Compliance Tips

The deadline for investment adviser representatives of both state-registered and federal covered investment advisers who are registered or have been registered in the State of Florida or a jurisdiction that requires IAR CE, you need to complete the continuing education requirements for the calendar year by December 31 of each year.

You must complete a minimum of 12 continuing education (CE) credits to maintain your IAR registration. The 12 credits must include six credits of Products and Practices courses and six credits of Ethics and Professional Responsibility courses.

For a full list of course requirements, please visit NASAA’s IAR CE webpage or call us at 803-734-9916.

The Office of Financial Regulation (OFR), Securities Division, Bureau of Enforcement (Bureau), is informing Florida registered investment advisers about common examination deficiencies relating to direct fee deductions from client accounts.

Common Deficiencies Identified During Examinations

Under Florida’s investment adviser regulations, custody includes any arrangement under which the investment adviser is authorized or permitted to withdraw client funds maintained with a custodian upon the investment adviser’s instruction to the custodian.¹ As a result, investment advisers have custody when their clients have authorized them to instruct custodians to withdraw funds, including the amount thereof, from client accounts to pay their advisory fees. Based on its examinations, the Bureau has concluded that some investment advisers are unaware that these direct fee deduction arrangements constitute custody in Florida.

Investment advisers are required to notify OFR when they have custody by way of their Form ADV.² Specifically, investment advisers must check yes to Form ADV, Part 1A, Items 9A(1)(a) and 9B(1)(a) and complete Items 9A(2) and 9B(2) when they have custody. This requirement applies even when custody is solely due to direct fee deductions from clients’ custodian accounts. During its examinations, the Bureau has observed that certain investment advisers’ Form ADV filings incorrectly state that they do not have custody when in fact they do have custody based on direct fee deduction arrangements with their clients.

Under Florida’s investment adviser custody regulation, investment advisers must send clients itemized invoices when they are authorized to instruct custodians to withdraw funds from clients’ accounts to pay their advisory fees. ³ The invoices must be sent concurrently with the fee deduction and include the formula used to calculate the fee, the amount of assets under management that the fee calculation is based on, and the time period covered by the fee. The fee invoices must be sent irrespective of whether the clients receive monthly statements from custodians. Based on its examinations, the Bureau has observed that some investment advisers are not sending the required fee invoices even though they have custody based on direct fee deductions or they are sending the fee invoices but they do not contain the required information.

Differences Between Florida and Federal Custody Requirements

The U.S. Securities and Exchange Commission’s (SEC) custody requirements are different than Florida’s. Although SEC registered investment advisers have custody due to direct fee deductions, they are not required to check yes to Items 9A(1)(a) or 9B(1)(a) in their Form ADVs when they have custody solely based on clients authorizing them to withdraw funds from their accounts to pay advisory fees.⁴ As a result, Item 9 of the Form ADV includes the following instruction:

If you are registering or registered with the SEC, answer “No” to Item 9.A.(1)(a) and (b) if you have custody solely because (i) you deduct your advisory fees directly from your clients’ accounts….

It is important for state registered investment advisers to understand that the above instruction is not applicable to them and, as discussed above, custody solely due to direct fee deduction must be disclosed in Form ADVs to comply with Florida requirements.

Another key difference between SEC and Florida custody requirements is that SEC investment advisers do not need to send itemized invoices to their clients when they engage in direct fee deductions. Instead, SEC investment advisers are solely required to have a reasonable basis, after due inquiry, for believing that the custodian sends an account statement, at least quarterly, to each client for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period.⁵ As noted above, Florida registered investment advisers who engage in direct fee deductions must send clients itemized invoices irrespective of whether the custodian sends account statements.

Conclusion

Florida registered investment advisers should ensure that they are complying with state law custody requirements which differ from custody requirements applicable to SEC registered investment advisers. Investment advisers who have the authority from their clients to instruct custodians to disburse funds upon their instruction to pay their advisory fees should review their Form ADV and confirm that it is accurate regarding custody. They should also verify that they are sending invoices concurrent with the direct fee deductions from their client accounts and that they contain the information described above required under Florida’s investment adviser custody regulation.

[1] F.A.C. 69W-600.0132(1)(a)1.a.

[2] F.A.C. 69W-600.132(2)(a)

[3] F.A.C. 69W-600.132(2)(i)

[4] 17 C.F.R. 275.206(4)-2

State-registered investment advisers (Adviser or Advisers) are subject to cybersecurity risk because they rely on the interconnected technological systems and/or networks of service providers such as custodians, broker-dealers, pricing services and other technology vendors. Cybersecurity incidents can result in loss to Advisers, misuse of client information, or client financial harm. Cybersecurity breaches can also be costly to Advisers due to potentially significant business disruptions and/or remediation costs. Although Florida does not have a specific statute or rule expressly addressing cybersecurity requirements, Advisers are fiduciaries who owe their clients a duty of care and a duty of loyalty and are required to minimize risks to clients’ assets under their supervision and care.

Under Florida Administrative Code (F.A.C.) 69W-600.0131, Advisers are required to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance, by the Adviser and its associated persons, with Chapter 517, Florida Statutes, and Division 69W,

F.A.C.1 Similarly under F.A.C. 69W-600.014, Advisers are required to have written procedures to supervise the activities of employees and associated persons of the Adviser that are reasonably designed to achieve compliance with applicable securities laws and regulations.² As a result, cybersecurity risk management measures should be set forth in Advisers’ written compliance manuals and available for inspection by the Office of Financial Regulation during an examination.

The North American Securities Administrators Association (NASAA) released a cybersecurity checklist, guide and data inventory which provide Advisers with best practices for addressing cybersecurity risks. These resources can be found at https://www.nasaa.org/industry-resources/investment-advisers/resources/. Additional cybersecurity resources are available from the U.S. Cybersecurity & Infrastructure Security Agency at https://www.cisa.gov/.

1 69W-600.0131 Prohibited Business Practices for Investment Advisers and Their Associated Persons.(1) The following are prohibited business practices for investment advisers and associated persons pursuant to Section 517.1215(2), F.S., and are deemed violations by an investment adviser or an associated person of an investment adviser under Section 517.161(1)(a), F.S., without limiting that term to the practices specified herein:

….(w) Failing to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance, by the investment adviser or its associated persons, with Chapter 517, F.S., and Division 69W, F.A.C.

2   69W-600.014 (2)...... Investment advisers shall have available for the Office of Financial Regulation at least the following records:

….(j) Written procedures to supervise the activities of employees and associated persons of the investment adviser that are reasonably designed to achieve compliance with applicable securities laws and regulations.

Florida requires associated persons of investment advisers and federal covered advisers to be registered with the Office of Financial Regulation (OFR) if you are conducting investment advisory business in, to, or from the state of Florida in accordance with section 517.12(3), F.S., and Rule 69W-600.0024, F.A.C.

Livescan Fingerprints are required if you are seeking registration as an associated person of an investment adviser or federal covered adviser in accordance with section 517.12(6), Florida Statutes, and Rule 69W-600.0024(7), Florida Administrative Code.

State registered investment advisers are required to notice-file branch offices through the Financial Industry Regulatory Authority’s Central Registration Depository system in accordance with Chapter 517.1202, F.S., and Rule 69W-600.0034, Florida Administrative Code.

Pursuant to Rule 69W-600.0161, Florida Administrative Code, investment advisers registered and located in Florida are required to annually file financial statements prepared as of the end of the investment adviser’s year end with the Office of Financial Regulation (Office) via the Office's online portal at: https://flofr.gov/regulation/online-services. The financial statements are due within 90 days following the investment adviser’s fiscal year end.

Rule 69W-600.0161, Florida Administrative Code, requires audited and unaudited financial statements filed with the Office of Financial Regulation be prepared in accordance with United States generally accepted accounting principles (GAAP). GAAP requires the use of accrual- based accounting, not cash-based accounting.

Unaudited financial statements filed in accordance with Rule 69W-600.0161(2)(b), Florida Administrative Code, must include: 1) a Statement of Financial Condition or Balance Sheet; 2) a Statement of Income; and 3) an oath or affirmation that such statement or report is true and correct to the best knowledge, information, and belief of the person making such oath or affirmation. The oath or affirmation must be made before a person authorized to administer such oath or affirmation and must be made by an authorized representative of the investment adviser.

Audited financial statements filed in accordance with Rule 69W-600.0161(2)(a), Florida Administrative Code, must be: 1) examined in accordance with generally accepted accounting standards; 2) audited by an independent certified public accountant; and 3) accompanied by an opinion by the accountant with respect to the financial statements, and by a note stating the principles used to prepare it, the basis of included securities, and any other explanations required for clarity.

Every applicant for registration and registrant under Section 517.12, F.S., as an investment adviser (as those terms are defined under Section 517.021, F.S.) shall have and maintain at least one associated person registered and designated as principal.

In the event an investment adviser fails to maintain at least one person registered and designated as principal for more than thirty (30) days, the registration of such investment adviser shall be suspended until such time as a designated principal is so registered.

Any applicant or registrant investment adviser may elect to designate more than one person as principal.  There is no limitation as to the number of associated persons that may be designated as principal as long as such persons meet the qualification standards, and the appropriate fees as specified in Section 517.12(9), F.S., have been paid.

Renewal fees for investment adviser firms shall be submitted through the IARD by December 31 of the year the registration expires. Renewal fees for associated persons of investment advisers and branch offices of investment advisers shall be submitted through the CRD by December 31 of the year the registration or notice-filing expires.

An expired registration or notice-filing may be reinstated in accordance with the provisions of Section 517.12(10) or 517.1202(3), F.S., provided that all required information, renewal fees and reinstatement fees are date stamped by the cashier’s office of the Department of Financial Services on or before January 31 of the year following the year of expiration.

Investment advisers must have a written advisory contract with their clients when recommending a third-party asset manager, even when the client also has a separate contract with that manager.

The advisory contract must accurately reflect current fees, whether they are higher or lower than the fees originally agreed upon at inception of the relationship.