2/7/17)

Top 5 Regulatory Alerts – January 2017

Here are our Top 5 Regulatory Alerts for January 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – January 2017

  1. SEC STAFF PUBLISHES 2017 EXAM PRIORITIES (1/13/17)
  2. FINRA ANNOUNCES 2017 EXAM PRIORITIES (1/6/17)
  3. LARGE WRAP SPONSOR PAYS $18.3 MILLION FOR COMPLIANCE PROBLEMS IN BUSINESS SOLD 8 YEARS AGO (1/30/17)
  4. SEC FINES 10 FIRMS FOR VIOLATING ANTI-PAY-TO-PLAY RULE (1/18/17)
  5. EXECUTING BROKER TO PAY $22.6 MILLION FOR MISREPRESENTING ORDER FILLING PROCESS (1/24/17)

 

Most Read – January 2017

  1. SEC STAFF PUBLISHES 2017 EXAM PRIORITIES (1/13/17)
  2. SEC FINES 10 FIRMS FOR VIOLATING ANTI-PAY-TO-PLAY RULE (1/18/17)
  3. LARGE ADVISER FINED $13 MILLION FOR PREDECESSORS’ COMPLIANCE BREAKDOWNS (1/17/17)
  4. ADVISER FACES CRIMINAL PROSECUTION FOR CHERRY-PICKING (1/26/16)
  5. LARGE ASSET MANAGER PAYS $340,000 FINE BECAUSE SEPARATION AGREEMENTS VIOLATED WHISTLEBLOWER RULE (1/19/17)

General Counsel Awarded $7.9 Million for Wrongful Whistleblower Termination

 

A jury awarded a terminated General Counsel $2.9 Million in compensatory damages and $5 Million in punitive damages for wrongful termination due to his whistleblower activities.  In a key ruling, the Court (USDC for Northern District of California) ruled not to exclude evidence provided by the GC that his former employer claimed was privileged under California professional rules.  The Court held that federal law preempted the more stringent state law and that federal common law governing privilege applied to his Sarbanes-Oxley Act whistleblower retaliation claim.  The GC had raised Foreign Corrupt Practices Act compliance concerns.

OUR TAKE: While we sympathize with the plaintiff in this case, the broader policy of piercing lawyer-client privilege may result in limiting the role of in-house counsel.  Because the court can discard privilege, senior management and outside counsel may be less likely to include in-house lawyers in more sensitive matters.

Jury Verdict

WADLER v. BIO-RAD LABORATORIES, INC.

Top 5 Regulatory Alerts – December 2016

Top 5

Here are our Top 5 Regulatory Alerts for December 2016, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – December 2016

  1. SUPREME COURT EXPANDS INSIDER TRADING LIABILITY (12/8/16)
  2. ETF SPONSOR WILL PAY $20 MILLION TO SETTLE CHARGES IT OVERSTATED PERFORMANCE (12/5/16)
  3. HEDGE FUND MANAGER CHARGED WITH CONCEALING LIQUIDITY CRISIS (12/20/16)
  4. BD FINED $16.5 MILLION FOR UNDER-RESOURCING AML COMPLIANCE (12/6/16)
  5. PRIVATE EQUITY FIRM FAILED TO OBTAIN APPROVAL FOR CO-INVESTMENTS (12/15/16)

 

Most Read – December 2016

  1. BD FINED $16.5 MILLION FOR UNDER-RESOURCING AML COMPLIANCE (12/6/16)
  2. SEC ENFORCEMENT DIRECTOR STRESSES INDIVIDUAL LIABILITY IN FCPA CASES (12/12/16)
  3. SEC IMPOSES $1.4 MILLION FINE FOR WHISTLEBLOWER RULE VIOLATIONS (12/21/16)
  4. FINRA FINES 12 FIRMS $14.4 MILLION FOR FAILING TO MAINTAIN DATA IN PROPER ELECTRONIC FORMAT (12/23/16)
  5. PRIVATE EQUITY FIRM FAILED TO OBTAIN APPROVAL FOR CO-INVESTMENTS (12/15/16)

Top 5 Regulatory Alerts – November 2016

 

Top 5

 

Here are our Top 5 Regulatory Alerts for November 2016, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – November 2016

 

  1. SEC CHAIR CALLS FOR “ZERO TOLERANCE” ENFORCEMENT (11/28/16)
  2. FOREIGN OFFICIAL HIRING PROGRAM RESULTS IN $264 MILLION IN FINES AND PENALTIES (11/21/16)
  3. SEC SUES AUDIT ENGAGEMENT PARTNER FOR IGNORING CLIENT MISCONDUCT (11/1/16)
  4. BD FINED FOR HACK OF THIRD PARTY CLOUD PROVIDER (11/16/16)
  5. RELIANCE ON OUTSIDE PROFESSIONALS DOESN’T MEAN ADVISER WASN’T NEGLIGENT (11/9/16)

  

Most Read – November 2016

  1. BD FINED FOR HACK OF THIRD PARTY CLOUD PROVIDER (11/16/16)
  2. SEC SAYS STOCK-PICKING APP IS AN ILLEGAL SECURITY-BASED SWAP (11/2/16)
  3. SEC SUES AUDIT ENGAGEMENT PARTNER FOR IGNORING CLIENT MISCONDUCT (11/1/16)
  4. SEC CHAIR CALLS FOR “ZERO TOLERANCE” ENFORCEMENT (11/28/16)
  5. UNREGISTERED FUND MANAGER STILL LIABLE FOR BREACH OF FIDUCIARY DUTY (11/11/16)

Best of the Web – October 2016

 

Best of Web

“I’m so glad I live in a world where there are Octobers.” (L.M. Montgomery, Anne of Green Gables)

 

Welcome to the October 2016 BOTW.  Who doesn’t love October: changing leaves, pumpkin-spiced lattes, football?  The regulatory world is also experiencing its own transitions.  SIFMA addresses the consequences of financial regulation, Dechert offers advice on private equity compliance, and K&L Gates explains auditor independence.  For those with an interest, check out BBD’s piece on mutual fund accounting and Thompson Hine’s overview of the new liquidity risk management rules.

 

The Intended and Unintended Consequences for End Users of Post-Crisis Financial Regulation (SIFMA)

http://www.sifma.org/blog/intended-and-unintended-consequences-for-end-users-of-post-crisis-financial-regulation/

 

Managing the Compliance Aspects of Private Equity Investments (Dechert)

https://info.dechert.com/10/7315/landing-pages/managing-the-compliance-aspects-of-private-equity-investments.asp

 

Making Sense of Auditor Independence Issues (K&L Gates)

http://www.klgateshub.com/files/Publication/c061e86a-f8b0-4046-925c-dc262d6cf747/Presentation/PublicationAttachment/331a5d4e-eed7-4e7f-b6e4-e5473ef290dd/IM_Alert_10172016.pdf

 

Considerations for Mutual Funds for Allocating Earnings and Profits to Distributions (BBD)

http://www.bbdcpa.com/investment-company-notebook/allocatingearningsandprofitstodistributions

 

SEC Adopts Rule Requiring Liquidity Risk Management Programs for Funds (Thompson Hine)

http://www.thompsonhine.com/publications/sec-adopts-rule-requiring-liquidity-risk-management-programs-for-funds

 

DOL Releases Guidance on Best Interest Contract and other Exemptions (Groom)

http://www.groom.com/media/publication/1766_DOL_Releases_Guidance_on_Best_Interest_Contract_and_other_Exemptions.pdf

 

Regulatory Focus and Developments on Potential Broker-Dealer Requirements for Private Fund Sponsor Activities (Cordium)

http://www.cordium.com/briefing/regulatory-focus-and-developments-on-potential-broker-dealer-requirements-for-private-fund-sponsor-activities/

 

Summary of FINRA Regulatory Actions April – June 2016 (ACA)

http://www.acacompliancegroup.com/news/compliance-alert/summary-finra-regulatory-actions-april-%E2%80%93-june-2016

 

What You Need to Know About the SEC’s New Swing Pricing Rule (Stradley Ronon)

http://www.stradley.com/insights/publications/2016/10/fund-alert-october-24-2016

 

NYDFS: “First-in-the-Nation” Cybersecurity Proposal (Morgan Lewis)

https://www.morganlewis.com/~/media/files/publication/outside%20publication/article/wall-street-lawyer-nydfs-first-in-nation-cybersecurity-proposal-25oct16.ashx?la=en

 

New Proposed RIC Regulations (Greenberg Traurig)

http://www.gtlaw.com/News-Events/Publications/Alerts/198756/New-Proposed-RIC-Regulations