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Navigating the Dodd-Frank Act’s New Regulatory Requirements for Investment Advisers. Investment Adviser Workshop. Presented by Texas State Securities Board. Workshop Topics What Dodd-Frank Means for Investment Advisers IA Regulation in Texas What to Expect from State IA Inspections.

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navigating the dodd frank act s new regulatory requirements for investment advisers
Navigating the Dodd-Frank Act’s New Regulatory Requirements for Investment Advisers

Investment Adviser Workshop

Presented byTexas State Securities Board

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Workshop Topics
  • What Dodd-Frank Means for Investment Advisers
  • IA Regulation in Texas
  • What to Expect from State IA Inspections

Texas State Securities Board

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DISCLAIMER

This seminar and the accompanying materials are presented as an educational experience, covering some of the changes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

You may be subject to all relevant laws, regulations, rules and orders whether or not they are included in this presentation. The views expressed are those of the presenter, and the Texas State Securities Board reserves the right to change its position. Presenters believe all information is truthful and accurate; however, mistakes can occur.

Texas State Securities Board

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About Us Our primary goal is to protect investors
  • The Texas State Securities Board (TSSB) regulates:
    • Investment Advisers & Investment Adviser Representatives
    • Broker-Dealers & their Agents
  • Other responsibilities of the TSSB:
    • Enforcement of the Texas Securities Act
    • Inspections
    • Securities Registration
    • Investor Education

Texas State Securities Board

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What Dodd-Frank Means For IAs

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, state securities regulators will have greater responsibility for the regulation of investment advisers, by restoration of authority over certain investment advisers.

Texas State Securities Board

what dodd frank means for ias

What Dodd-Frank Means For IAs

  • Dodd-Frank establishes a threshold of $100 million assets under management (AUM) for federally covered advisers.
  • Law takes effect July 21, 2011.
  • Approximately 4,000 advisers nationwide will be affected, including about 1200 who will be seeking registration in Texas.
  • Eliminates the private adviser exemption.

Texas State Securities Board

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What Dodd-Frank Means For IAs

Insert Agency Name Here

  • Private Fund Investment Advisers Registration Act of 2010 (Title 4 of Dodd-Frank) – Please reference SEC IA Release 3111 Significant reforms to the regulation of advisers to hedge funds and other private funds, including, among others:
    • Eliminates the private adviser exemption at 203 (b) (3)
    • Requires SEC registration for advisers to “private funds” with AUM of at least $150 million
    • Requires SEC reporting for advisers to “private funds” with AUM of less than $150 million and for advisers to “venture capital funds”
    • Defines “foreign private adviser” & exempts from SEC registration
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What Dodd-Frank Means For IAs

Texas State Securities Board

PRIVATE FUND DEFINITION

  • Private fund – An issuer that would be an investment company under the Investment Company Act, but for the exceptions contained in 3(c)(1) or 3(c)(7) of that Act.
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What Dodd-Frank Means For IAs

  • 3(c)(1)
      • securities are not publicly offered and are owned by not more than 100 persons
      • Interests typically offered pursuant to Reg D, Rule 506.
      • accredited investors
  • 3(c)(7)
      • Securities are not publicly offered and generally not owned by more than 499 persons
      • Investors must be qualified purchasers (individuals with investments of $5,000,000/institutions with $25,000,000 of investments)

Texas State Securities Board

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What Dodd-Frank Means For IAs

Texas State Securities Board

Advisers to Private Funds:

Registration and Reporting Requirements

  • Advisers solely to private funds with AUM of less than $150 million
    • Exempt from registration with the SEC
    • Reporting requirement with SEC
    • State registration required, unless exempt under Texas Rule 109.6.
  • Advisers solely to private funds with AUM of $150 million or more
    • Register with the SEC
    • States are preempted – Notice Filing Requirement
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In Texas, all advisers with $100 million or less under management will be required to register with the state unless:

They fall between $25 million and $100 million and required to be registered in 15 or more states, or

The investment adviser qualifies for an exemption under Rule 203A-2 of the Investment Advisers Act of 1940 (i.e, pension fund consultant).

What Dodd-Frank Means For IAs

Texas State Securities Board

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The SEC has POSTPONED the effective date of the Switch from the original deadline of October 19, 2011 to the 1st Quarter of 2012.

Although the state of Texas is cooperating with the SEC’s extension, we urge you to pursue dual registration to avoid the potential bottleneck during the 1st quarter of 2012.

What Dodd-Frank Means For IAs

Texas State Securities Board

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What Dodd-Frank Means For IAs

Texas State Securities Board

About State Regulation:

  • Switching is not new. Regulatory switches regularly happen when the asset levels of IA firms rise above or fall below mandated thresholds.
  • States are preparing to handle the switch. State securities regulators are working to ensure a seamless, comprehensive and effective switching process.
  • States conduct a thorough review of adviser applications. State reviews will not change with the migration of IAs with up to $100 million in assets under management.
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What Dodd-Frank Means For IAs

Texas State Securities Board

About State Regulation:

  • Firms switching to state regulation for the first time can expect thorough inspections generally on a more frequent basis than they may have experienced before.
  • The goal of our inspections is to ensure compliance with the Texas Securities Act and regulations.
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IA Regulation

Registration & Form ADV

Texas State Securities Board

ia regulation the registration process
IA Regulation: The Registration Process

You now have two choices regarding the timing of your

registration.

Remain SEC registered and continue your Notice Filing in Texas until the SEC establishes a new deadline.

Move forward with dual registration with the SEC and the state. If all conditions of registration have been met, your application for Texas registration will be approved.

Texas State Securities Board

ia regulation registration form adv part 1
IA Regulation: Registration | Form ADV Part 1

Form ADV Part 1 is a uniform form that:

will be used by the Adviser to determine their eligibility to remain registered with the SEC, or to switch to state registration.

must be filed electronically on the Investment Adviser Registration Depository (IARD).

Texas State Securities Board

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IA Regulation:Registration | Form ADV Part 1

Texas State Securities Board

  • Material changes must be filed within 30 days –Texas Rule 116.9(a)(6).
    • Called an “other than annual amendment”
    • Do not file hard copy changes with our office – Online ONLY
  • What is a material change that requires an other than annual amendment?
    • Change of name, address, contact information, form of organization, custodial arrangements, disciplinary actions, etc.
  • Texas recently adopted Texas Rule 116.9(d) that requires state registered advisers to file a Part 2 along with the annual updating amendment on Form ADV within 90 days of the end of fiscal year. The effective date of the Rule is March 9, 2011.
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IA Regulation:Registration | Form ADV Part 2

  • July 28, 2010: SEC adopted a new Form ADV Part 2 replacing the old Part II, effective October 12, 2010.
    • All new and current SEC advisers are required to use the newForm ADV Part 2 and uploaded onto the IARD system.
    • Part 2 will be available for viewing through Investment Advisor Public Disclosure System (IAPD) available from the SEC website at: http://www.adviserinfo.sec.gov

Texas State Securities Board

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Effective March 9, 2011:

New Applicants applying for IA registration for the first time should submit the new Form ADV Part 2 through the IARD.

IAs Switching from SEC to State registration must incorporate the new Form ADV Part 2 with their Form ADV Part 1.B submission seeking State registration.

IA Regulation: Registration | Form ADV Part 2

Texas State Securities Board

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IA Regulation:Registration | Form ADV Part 2

  • The new Part 2 consists of three parts:
    • Part 2A, the Firm Brochure – 19 Items
      • Includes all firm details written in plain English to promote effective communication between you and your clients.
    • Part 2A Appendix 1, Wrap Fee Program Brochure - 10 Items
      • If you sponsor a wrap fee program.
    • Part 2B Brochure Supplement - 7 Items
      • For supervised persons who formulate investment advice for clients and have direct client contact.

Texas State Securities Board

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Key Points of Form ADV Part 2:

Provides new and prospective clients with a brochure written in plain English. No more “check the box” features.

Describes business practices and investment strategies;

Provides meaningful disclosure regarding material or potential conflicts of interest; and

Describes the background of the investment adviser and its advisory personnel.

IA Regulation:Registration | Form ADV Part 2

Texas State Securities Board

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Key Points of Form ADV Part 2

An adviser is a fiduciary whose duty is to serve the best interests of its clients.

An adviser must deal fairly with clients and prospective clients, seek to avoid conflicts with its clients and, at a minimum, make full disclosure of any material conflict or potential conflict.

Disclosures that clients and prospective clients receive is critical to their ability to make an informed decision about whether to engage an adviser.

To evaluate the risks associated with a particular IA, its business practices and investment strategies, it is essential that clients and prospective clients have clear disclosure that they are likely to read and understand.

IA Regulation:Registration | Form ADV Part 2

Texas State Securities Board

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Instructions for Preparing your Wrap Fee Program Brochure

Who must deliver a wrap fee program brochure?

If you sponsor a wrap fee program, you must give a wrap fee program brochure to each client of the wrap fee program.

However, if a wrap fee program that you sponsor has multiple sponsors and another sponsor creates and delivers to your wrap fee program clients a wrap fee program brochure that includes all the information required in your wrap brochure, you do not have to create or deliver a separate wrap fee program brochure.

A wrap fee program brochure takes the place of your advisory firm brochure required by Part 2A of Form ADV, but only for clients of wrap fee programs that you sponsor. See SEC rule 204-3(d) and similar state rules.

IA Regulation: ADV Part 2A Appendix 1 | Wrap Fee Program Brochure

Texas State Securities Board

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Instructions for Preparing your Brochure Supplement

For which investment adviser representatives must we prepare a brochure supplement?

You must prepare a brochure supplement for the following investment adviser representatives:

(i) Any representative who formulates investment advice for a client and has direct client contact; and,

(ii) Any representative who has discretionary authority over a client’s assets, even if the representative has no direct client contact.

IA Regulation: Form ADV Part 2B | Brochure Supplement

Texas State Securities Board

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To begin the registration process, check “Texas” under Item 1 of Form ADV Part 1B, and file Form U4 for each investment adviser representative who intends to provide services in this state.

The fee to amend the Form ADV is $25 (and collected thru the IARD system) to switch from SEC to state registration

The fee for each Form U4 is $285.

Upload the Form ADV Part 2

IA Regulation:The Registration Process

Texas State Securities Board

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The TSSB will be notified electronically of your Form ADV filing within 48 hours of your filing and payment of the fees. Upon receipt, the TSSB will communicate directly with you requesting additional documents required for registration.

List of documents that must be submitted in paper form for registration in Texas.

Articles of incorporation/Bylaws

Balance Sheet and Certification Form

Advisory contract

Private Placement Memorandum and subscription documents, if an adviser to a hedge fund

IA Regulation: Documents Required for Registration

Texas State Securities Board

ia regulation registration goal of registration review
IA Regulation: Registration | Goal of registration review

Upon receipt of a complete application, your application is reviewed for compliance with Chapter 116 of the Rules and Regulations of the Texas Securities Board.

The goal is to ensure that your firm is in compliance to before conducting business. You will receive a comment letter if, among other things:

You failed to include information required or requested;

Your investment adviser representatives have not qualified by examination (i.e., passed the Series 65);

We find discrepancies in the responses in Form ADV Part 1 and 2 and the advisory contract.

Must respond to comment letters to continue with the application process.

Once you have resolved all the deficiencies, the Agency will approve your registration.

Texas State Securities Board

state ia examinations inspections

State IA Examinations/Inspections

What to Expect

Texas State Securities Board

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State IA Examinations/Inspections:What to Expect

  • Our goal in examining state-registered Investment Advisers is to protect investors and ensure the advisers are in compliance with the statutes and regulations
  • Generally, there are two types of Inspections
    • Routine► generally a standard comprehensive exam
    • For Cause►there for a reason, sometimes a focused exam
  • Typically, examinations are unannounced.

Texas State Securities Board

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State IA examinations generally include the following areas:

Books and records

Financials

Registration – Form ADV Part I and 2

Investment Activities

Complaints

Advertising and Marketing

Conflicts of interest

Custody

Supervisory/Compliance Procedures

Business Practices

State IA Examinations/Inspections:Examination Focus

Texas State Securities Board

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State IA Examinations/Inspections: What to Expect

  • Routine exams are typically a three-part process.
    • On-Site Inspection
    • Post-Exam
    • Resolution
  • Onsite portion of exam may last from one day to a week depending on several factors.
  • Usually two examiners.

Texas State Securities Board

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ONSITE

Introduction and description of the purpose of the visit.

Identify contact/point person for the examiner.

Initial interview conducted by examiner.

Tour of the office

Where are your records?

Where is the copier?

Where can I work?

Interview: Questions about your practice

State IA Examinations/Inspections:

What to Expect | Onsite

Texas State Securities Board

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ONSITE

Try to have key personnel available.

Exit interview (optional).

The examiner explains what comes next. May be done onsite or may come after the actual visit, but not required.

State IA Examinations/Inspections: What to Expect | Onsite

Texas State Securities Board

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Post-Exam

Once examiner has left your office, the exam is not over.

Most of exam is done at the regulator’s office and frequently additional documents or information is requested.

May take one to several weeks depending on several factors.

State IA Examinations/Inspections: What to Expect | Post-Exam

Texas State Securities Board

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Resolution

Once post-exam work is complete, a deficiency letter will be mailed to you.

Registrant must respond to the deficiency letter in writing, usually within a set amount of time.

Once all deficiencies have been satisfactorily addressed, exam is closed.

Certain issues may be referred to the legal section of the Inspections & Compliance Division.

State IA Examinations/Inspections: What to Expect | Resolution

Texas State Securities Board

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Inaccurate or incomplete Forms ADV Part 1 & 2

Incomplete, inadequate, or no contract with clients

Failing to maintain current suitability informationregarding clients

Non-compliance with privacy requirements

Incomplete or no written supervisory/compliance procedures

State IA Examinations/Inspections: Common Exam Deficiencies

Texas State Securities Board

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State IA Exams:Common Exam Deficiencies

  • Non-compliance with advertising rules
  • Failing to maintain applicable books and records
  • Not sending invoice of fees if auto-deducting fee

Texas State Securities Board

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Texas State Securities Board

www.ssb.state.tx.us

North American Securities Administrators Association

www.nasaa.org

Investment Adviser Resources

Uniform Forms

IA Switch Resource Center

Resources

Texas State Securities Board

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IA Regulation: Registration | Form ADV Part 2

Form ADV Part 2 Resources

  • The new Part 2 of Form ADV is posted on the websites of the SEC and the North American Securities Administrators Association (NASAA).
  • NASAA has posted guidance for investment advisers filing the new Form ADV Part 2 in IARD.
    • Visit the NASAA website, look in “Industry & Regulatory Resources”

www.nasaa.org

Texas State Securities Board

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NASAA IA Switch Resource Center

The North American Securities Administrators Association (NASAA) is assisting states with the migration of investment advisers.

NASAA’s online IA Switch Resource Center includes an FAQ, calendar of events and additional guidance to help advisers make the switch to state regulation.

Advisers can use the resource center to submit questions about the switch. The resource center is available at www.nasaa.org

More IA Switch Resources

Texas State Securities Board

for more information contact texas state securities board registration division 512 305 8300
For more information,

contact:

Texas State Securities Board

Registration Division

512-305-8300

Questions?

Texas State Securities Board