• Best Practices for Maine-Licensed Investment Advisers
  • November 10, 2011 | Author: Margaret C. Callaghan
  • Law Firm: Verrill Dana LLP - Portland Office
  • As Maine-licensed investment advisers prepare to make licensing renewal filings with FINRA, and to file annual updating amendments to their Forms ADV, they should keep in mind certain best practices highlighted at a recent seminar conducted by the Maine Office of Securities.

    Last month, the staff of the Maine Office of Securities gave presentations in Portland and Gardiner on the subjects of regulatory requirements for Maine-licensed investment advisers, and the ways in which the Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the “Dodd-Frank Act”) will inform the licensing renewal process in Maine. The focus of the presentations was the so-called “IA switch”, meaning the Dodd-Frank imposed requirement that investment advisers with less than $100 million in assets under management withdraw from SEC registration and instead become subject to state investment adviser licensing and regulatory regimes. The staff also discussed several topics likely to be of interest to Maine-licensed investment advisers, whether or not they are not affected by the IA switch.

    According to the staff, approximately 32 existing investment advisers are expected to withdraw from SEC registration and apply for licensing in Maine as a result of the IA switch. The staff highlighted certain key differences between the SEC’s investment adviser rules, and the Chapter 515 rules governing Maine-licensed investment advisers. Most of the differences have to do with the code of ethics requirements imposed at the federal level, but the staff also pointed out differences in surprise audit requirements, Form ADV delivery rules, and rules relating to direct fee deductions.

    The staff also reviewed common deficiencies that they uncover in the process of licensing new investment advisers and auditing existing advisers. Some of the common deficiencies identified by the staff include:

    • Failure to file Part 2B of Form ADV (the brochure supplement)
    • Inconsistencies in disclosures among Form ADV Parts 1 and 2, and the investment advisory client agreement
    • Failure to maintain updated suitability information in each client’s file
    • Inadequate policies and procedures safeguarding confidential information
    • Lack of appropriate business continuity plans in the event of a power failure, natural disaster, or other contingencies
    • Noncompliance with advertising rules in use of social media

    With respect to these and other common deficiencies, the staff recommended that Maine-licensed investment advisers adopt certain best practices, such as:

    • Make sure that rules imposing physical security procedures (e.g. locks on file cabinets, office doors) and electronic security procedures (e.g. firewalls, frequently replaced passwords, use of encryption technology) are regularly updated and always followed
    • The investment adviser’s “WSP” (written supervisory procedures) should include a prohibition against the collection of client signatures on blank documents
    • Maintain a separate “complaints” file - don’t file a client complaint in the client’s individual file
    • Segregate business and personal email systems to facilitate regulator review