Oftentimes the question arises as to whether or not the publisher of an investment newsletter is required to register as an investment adviser. Section 202(a)(11) of the Investment Advisers Act of 1940 (the “Act”) broadly defines an investment adviser as “any person who, for compensation engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” On first reading this definition, it may appear as though a publisher would fall within this general definition. However, specifically excluded from the definition is “the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” This exemption is often referred to as the “publisher’s exemption,” and its purpose is to ensure First Amendment protection of financial and investment publications.

Recently, the Securities and Exchange Commission (“SEC”), in tandem with the Commodity Futures Trading Commission (CFTC), jointly adopted Final Rules requiring certain entities to implement programs to detect red flags and prevent identity theft. These rules were developed in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) which shifted responsibility for identify theft rules and enforcement of such rules from the Federal Trade Commission to the SEC and the CFTC for those entities under their respective jurisdiction. Specifically, the SEC’s rules will apply to those entities under its jurisdiction, including broker-dealers, investment companies, and investment advisers; while the CFTC’s rules will apply to futures commission merchants, commodity trading advisors and commodity pool operators. However, both the SEC and CFTC rules will only apply to “financial institutions” and “creditors” as those terms are defined in the Fair Credit Reporting Act that offer and maintain “covered accounts.”

Recently, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings against ZPR Investment Management, Inc. (“ZPR”) and Max E. Zavanelli (“Zavanelli”) alleging that ZPR and Zavanelli made false and misleading advertisements in several financial magazines and in monthly newsletters to clients and prospective clients. The SEC goes on to specify that ZPR, through Zavanelli, omitted material information about the firm’s historical performance results (specifically that their period to date performance was underperforming its benchmark index) and claimed compliance with Global Investment Performance Standards (“GIPS Standards”) when in fact they were not in compliance. If convicted, ZPR and Zavanelli face civil penalties, cease-and-desist orders, and other remedial actions. This case is an important reminder that although the rules governing advertising by investment advisers are sometimes difficult to navigate, compliance with such rules is mandatory and regularly enforced by the SEC.

According to Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Act”), the Securities and Exchange Commission (“SEC”) defines “custody” as “…holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” This definition gives a broad interpretation as to what constitutes custody, and leaves several grey areas for advisers to try to elucidate. Recently Charles Schwab published an article on one such area, stating that advisers who have access and login credentials to their client’s online accounts are generally deemed to have custody, if the custodian’s website permits the withdrawal and transfer of funds (regardless of whether the adviser is making such transfers or if the client allowed/disallowed such activities). In taking this a step further, what would be the outcome if an adviser did not have a client’s login credentials, but did the adviser utilize a “screen sharing” application, whereby both the client and the adviser have the ability to view the client’s online account, and each have access to make withdrawals/transfers to that account simultaneously?

Jacko Law Group, PC (JLG) is very proud to present our new Legal Risk Management Tip for the month of March, authored by JLG’s recent addition to the legal team, Charles H. Field, Esq. Mr. Field has over 26 years of experience working with business leaders and senior executives on matters affecting investment advisors (IAs), broker-dealers (BDs) and private funds. His extensive knowledge of this field lends itself to our March Legal Tip, where Mr. Field details the intricacies, definitions, exemptions and impacts of commodity investments.

Last week, the Securities and Exchange Commission (“SEC”) published additional guidance on social media filings, in order to clarify the obligations that mutual funds and other investment companies have in seeking review of materials posted on their social media websites. This was done partly to increase transparency of federal securities laws and regulations, and partly as a response to claims by the Financial Industry Regulatory Authority (“FINRA”) (the body responsible for reviewing those advertisements required to be submitted by mutual funds and other investment companies) that several “unnecessary” submittals have occurred due to firms being overly-cautious.

Recently, the Securities and Exchange Commission (“SEC”) issued a Risk Alert (the “Alert”) concerning rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Rule”), commonly referred to as “The Custody Rule” for investment advisers. The Alert was issued as a response to recent examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) who found significant deficiencies in this area in nearly one-third of firms that were examined. The following items were provided by OCIE as some of the more common deficiencies discovered:

The U.S. Supreme Court (the “Court”) last week unanimously reversed a 2nd U.S. Circuit Court of Appeals decision, effectively mandating the Securities and Exchange Commission (“SEC”) to file complaints seeking civil penalties for securities fraud within five years of the alleged incident, not five years after the alleged incident is discovered.

This week William Galvin, Massachusetts Secretary of the Commonwealth, sent a letter to the Securities and Exchange Commission (“SEC”) urging them to disallow the use of arbitration agreements by registered investment advisers. Such agreements are common in contracts between investment advisers and their clients, and typically specify such items as the process of arbitration, what governing body will administer the arbitration proceedings, and the jurisdiction in which arguments will be heard.