Missouri Legislature Proposes Investment Adviser Disclosure of Social Objectives

On January 8, 2023, Representative O’Donnell introduced a bill to the 102^nd General Assembly that adds to the disclosure obligations of Missouri-registered investment advisers. If enacted, Missouri House Bill No. 824 will amend Chapter 409 (Regulation of Securities) of the Missouri Revised Statutes to require these investment advisers and investment adviser representatives to disclose any socially responsible criteria included in any recommendation to a client or solicitation of a prospective client. Then, before acting on any such social objective, the proposed law would require client written consent, such as:

“I, (NAME OF CLIENT), consent to my adviser or adviser’s representative incorporating a social objective or nonfinancial objective into any discretionary investment decision my adviser or adviser’s representative makes for my account; any recommendation or advice my adviser or adviser’s representative makes to me for the purchase or sale of a security or commodity; or the selection my adviser or my adviser’s representative makes, or recommendation or advice my adviser or my adviser’s representative makes to me regarding the selection, of a third-party manager or subadvisor to manage the investments in my account.  Also, I acknowledge and understand that incorporating a social objective or nonfinancial objective into investment decisions, recommendations, advice, and/or the selection of third-party manager or subadvisor to manage the investments in my account will result in investments and recommendations/advice that are not solely focused on maximizing a financial return on my account.”

This bill’s proposed effective date is August 28, 2023, which is very timely considering the U.S. Securities and Exchange Commission’s similar recently proposed amendments to rules and reporting forms that would establish disclosure requirements for funds and investment advisers that market themselves as having environmental, social, and governance (ESG) strategies.

Since matters such as investment adviser client disclosures are complicated, it can be helpful to hire an attorney that specializes in such areas. Cosgrove Law Group has experience dealing with these questions. If you are a client or a prospective client of a Missouri-registered investment adviser that has questions about these or other investment adviser disclosure obligations and would like to speak with one of our Missouri-licensed attorneys, call 314-563-2490.

SEC Takes a Closer Look at Real Estate Investment Trusts

A Real Estate Investment Trust (“REIT”) is generally a company that owns income producing real estate.  To qualify as a REIT, a company must have the majority of its assets and income connected to real estate investments and must annually distribute at least 90 percent of its taxable income to shareholders in the form of dividends.  To review additional qualifications of a REIT, See SEC - REIT Information. 

REITs have really come under intensifying scrutiny by securities regulators since many non-traded REITs have been forced to cut their estimated value and have ceased making distributions.  Furthermore, many of these REITs have attracted retirees as investors by promising steady and dependable distributions.  For example, the SEC has recently taken interest in the activities of Inland American Real Estate Trust to determine if it committed violations relating to management fees, the timing and amount of distributions paid to investors, determination of property impairments and transactions with affiliates.  The investigation was announced by Inland last week in its quarterly report.  Executives from Inland have stated that they intend to fully cooperate with any investigation and that they do not believe it has committed any violations. 

Inland holds around $11.2 billion in property, including retail hotels, offices, industrial buildings and apartment complexes.  It is the largest REIT in an industry of around 90 non-traded REITs.

FINRA has recently proposed new guidelines on adviser disclosure of REITs.  See FINRA Regulatory Notice.   Furthermore, the SEC has been pressing non-traded REITs to provide better disclosure on their share valuations because these valuations can vary due to some REITs relying on outside appraisals and others relying on their own management.  For instance, FINRA sued David Lerner Associates Inc., last year, alleging that the Apple REIT seller “unreasonably valued their shares at a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage.”  The case is still pending. 

In June, 2011, another REIT, Retail Properties of America Inc., estimated its value at $6.95 per share.  However, in its initial public offering last month, the shares were listed at $3.20 per share. 

REITs, however, may be appropriate for the savvy and experienced investor, particularly since many REITs have been investing in the global market.  Several U.S. REITs that have invested abroad believe the future is promising.  For instance, New York and Toronto based Brookfield Office Properties entered into its first London deal on a development site known as 100 Bishopgate.  Many of these investments are good for the patient investor because income is usually not realized until further down the road. 

If you have suffered losses as a result of purchasing non-traded REITs, contact us to discuss your legal rights.

FINRA Reprimands St. Louis Brokerage Firm for Poor Oversight

This month, the Financial Industry Regulatory Authority (FINRA) reprimanded First Clearing, LLC, a St. Louis-based brokerage firm, for insufficient anti-money laundering (AML) protections in FINRA Case #2008012791101.

First Clearing consented to the described sanctions, without admitting or denying the findings, submitting the firm to $400,000 in fines. The AML inadequacies focused on the firm’s practice of only reviewing transactions regarding a limited amount of potentially suspicious activity. FINRA findings stated that “the firm generated many exception reports and alerts dealing with potentially suspicious securities transactions and money movements in customer accounts that were introduced by unaffiliated broker-dealers to the firm.” However, a majority of these exception reports were not reviewed. As a result, FINRA concluded that First Clearing did not have an adequate program for detecting, reviewing, and reporting suspicious activities as required by the Suspicious Activities Report (SAR) reporting provisions of 31 U.S.C. 5318(g) and NASD Rule 3011(a).

Previously in March 2009, FINRA levied fines against First Clearing for the firm’s failure to provide the required notifications to customers over a five-year period ending in 2008.

New Form ADV Part 2 “Plain English Rule” Deadlines Fast Approaching

In July 2010, the Securities and Exchange Commission (“SEC”) adopted changes to Form ADV, Part 2, which became effective October 12, 2010. This section is commonly referred to as the “brochure” and explains an investment adviser’s qualifications, investment strategies, and business practices to investors. Essentially, the amendment requires registered investment advisors to now make disclosures in plain English, as opposed to a fill-in-the blank and check box form. To learn more about the substantive changes of the amendment, please visit our previous securities and investment blog regarding these changes.

The Old Deadlines

When the amendments were adopted, the SEC established two separate deadlines for delivering brochure supplements for existing investment adviser registrants (“Existing Registrants”). Originally, Existing Registrants were required to provide brochure supplements to new and prospective clients upon filing their annual updating amendment to Form ADV for the fiscal year end 2010, and to existing clients within 60 days of filing the annual updating amendment. Noting that most Existing Registrants have a fiscal year end on December 31, existing registrants would be required to deliver their first brochure supplements no later than March 31 and to deliver to existing clients no later than May 31.

New investment adviser registrants (“New Registrants”) applying for registration on or after January 1, 2011 would be required to provide brochure supplements to clients upon registration.

The New Deadlines

However, based on concerns expressed about the deadlines, on December 28, 2010, the SEC extended compliance dates for portions of Form ADV, Part 2. Specifically, the compliance date for Form ADV, Part 2B and the provisions of Rule 204-3 concerning the delivery of brochure supplements is extended approximately four months. Note the extension does not apply to the annual updating amendment deadline.

For Existing Registrants with a fiscal year ending on December 31, 2010 through April 30, 2011, delivery of the brochure supplements to new and prospective clients must occur by July 31, 2011. Delivery to existing clients has been extended to September 30, 2011.

For New Registrants filing applications between January 1, 2011 and April 30, 2011, delivery to new and prospective clients must occur by May 1, 2011. New Registrants have until July 1, 2011 to deliver brochure supplements to existing clients.

Important Dates
March 31, 2011	Filing deadline for all applicants for Form ADV annual updating amendment, including the new Part 2A brochure
May 1, 2011	Delivery deadline for new registrants to deliver brochure supplements [Form ADV, Part 2B] to new and prospective clients
July 1, 2011	Delivery deadline for new registrants to deliver brochure supplements to existing clients
July 31, 2011	Delivery deadline for existing registrants to deliver brochure supplements [Form ADV, Part 2B] to new and prospective clients
Sept. 30, 2011	Delivery deadline for existing registrants to deliver brochure supplements to existing clients

The North American Securities Administrators Association has recommended that state securities authorities provide the same extension for state-registered investment advisors. However, state-registered advisers should contact the states where they are registered to confirm compliance dates. The attorneys at Cosgrove Law, LLC have experience with investment adviser registration matters, including annual and as-needed Form ADV updates and reviews. If you or your company has concerns regarding these amendments to ADV Part 2, please do not hesitate to contact us.

New Broker-Check Disclosure & Dispute Process Begins August 23, 2010

Last month, the Securities and Exchange Commission approved changes to FINRA Rule 8312. The changes will expand the information available in BrokerCheck and codify the dispute process regarding inaccuracies in the disclosed information. The amendments will be implemented in two phases, the first of which goes into effect on Monday, August 23, 2010. This first phase of implementation deals with the changes to historic complaints and the dispute process.

On Monday, all customer complaints will be publicly available in BrokerCheck. This includes any complaints that had previously been deemed “non-reportable” when the Central Registration Depository (CRD) was implemented (i.e. complaints made after August 16, 1999).

Also to be implemented on Monday is FINRA’s new dispute process regarding inaccuracies in BrokerCheck. Under the new dispute process, only an “eligible party” will be able to bring a dispute. FINRA defines an “eligible party” as any current member firm, a CXO of a former member firm, or any person associated with or formerly associated with a member firm that has a BrokerCheck report. In order to file a dispute under the amended rule, an eligible party must (1) submit a BrokerCheck Dispute Form (which will become available on FINRA’s website), (2) identify and explain the inaccuracy, and (3) provide any supporting documents.

The next (and final) implementation of the new amendments regarding the disclosure period and permanently available information will occur on November 6, 2010.

A complete discussion of all the rule changes and commentary on those changes can be accessed here.

SEC Claims New Information Disclosure Restriction in Financial Regulation Law will Simply Validate its Current Practices: So What's the Good News?

According to a recent Wall Street Journal article, a 2009 report by the SEC's inspector general revealed that the agency is far stingier then other federal agencies when it comes to responding to the public's requests for information under the Freedom of Information Act (“FOIA”). For example, the SEC fully granted information requests at a measly rate of 10.5% and granted partial responses at a rate of 3%. And yet despite what one must assume were legally valid outright rejections of the remaining 85% of all FOIA requests, the SEC garnered a provision in the new financial regulation overhaul law that empowers them to reject any request implicating documents it has received from members of the financial industry pursuant to SEC surveillance and risk assessments “or other regulatory oversight activities.”

The SEC's response to the uproar over this provision has been both anemic and incomplete - arguing that they didn't really need what they supposedly really needed. According to a recent FOX Business report, an SEC spokesman explained that the provision was tied to the SEC's expanded examination program, and the new provision simply “makes certain that we can obtain documents from registrants for risk assessment and surveillance under similar conditions that already exists by law.” Of course, prohibiting the SEC from using its regulatory authority to comb through a company's records to turn around and disgorge them out of context to the public is hardly outrageous. But the SEC seems unable to provide any justification for the the true source of the uproar; the final clause of the new provision: “or other regulatory...activities.” The final clause has nothing to do with confidential records gathered during examinations of industry participants. And yet it would provide the SEC ample justification to ramp up its FOIA swat-down rate from 85% to 100%.

The SEC receives and generates a lot of information outside of its exam function as a part of its “regulatory oversight activities.” Perhaps new legislation can be drafted to protect a legitimate interest in protecting the industry's confidential information without completely emasculating the right to access provided by the FOIA.