FINRA Rule 3310 requires that Broker-Dealers (“BDs”) conduct independent Anti-Money Laundering (“AML”) program testing on a calendar year basis or more frequently if circumstances warrant. The independent testing must be conducted by a person with working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations. Our consultants are CAMS, CRCM, and CFRM certified, and some are former regulators who have specific insight into the review process and BSA/AML requirements. 

Bates' independent AML review is designed to meet the requirements of FINRA Rule 3310, the Bank Secrecy Act, and the USA PATRIOT Act. Our assessment of the adequacy and effectiveness of the AML Program will include a review of the following:

• AML Program Governance
• Key personnel experience
• A sampling of Know Your Client (“KYC”) information
• A review of the firm Customer Identification Program (“CIP”)
• OFAC/SDN sanction list screening
• Transaction monitoring and surveillance
• Suspicious Activity Reporting (“SAR”)
• Employee Training

Upon completion of the review, a written report will be provided that details Bates’ observations and recommendations for improvement, where applicable.

All Registered Investment Advisers (“RIA”) are required to have a compliance program that addresses certain regulatory requirements; written policies and procedures, designated chief compliance officer, annual program review, as well as other elements. The effective administration of a RIAs compliance program is challenging.

Bates Compliance’s Annual Compliance Program Support provides the following core services:

• Annual Updating Amendment of Form ADV
• Rule 206(4)-7 | Annual Program Review
• Regulatory updates to applicable compliance policies and procedures
• Annual compliance meeting
• Compliance program calendar
• Block of general consulting hours

Bates also provides additional tailored services to be added to the core services depending on a RIAs needs, such as:

• Assessment, development, and implementation of policies and procedures for new regulatory rules
• Regulatory filing assistance (Form U4, U5, 13F, and PF)
• Policy and procedure drafting and editing
• Document consistency review – marketing > agreements > policy and procedures > disclosures
• Periodic CCO or compliance department support meetings

This service assists the RIA with the administration of their compliance program. The core annual support services are designed to help address the main elements of a compliance program. It does not include the performance or testing of any specific compliance policy or procedure tasks. Clients have the option of adding in those activities which would be identified and scoped separately as a service.

Registered Investment Advisers (“RIA”) may desire a third party or an Independent Compliance Consultant (ICC) to help remediate a compliance violation or program deficiency. These reviews may be the result of an internal audit finding, in anticipation of a regulatory action, or in response to a regulatory proceeding. Due to the nature of an independent compliance consultant review, they may be performed through a firm’s outside counsel and/or as prescribed by a regulator. 

Many Bates consultants and experts are former regulators and are very familiar with regulator expectations.

Bates will, depending on the specifics of the circumstance or regulatory order, conduct this review consisting of the following stages:

• Introduction and Initial Review of the Violation
• Request and Analysis of Related Documentation
• Interviews with Relevant Parties
• Drafting of Report
• Delivery of Report and Remediation Recommendations

This service is generally in response to a specific program weakness, deficiency, or violation. For ICC’s involving regulatory orders, they typically include an initial review with a follow up review a year later. An ICC performed under a regulatory order results in a review report with remediation recommendations that is provided to both the RIA and the regulator. For non-regulatory ICC’s, the review and report is typically coordinated through the firm’s outside counsel.

Bates may involve other practice areas (such as our Data Analyses and Analytics) as well as our Bates subject matter expert affiliates to provide particular experience to the review service.

All Registered Investment Advisers (“RIAs”) are subject to examination by their regulatory authority (state securities division and/or the SEC). This Mock Regulatory Exam service provides firms the opportunity to experience a dry run of the examination experience. The examination follows a routine regulatory exam process with periodic evaluation points to help RIAs assess their preparedness.

Bates Compliance will, generally, conduct this mock exam under the following stages:

• Introduction and Initial Firm Interview (presentation)
• Evaluation of Firm Interview
• Mock Exam Document Request
• Evaluation of Firm’s Document Production
• Personnel Interviews (examine like interviews of select RIA personnel)
• Evaluation of Personnel Interviews
• Exit Interview and Summary of Preparation Recommendations

This is a preparatory service for RIAs wanting to test their readiness for a regulatory examination. Clients have the option of adding on an analysis of business activities or the adequacy or testing of policies, procedures, or practices contracted as separate services.

Broker-Dealers (“BDs”) must conduct a review of its Office of Supervisory Jurisdictions (“OSJs”) and non-OSJ branches that supervise non-branch locations at least annually. All non-supervising branch offices must be inspected at least every three years. All non-branch offices must be inspected periodically depending on the nature and complexity of the branch’s business, volume of business, and number of associated persons assigned to the branch.

Bates branch inspections includes verification of policies and procedures related but not limited to:

• Safeguarding of customer funds and securities
• Maintaining required books and records
• Supervision of supervisory personnel
• Transmittal of funds or securities
• Changes in customer information
• Transaction review and reporting
• Sales practices
• Advertising and other communications
• Client complaints
• Cybersecurity

An inspection report will be produced that summarizes the findings and provides recommendations, if applicable. If a firm is utilizing an audit platform (e.g., RegEd AuditTrax), Bates will use the firm platform.

Bates Compliance may involve other practice areas as well as our subject matter expert affiliates to provide particular experience to this service.

Compliance programs will at times need resource assistance or added expertise. Whether it is a change in compliance program personnel, changes in the business, or application of regulatory requirements, your program may need temporary assistance.

Bates provides “As-Needed” compliance program support on a project or hourly basis for various program needs such as, but not limited to:

• Providing interim support for vacant compliance department positions
• Creating, updating, or reviewing compliance program related documentation:
  • Compliance policies and procedures
  • Code of ethics
  • Written Supervisory Procedures ("WSPs")
  • Business continuity and disaster recovery plans (“BCP”)
  • Information security plans
  • Regulatory disclosure documents
  • FINRA applications and reports
  • Anti-Money Laundering Program
  • Client notices and applications
• Performing marketing and advertising reviews
• Performing other tailored supervisory procedure reviews and testing
• Developing and delivering compliance related training
• Supporting vendor due diligence activities
• FINRA, SEC, or State examination support

This is a temporary service to support a periodic need for assistance with compliance program administration. Each service includes a statement of work and is engaged as a project with an estimated beginning and end date. Bates consultants and our subject matter expert affiliates can provide experience in the many areas of regulatory compliance.

For traditional financial institutions and most Money Services Businesses (MSBs), compliance with the anti-money laundering (AML) requirements under the Bank Secrecy Act (BSA) is an unavoidable component of conducting your operations. All financial institutions and any business conducting financial transactions are required to meet the Office of Foreign Assets Control (OFAC) compliance obligations. It is essential to have a well-developed BSA/AML/OFAC compliance program in place that manages compliance risks and promotes best practices for your industry.

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Advisers that claim an exemption from registration, typically private fund or venture capital advisers (“private fund advisers”) must still report certain information to regulatory authorities (the SEC and/or State) and comply with applicable regulations. Generally, the exemption is available to private fund advisers that have assets under management below $150 million.

Bates will aid in the drafting and submission of all required documents to report Exempt Reporting Adviser (“ERA”) firm. Bates takes a holistic approach to the registration process by first working with your firm to design, create and implement the ERA’s compliance obligations prior to completing your report process. The SEC (as well as state regulators) will expect that, upon approval, your firm is meeting all the regulatory requirements.

The ERA will receive upon completion a host of various documents that include, but are not limited to:

• Form ADV 1
• Policies addressing ERA compliance requirements, including but not limited to:
  • Anti-Fraud
  • AML
  • Conflicts of interest, including gifts and other employee conduct
  • Insider Trading
  • Investor Privacy
  • Marketing
  • Pay-to-Play
  • Proxy Voting
  • Recordkeeping
  • Regulation D filings
  • Valuation

In addition, the client will be able to leverage the knowledge of the Bate’s consultant to explain the exempt reporting adviser obligations.

Once approved by the SEC, we recommend speaking a Bates consultant to inquire about additional services Bates can offer to help the ERA maintain compliance with various ongoing obligations. This can include, but it not limited to, assistance with your Annual Updating Amendment (“AUA”), your Form D filing requirements, other state specific requirements, modifications to offering documents and marketing materials, special considerations for ERISA investors, and annual bad actor certifications.

Bates will aid in the drafting and submission of all required documents to register a Registered Investment Advisors (“RIA”) firm. Bates takes a holistic approach to the registration process by first working with the firm to design, create and implement the RIA’s compliance program prior to completing its registration. The SEC (as well as state regulators) will expect that, upon approval, the firm is meeting all the regulatory requirements from that point forward.

The RIA will receive upon completion a host of various documents that include, but are not limited to:

• Form ADV 1
• Form ADV 2
• Form U4(s)
• Compliance Manual
• Privacy Policy
• Form CRS
• Client Agreements

In addition, the client will be able to leverage the knowledge of the Bate’s consultant to explain the content and implementation of all required documents.

Once approved by the SEC, we recommend speaking with a Bates consultant to inquire about additional services Bates can offer to help the RIA maintain compliance with various ongoing obligations. This can include, but it not limited to, assistance with Annual Updating Amendment (“AUA”), Annual Review (i.e. 206(4)-7 Review), 13F Filings, or compliance document updates.

Bates will assist a Registered Investment Advisors (“RIA”) with transition filings from State to SEC registration. Rule requires State registered RIAs transition to SEC jurisdiction based upon a number of “triggers”. Most commonly, this happens when firms hit $100M in regulatory assets undermanagement.

Bates with review and/or draft various required documents for adherence to SEC rule(s) that include, but are not limited to:

• Form ADV 1
• Form ADV 2A & 2B
• Form U4(s)
• Compliance Manual
• Privacy Policy
• Form CRS
• Client Agreements

Once approved by the SEC, Bates will also assist with the formal withdrawal from State registration. In addition, the client will be able to leverage the knowledge of the consultant to explain the content and implementation of all required documents. 

Please note that once RIA is newly transitioned to the SEC, the RIA will likely undergo their first SEC Examination within 12-18 months from the approval date. This is a good time to talk to a Bates consultant about the additional requirements your RIA will be required to meet. Some requirements, such as the required Annual Review of compliance Policies and Procedures under Rule 206(4)-7, are all services provided by Bates Compliance.

The Exchange Act requires that any broker-dealer effecting securities transactions by means of interstate commerce be registered.  Broker dealers are subject to regulation by the SEC, FINRA and any other Self-Regulatory Organization (“SRO”) in addition to the states where they do business.  Unless a registration exemption is available, state laws require registration of any broker dealer doing business from or with residents of their state and the representatives doing business within the state. 

Bates will aid in the drafting and submission of all required documents to register as a broker dealer (“BD”). Bates takes a holistic approach to the registration process by first working with your firm to design, create and implement the BD’s supervisory program prior to completing registration. FINRA will expect the firm is meeting all the regulatory requirements upon approval.

The BD will receive upon completion a host of various documents that include, but are not limited to:

• Reserve the name of the broker-dealer with FINRA
• Prepare Super Account Administrator Entitlement Form
• Member Firm FINRA Contact Form
• Provide a list and samples of all documentation required to file form NMA (New Member Application)
• Provide the project plan for the broker-dealer registration process
• Schedule regular calls to review the progress of the project plan
• Develop financial requirements, initial deposit, and funding process
• Prepare FINRA Form NMA and all required documentation
• Assist in preparation of the Business Plan and the Business Continuity / Disaster Recovery Plan
• Prepare Written Supervisory Procedures
• Prepare the Continuing Education Needs Analysis and Training Plan
• Assist with development of Anti‐Money Laundering Procedures
• Identify required experience and licensing requirements, based on the business model
• Prepare and submit Forms U4 for Principals
• Prepare and submit Form BD
• Prepare and submit Form BR
• Assist in preparation of the initial fidelity bond application
• Prepare Principals for FINRA’s pre‐membership interview
• Attend FINRA’s membership interview (If desired)
• Prepare and submit state applications, as requested

Bates may involve other practice areas as well as our subject matter expert affiliates to provide particular experience to this service.

All Registered Investment Advisers ("RIA") are required to file their Annual Updating Amendment (“AUA”) within 90 days after their fiscal year end.

Bates will assist in the following ways:

• Review Preliminary and/or Final Renewal FINRA Statement to confirm adequate funding is available in the RIA’s FINRA account.
• Update the RIA’s Form ADV 1, ADV 2, and other documents as needed through communications with and data provided by RIA.
• Review the RIA’s client base to confirm firm registrations and notice filings are made in the appropriate jurisdictions.
• Upload/Submit all required documents via FINRA’s IARD/CRD Portal.

This service assists the RIA with all required updates to various filing documents. It does not include new registrations in additional jurisdictions, IAR registration, or writing new regulatory disclosure content for an RIA. These would be separate services.

Registered investment advisers with investment discretion of over $100 million or more of equity securities that trade on an exchange (Section 13(f) securities) must report those holdings quarterly by filing a Form 13F. The Official List of Section 13(f) Securities shows the securities that firms must report on Form 13F. The list is published quarterly.  It is available for free by going to https://www.sec.gov/divisions/investment/13flists.htm.  

 Bates will prepare and submit the Client’s Form 13F including:

• Identification of qualified securities
• Multiple manager reporting
• Preparation of XML Information Table
• Submission of XML Table on EDGAR

This service assists the RIA with identifying, uploading, and submitting reporting data. It does not include evaluating a RIA’s holdings.

All Broker/Dealers, as required by FINRA Rule 3120, are required to review & test annually, their system of supervisory procedures and internal controls. This is a review to ensure the adequacy and effectiveness of the compliance controls and to provide a summary of the test results and significant identified exceptions. The review will also consider rule changes, as well as recently regulatory developments.

This, generally, includes an evaluation of the following:

• Has the firm designated one or more principals who are responsible for the establishment, maintenance, and enforcement of a system of supervisory control procedures that:
  • Test and verify that the firm’s supervisory procedures are reasonably designed with respect to the activities of the firm and its associated persons to achieve compliance with applicable securities laws and regulations?
  • Provide a summary of the test results and significant gaps found; and
  • Create additional or amend supervisory procedures where the need is identified by such testing and verification.

Bates will supplement the documents reviewed with interviews with key personnel to ensure that the written report accurately reflects firm practices. Upon completion of the review, Bates will create a written report for management that includes the required CEO certification.

Every state has its own definition of what constitutes a “money transmitter,” which means it can be difficult to know whether you need a license for your company’s operations. For example, some states exempt digital currency operations from needing a license, while other states do not. We can evaluate your situation and advise whether we believe you need a license for your particular business model. 

Generally speaking, any party that completes transactions over $1,000 in a day can qualify as a money transmitter if the transactions include: 

• Currency exchanging or dealing
• Check cashing
• Money orders
• Traveler’s checks
• Money transfers

Once you determine that you need an MTL, you must meet specific requirements, which can vary significantly from state to state. Some common requirements in most states may include:

• Submission of a state-specific Money Transmitter Application
• Meeting a Net Worth requirement and presenting a Statement of Net Worth 
• Company’s Good Standing Certificate (State of Formation & State the Company is applying in)
• Background Checks & Fingerprints for Control Persons
• AML Compliance Program
• Internal Policies & Procedures
• Personal Financial Statements for Control Persons
• Paying licensing fees
• Obtaining a Surety Bond or another form of security

Applications also can require a substantial amount of supporting documentation. This can include a detailed business plan that details the financial health and intended operations of the business, financial statements and records for shareholders and directors, and your background check information. In addition, you will need to present your anti-money laundering (AML) policies and procedures that are in line with the requirements enforced by the Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Department of Treasury.

In addition to license acquisition, we can also complete all required aspects of the license maintenance process including, but not limited to:

• Staying up-to-date on the license maintenance requirements for all states where the Client holds a license
• Coordinating with the Client on all MSB reporting requirements
• Completion and submission of the Money Services Business (MSB) Call Report every quarter in NMLS
• Completion and submission of all other state MSB Quarterly Reports that are due outside of NMLS
• Completion and submission of all state MSB Annual Reports that are due throughout the year
• Coordinating with state regulators on any questions they have and/or documentation they need related to MSB licensing throughout the year
• Uploading documentation and update relevant information in NMLS if changes within the Client require uploading/updating (Policies & Procedures, Address, Business Plan, Risk Assessments, etc.)
• Submitting the Client’s Annual Financial Statement each year in NMLS and anywhere else that a state may require it to be uploaded for the maintenance of their MSB licenses
• Submitting the Authorized Agent Report each quarter in NMLS (whether the Client uses agents or not, it must be submitted)
• Periodic review of the Client’s NMLS account for any deficiencies identified by state regulators
• Coordinating with Client personnel on any information that is needed to complete required reports, forms, assessments, etc. related to their MSB licenses
• Coordinating with the Client on any MSB licensing-related renewal requirements

• Training Initiatives
• Currency Transaction Reporting Exemptions
• Currency Transaction Reporting (CTR)
• Remote Deposit Capture
• Cash Shipments
• Funds Transfers Recordkeeping
• Monetary Instrument Sales Recordkeeping
• Additional Recordkeeping Requirements by the BSA
• Verification of policies, procedures, and processes in light of the BSA record retention requirements
• Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)
• Customer Identification Program (CIP) & Know Your Customer (KYC)
• Possible Office of Foreign Assets Control (OFAC) Issues
• Compliance with Beneficial Ownership and CDD Requirements
• Compliance with USA PATRIOT Act sections 314(a) and 314(b)
• FFIEC expanded procedures, if needed for your company
• Suspicious Activity Monitoring and Reporting (SARs)
• Review of State Examination Results

The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) enforces the various requirements under the law for Money Services Businesses (MSBs). One requirement under the Bank Secrecy Act (BSA) is that each business in this industry must have clear anti-money laundering (AML) policies and programs in place. These programs must include Independent Reviews that take place to test the AML programs for BSA compliance. The frequency and scope of such reviews must be in line with the risk of the particular financial services offered by the business. 

These reviews are necessary to ensure that companies are operating in accordance with the BSA and that their AML policies are effective in minimizing money laundering risks. The designated Compliance Officer of the company may not conduct the review, nor can anyone who reports to the Compliance Officer. Many Money Services Businesses (MSBs) hire third-party professional reviewers and consultants to conduct these Independent Reviews to best prevent any compliance problems with FinCEN. 

Each company has a different risk profile, so there is no one-size-fits-all approach to compliance programs. FinCEN expects each institution to tailor its program specifically to its operations, and our specialists can assess your risks based on your location, customers, and services, and then develop a compliance program based on each individual risk profile.

Each program should have clear policies and procedures for every role in the business and each type of transaction. Policies should clearly communicate internal responsibilities, systems, and best practices.

A key part of AML compliance is conducting Independent Reviews to test your program for risk or compliance issues. Review frequency and scope will vary based on your operations, and we can advise on necessary reviews as well as conduct the reviews.

Everyone in your company who participates in the BSA/AML/OFAC compliance program should understand relevant parts of the program and their responsibilities. Training should be conducted on a regular basis to maintain a culture of compliance.

When FinCEN (the U.S. Treasury Department’s Financial Crimes Enforcement Network) changes its guidance on BSA/AML compliance, it can be challenging to manage a program in full compliance with changing rules, as well as managing OFAC economic sanctions obligations and any applicable state regulations. At Bates, our specialists understand and identify all requirements for different types of financial businesses. Many of our consulting experts have CAMS, CAMS-Audit, CFRM, and CRCM certifications, and some are former AML regulators who understand exactly what government officials are looking for.

The regulatory landscape is always changing, and it is important to regularly assess the effectiveness of your BSA/AML compliance program in light of updated laws and standards. Our BSA/AML consultants can conduct a gap analysis to identify potential risk areas. We can then work with your company to update and enhance your anti-money laundering program accordingly.

Banks and MSBs across the country must strictly comply with federal and state laws, especially Bank Secrecy Act and other anti-money laundering regulations. It can take a significant amount of time and knowledge to design and implement policies and training programs that keep your business on track with BSA/AML compliance. However, cutting corners can only lead to possible violations and costly penalties.

If your organization needs assistance with ongoing compliance, you should not hesitate to learn about our professional BSA/AML consulting services. Bates offers ongoing advisory services to a wide range of financial institutions and MSBs -- Contact us to learn about our range of services.

When consumers trust financial institutions and money services businesses with their information, accounts, or financing, they are taking a risk. To protect consumers from the risks of harm, there are many federal consumer protection laws that apply to these types of companies. 

Compliance with consumer protection laws and regulations is essential to every bank, lender, or MSB. Your company must have a comprehensive and effective compliance program in place to avoid penalties, fraud, losses to customers, and other types of liability. It is important to seek assistance from compliance experts who can help your business with consumer protection reviews.

The federal government takes consumer protection very seriously. These protections are enforced by different federal agencies, including the Consumer Financial Protection Bureau (CFPB), as well as state agencies.

Every financial company should have a compliance risk-management program that is specifically designed for the company based on size, relative risk, and operational details. There are different components to these programs, such as:

• Policies and procedures for each role in the organization that ensure consumer protection compliance
• Monitoring, internal controls, and audits to test the effectiveness of the program
• Regular risk assessment
• Having proper management information systems
• Oversight from senior management or board of directors
• Training for employees subject to the compliance program

Our team of consultants has Certified Anti-Money Laundering Specialist (CAMS) and CAMS-Audit certifications, and this advanced training allows us to help all types of companies develop and implement anti-money laundering (AML) compliance programs to ensure regulatory compliance with the Bank Secrecy Act (BSA) and other requirements. Our expertise in financial compliance allows us to customize AML policies to suit your specific cryptocurrency operations while staying in line with state and federal AML obligations. If your company needs to develop AML programs specific to crypto transactions, please do not hesitate to contact us directly.  

A critical part of BSA compliance is thorough AML training for all your employees. Our specialists can help develop a training program centered around your specific AML policies, and we can advise and inform your team regarding their specific AML expectations and changing compliance requirements, both externally and internally. 

Another key part of BSA/AML compliance is conducting regular reviews and audits of your AML policies and identifying potential risks. We regularly conduct Independent Reviews based on the needs of specific companies, helping them to stay fully compliant with AML obligations and improve their internal AML programs. 

If you’re launching a new NFT-related business, you will need to undergo a risk assessment to accurately understand your exposure to potential financial crime, given your customer demographics, geographic locations, and products and services offered. Bates will design and implement controls to detect and prevent fraud, money laundering, and other forms of illegal activity.

When an estate initiated litigation against an insurance agency involving universal life insurance policies that had lapsed, Bates was engaged to calculate the hypothetical premiums that would have been required to keep the policies in force.  We provided a potential damages calculation which included hypothetical insurance premiums and death benefits discounted to present value. Our expert was also able to consult on the suitability and sales practices involved with the sale and maintenance of the universal life insurance products.

A recent life settlement project included actuarial analyses of selected policies where the sellers were unable to find buyers in the secondary market. Our expert provided testimony regarding the policies as well the broad economic decline that generated a perfect economic storm in the second half of 2008 and the implications of those events for the life settlement industry.

The Bates team includes insurance, tax and damages experts who assist counsel in defending welfare benefit programs including 419(e) plans.  Our experts have consulted with counsel to explain how the insurance products work, discuss IRS tax implications and to calculate the economic benefit of these types of plans.

We have performed a large number of asset and sector allocations/analyses for variable annuity and variable life contracts. These analyses were useful in defending against suitability (concentration) claims and comparing to model portfolio allocations.

Bates has analyzed thousands of Annuity/Life Insurance contracts to determine gains or losses associated with Fixed/Variable/Indexed Annuities as well as Term/Whole Life/Universal Life/Variable Life Insurance products. For variable products, our analyses can identify subaccount performance as well as the overall contract’s performance.

We have prepared, and testified to, numerous schedules including Guaranteed Minimum Accumulation Benefit (GMAB), Guaranteed Minimum Withdrawal Benefit (GMWB), and Guaranteed Minimum Income Benefit (GMIB).  Displaying the intrinsic value of these benefits at select points in time in comparison to ending/accumulated values was very effective in cases where contracts were surrendered during the financial crisis. For some contracts that have been surrendered or exchanged at a low point in the market cycle, Bates prepared “what if” scenarios projecting the hypothetical living/death/portfolio values from a historical date to a future date to capture the appreciation that would have occurred if the positions had been held. Where appropriate, we have the capabilities to incorporate actual or hypothetical withdrawals and to also identify the tax implications involved. We have also provided present value analyses of living benefits incorporating life expectancy. 

To assist counsel in comparing the value of annuity contracts under various scenarios, Bates has prepared analyses that compare cash surrender values, annuitization values and annuity distributions of actual or hypothetical income streams at multiple points in time.  Our analyses can utilize life expectancy tables or model expected growth using Monte Carlo simulation with the results discounted into current dollars to assess damages, or provide damage alternatives.  Comparison of actual or hypothetical contract performance can also be evaluated against alternative investment products or portfolios.

In addition to evaluating annuity switches in regulatory matters, Bates has reviewed dozens of switches involved in retail litigation.  Our “Net Cost to Exchange” model has been very helpful for our clients and arbitration panels to better understand the quantitative and qualitative components of these exchanges including contract performance, bonus recapture, surrender charges and contract features.    

We have successfully itemized and compared fees within various insurance products to other investment alternatives. One comparison included variable annuity subaccounts and evaluated the cost of ownership to hypothetical investments in alternative class A and class C open-end mutual fund shares. Our analyses included a detailed breakout of annual fees, rider fees, sales charges and operating expenses to calculate the total cost of ownership.

• Bates Group was retained to assist an insurance carrier during a FINRA investigation alleging the carrier’s misrepresentations, suitability violations, and supervision in connection with sales and replacements of variable annuities.  We analyzed thousands of pages of contract applications and internal documents pertaining to over 500 variable annuity exchanges to compile a database of annuity transactions.  Data validation techniques were used to check the consistency and accuracy of the dataset.  Once validated, the database was used to generate summary reports and schedules detailing our findings related to the alleged misrepresentations and omissions, which allowed counsel to rebut allegations and negotiate a more favorable result.  During the investigative process, Bates’ experts also consulted on the suitability and supervision of the annuity transactions.

• As state regulators investigated an association’s deficient pre-need trust which held hundreds of variable life insurance policies, we were asked by counsel representing a financial services firm to analyze tens of thousands of pages of documents and perform a profit/(loss) analysis for each contract within the trust. Bates also constructed thousands of hypothetical scenarios comparing actual contract performance to various benchmarks to assess potential damage scenarios. Additionally, we analyzed millions of transactions within the client’s mainframe database and accounting system to provide counsel with insight and guidance regarding damages during the resolution process.

• In another state regulatory matter involving a financial services firm, Bates Group worked directly with inside counsel to prepare an economic benefit analysis showing the impact of dozens of variable annuity switches.  The analysis used internal reports as well as Morningstar to evaluate the switches at the policy, benefit and fund levels.  Our analyses included review of surrender charges and premium enhancements to evaluate the potential damages associated with alleged variable annuity sales practice violations.  Bates also provided a substantive suitability review of selected switches.  In addition, we assisted counsel during this investigation by reviewing the damage calculations provided by the state and providing clarification regarding the calculation methodology. 

• Out-Of-Pocket P/(L) and Damages Analyses
• Sales Practice
• Product & Market-Based Analytics
• Employment Dispute Damages Assessment & Calculations
• Analysis of Stock Manipulation
• Trading Analyses
• Deposit Tracing
• Actual vs Hypothetical P/(L) Analyses
• Damages Methodology Rebuttal & Alternative Damages
• Valuation

We divide our consulting testifying experts into two areas, quantitative and substantive, though there are several testifying experts who can provide testimony in both areas, should the case call for it. Quantitative experts provide testimony related to our account, valuation, and other related analyses, while our substantive experts provide testimony in relation to myriad other issues.

Our experts’ unique histories cover all aspects of the financial industry, from industry practices to specific products. We pride ourselves on providing the highest level of expertise, and you can see that commitment reflected in the quality of our individual consultants and experts, who typically have 15+ years of industry experience within their field, followed by years of experience testifying as expert witnesses in numerous forums.

We are proud to have established long-term relationships with our clients as a result of the strength of our experts—there is no higher compliment to us than a request asking to use the same expert again on another matter.

Sales Practice

• Supervision
• Suitability
• Regulation Best Interest - Reg BI
• Diminished Capacity

Employment Related Disputes

• Wrongful or Constructive Termination of Advisors
• U4/U5 Disclosure
• Promissory Note Disputes
• Advisor Transition/Broker Protocol
• Advisor Employment Disputes [Link]

Data Analysis

• P/(L) Analyses
• Damages Assessment & Calculations
• Market Analyses (Macro and Micro)
• Product Analyses
• Business Valuations

Operation of Trusts

• Breach of Fiduciary Responsibilities
• Portfolio Management
• P/(L) Analyses
• Damages 

Trading Related Issues 

• Insider Trading
• Market Manipulation
• Currency Trading
• Failure to Hedge Concentrated Positions 
• Unauthorized Trading 
• Margin Calls 
• Churning
• Selling Away
• Best Execution
• Clearing

Due Diligence

• Adequacy of Disclosures
• New Product Due Diligence

• Real Estate Investment Trusts (REITs)
• Tenancy In Common Investments (TICs)
• Oil & Gas Limited Partnerships (LPs) and Master Limited Partnerships (MLPs)
• Business Development Companies (BDCs)
• Puerto Rico Closed-End Bond Funds
• Puerto Rico Bonds
• Special Purpose Acquisition Companies (SPACs)
• Life Insurance and Annuities
• Collateral Calls
• Options
• Exchange-Traded Funds (ETFs)
• Fixed Income Securities
• Equities
• Domestic and International Securities
• Employee Stock Ownership Plans
• Foreign Currency
• Yield Enhancement Strategies (YES)
• Structured Products
• Volatility Linked/Leveraged Products
• Non-Purpose Loans
• Margin Loans
• Auction Rate Securities
• Callable Yield
• Disbursements
• ETRACS
• Futures
• Government Sponsored Entities
• Hedge Funds
• High Yield Bonds
• Managed Distribution Programs
• Mutual Funds
• Non-Publicly Traded Alternative Investments
• Preferred Securities
• Research/Rating Agencies
• Sub Prime Mortgages

• Broker Dealers
• Independent Broker Dealers
• Investment Advisors
• SEC
• NASAA
• State Regulators
• Retail Investors
• Insureds
• Insurance Agents
• Insurance Carriers
• Insurance Coverage Firms
• Insurance Claims Departments

• FINRA
• AAA
• State Court
• Federal Court
• Mediation

Bates assisted a client in proactively investigating an issue identified by their internal controls. Our staff and experts completed a comprehensive review of trading activity over a multi-year period for an equity security traded on both U.S. and International exchanges. Bates collected and modeled detailed order book information to evaluate the following characteristics related to the market microstructure of trading in the security across both exchanges: 

• Cancellation activity
• Trade-to-order volume
• Short bursts of sell initiated volume, pre-market selling activity versus subsequent trading
• Time to cancel
• Concentration and pattern of cancelled orders on particular days/times
• Execution proximity to best bid/offer
• Order size
• Other factors

These same characteristics were evaluated for shifts in market dynamics over time and in comparison to trading on the same exchanges in peer company securities while also noting differences/similarities in trading across the two exchanges. The price impact of potentially noneconomic trading was established, and a formal report was submitted, as well as several reports rebutting the findings of the regulator, culminating in testimony by a Bates expert before the regulator.

Bates experts were called upon to evaluate the conduct of a team of traders within a large global financial institution for a variety of issues, including trading ahead of client orders, inappropriate trade mark up, indications of market manipulation or attempted manipulation, and round-trip trading—in the latter two areas we also considered the behavior and involvement of traders from other major financial institutions. The analysis required a detailed investigation of daily trading, spreads, and quotations on major currencies and currency derivatives, as well as interviews and communication reviews of the alleged involved parties.  The report prepared by Bates identified significant failures in the institution’s internal supervisory and control processes and was relied upon in subsequent litigation.

In a recent investigation, Bates was asked to assess the trading of an individual who had accumulated an ownership interest in multiple penny stocks as payment for consulting services rendered. This individual was then alleged to have used both his accumulated ownership and access to company insider information to conduct a classic “pump & dump” of the stock. Bates performed a detailed quantitative assessment of his trading using both publicly available data and Blue Sheets, as well as a qualitative assessment to establish interrelationships between parties via phone records, text message exchanges, and emails. Bates provided detailed timelines of trading activity that included news events, volume, intraday pricing, short interest, and other relevant characteristics. We prepared interactive models showing the relationships between parties, their trading behavior versus the rest of the market, and other demonstratives. We then estimated potential damages following a modified share price inflation methodology. As a result of the work Bates performed, additional potential market manipulators were identified.

On a criminal pump & dump matter, Bates performed the full range of analyses listed above in addition to preparing demonstratives specifically concerning wash or matched trading. During the course of performing our analysis, Bates was informed that several of the alleged manipulators pled not guilty on the basis that they were unaware that the manipulation was taking place. Bates assessed their trading records, Blue Sheet data, and communication records to establish that, at a minimum, they had knowingly participated in wash or matched trading during the manipulated period.

The Regulatory & Internal Investigations team has significant experience in conducting reviews related to insider trading, in both civil and criminal proceedings. These reviews generally follow a two-step approach, beginning with a quantitative focus and concluding with a qualitative focus.

Beginning with the trading activity, Bates will first identify trades which allowed an investor to achieve outsized gains or to avoid outsized losses. The securities reviewed can be selected through prior research conducted by the regulator or counsel, or they can be determined by statistical analysis.Typically, Bates will begin by identifying trading days in the at-issue securities which experienced statistically significant abnormal price returns. Once identified, those days are then compared to the individual (or individuals) trading. Additional statistical analysis can then be used to identify the likelihood of a particular trade being made in “perfect timing” before a market movement, which is then expanded to cover the likelihood of a single individual (or individuals) trading with “perfect timing” for the totality of “perfect” trades.

This analysis is further informed by the at-issue individuals’ prior trading; how often have they traded similar securities (by industry or other factors) in the past, how often do they trade options (for example), what have their historic returns been on trades of the same type? This information helps contextualize the trading at issue, at which point qualitative information such as emails, phone records, text messages, significant news releases, etc. are incorporated into the analysis to provide additional context. As a final step, Bates can also assist in estimating the implied gain achieved (or loss avoided) that was derived from the insider trading activity.

Bates Group’s Insurance and Commercial damages experts have experience handling claims across the following types of insurance coverage:

• Commercial Property Business Interruption
• D & O Liability
• Property & Casualty
• Builders Risk
• Bad Faith
• Force Majeure
• Named Peril Coverage
• All Risk Coverage
• Employment Practices Liability
• Excess/Umbrella Liability
• Eligible Employee 

Bates Groups’ insurance experts are well versed with insurance industry customs, practices, and standards, standard of care, coverage analysis, and claims practices. We consult on or testify to the follow aspects of coverage litigation claims:

• Review of policy underwriting and drafting history of policies
• Application of case law precedent as it relates to the specific facts and circumstances of the coverage issues.
• Rendering coverage opinions based on policy provisions, exclusions, conditions and limitations
• Claim adjudication
• Suitability of policy coverage
• Actuarial analysis of claims reserves for GAAP & statutory reporting
• Assessment of civil authority claims
• Assessment of physical property damage claims
• Assessment of exclusions including, but not limited to: virus, pandemic, pollution and bacteria
• Application of reinsurance coverage

Bates Group’s team of forensic accounting and damages experts with CPA, Chartered Accountant, Certified in Financial Forensics, Certified Fraud Examiner and Certified Valuation Analyst designations have experience reviewing, critiquing and adjusting claimed losses for reserve setting, undertaking actuarial analyses for setting loss reserves, and providing pretrial consulting or expert witness testimony.

Our experts are experienced at providing analyses of lost business income or profits, lost wages, and out-of-pocket losses analysis across, but not limited to, the following areas:

• Insurers charged with wrongful denials of claims
• Employers who took drastic actions to keep their companies solvent but are alleged to have used discriminatory criteria in doing so, or whose workers claim they were not adequately protected from on-the-job coronavirus exposure
• Insurance agents and brokers accused of recommending inadequate policy limits
• Investment advisors whose clients either panicked during the stock market drop or were forced to liquidate their holdings due to COVID-19-related exigencies.
• Real estate brokers sued because of drops in property values, or buyers who lack the income to pay their mortgage loans and allege there were undisclosed defects in the premises
• Accountants whose clients contend they were not clearly advised regarding changes in tax rules or deadlines

Bates Group has decades of experience designing and managing large-scale eDiscovery and managed document review projects for all types of litigation and investigations. Retaining Bates Group enables organizations to leverage the advantages of highly experienced discovery specialists and technology-enabled e-discovery review solutions, allowing counsel to focus their time and effort on the high-value tasks you were hired to perform.

Whether as a result of an enforcement action or as a self-initiated project, Bates works with financial institutions to evaluate, redesign and implement part or all of an AML program. Our experienced consultants can advise financial institutions on current industry standards and best practices in AML and Financial Crimes in the following areas: program governance, policies and procedures, BSA/AML/OFAC risk and gap assessments, audits, KYC and customer risk scoring, and systems integration and implementation

Financial Institutions are required to conduct independent audits of their AML programs. In order to achieve complete independence and also to benchmark a financial institution’s AML program against industry best practices, it is important to use a third-party consulting firm for your annual audit. Bates has experienced AML auditors who can help AML departments in this critical area.

Bates provides assistance to financial institutions in the clearance of backlogs or to conduct lookbacks in the following areas: customer due diligence (CDD) reviews, enhanced due diligence (EDD) reviews, name screening alerts, OFAC alerts, 314(a) alerts, transaction monitoring alerts, case investigations and suspicious activity reports (SAR), trade surveillance alerts, and fraud alerts.

It is critical to evaluate the AML risk that each customer represents to the financial institution. Bates can evaluate your current risk scoring model and advise how to enhance your customer risk scoring. Alternatively, we can design new risk scoring models that are tailored to your AML program.

Whether due to regulatory intervention or as a self-initiated project, Bates can assess and evaluate your AML Compliance program to check whether it meets industry best practices. It is important to periodically conduct gap assessments in order to keep up with current industry AML standards and best practices. Our consultants have considerable experience, knowledge of industry standards and expertise in all areas of AML Compliance, and are well-equipped to complete a gap assessment for your firm.

The cornerstone of a strong BSA/AML Compliance program is the implementation of comprehensive policies and procedures that enable financial institutions to determine their clients’ risk for money laundering, financial crime and or terrorist financing activities. The Bates team of experts and consultants have many years of experience working in regulatory environments as inside and outside counsel and as Compliance professionals for some of the world’s largest financial institutions. These experts and consultants can help implement, review and test each client’s Customer Identification Program (CIP) and Know Your Customer (KYC) program including policies and procedures, KYC customer risk scoring models, Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) and Beneficial Ownership requirements as required by the FinCEN Customer Due Diligence Rule.

Bates has successfully assisted a number of financial institutions in connection with AML regulatory-related inquiries and responses. Our success in helping our clients is due in large part to the experience and insight of our CAMS-certified consultants and AML project managers, many having previously worked for regulatory agencies and also have been members of AML teams working on behalf of some of the largest financial institutions in the United States. Their collective and unique insights, coupled with their industry knowledge and regulatory know-how, help our clients meet regulatory expectations and resolve AML deficiencies in the face of regulatory scrutiny.

An integral component of a robust BSA/AML Compliance program is the completion of an annual BSA/AML/OFAC risk assessment. Financial institutions should conduct tailored enterprise-wide risk assessments to evaluate the inherent risk of the various businesses at their firm against their control environment. Once residual risks are identified it is important for AML Compliance departments to enhance their AML programs to address the risk.  Bates has experienced consultants who specialize in risk assessments from the smallest to the largest and most complex financial institutions.

In today’s data-driven world, the ability to manage and analyze large, complex sets of data is critical to the success of litigation matters and internal and regulatory investigations. Bates Group is highly experienced in providing consulting services involving large and complex datasets, some containing billions of records.

Utilizing state-of-the-art technology, we have developed an efficient and cost-effective approach to assist in navigating the discovery process, performing data diagnostics, and conducting statistical and empirical analysis. Through our engagements, we have collected and aggregated data from multiple sources within our clients’ businesses, and, in doing so, have gained the experience to help minimize the efforts required from our clients’ data personnel and to ensure data integrity throughout the process.

Bates Group is also equipped with proprietary software to provide an efficient in-house solution for potential data entry exercises. We understands the importance of protecting client data and take steps to ensure that all data at Bates is protected and safe from unauthorized access. Bates Group vigilantly updates its systems to ensure they are secured against vulnerability, based on the latest computer security industry protocols and announcements. We also undertake regular SOC 2 audits to ensure the proper controls around security and confidentiality. For more on our data security measures, please give us a call or visit our Data Security page. For examples of work we have performed in support of litigation or investigation matters, scroll to the bottom of this page

Regulators are dedicated to using large scale market activity data to monitor financial institutions and to bring enforcement actions against them. Against that backdrop, it is crucial that firms understand how a regulator might view their data in case they are targeted for an investigation.

Bates Group has a substantial, proven track record assisting clients in two key areas: abnormal performance indicators and market abuse detection. Both areas are key concerns of regulators and areas in which they are using machine learning and other data analysis techniques to detect illegal behavior (see here for abnormal performance, beginning at slide 13; see here for market abuse and the Consolidated Audit Trail).

Our data-driven detection services can be used to screen for abnormal performance in a fund, manager, or asset’s prior returns. This service is invaluable for financial institutions, family offices, or even individual investors in uncovering and avoiding fraudulent schemes. We evaluate the quality of the reported prior performance from multiple angles, looking for indications that the reported results may not be accurate. Our in-depth understanding and experience in financial markets then allows us to examine each flag or exception generated by our data-driven review, discounting flags and exceptions that may have a reasonable explanation, and thoroughly investigating those that do not.

Bates Group has also developed a number of proprietary programs and platforms for identifying instances of market abuse in both equity and futures markets. Our analysis can be used to identify spoofing, layering, iceberging, momentum ignition, wash sales, painting the tape, insider trading, cherry picking, and pump and dump behavior. Our data-driven capabilities are augmented by our deep experience in trading and trading platforms, allowing us to thoroughly investigate each instance of potentially illegal behavior and to provide concrete guidance back to our clients on whether or not such activity has taken place.

For example reporting from our work in this space, please contact us.

Corporations are increasingly reliant on analysis conducted in a big data environment to drive key decision making, often as a factor in determining the positioning and strategy of the business itself. Frequently the work performed is done with a high degree of care, but it is inevitable that errors will occur in any analysis environment. We have found this to be especially true in instances where the client is utilizing a programming language in which only a few employees are fluent, or when the same team performing the analysis also reviews their own results. Unfortunately, this is a fact of life for even the largest organizations, as they are often building and growing their internal data science teams and may not have standard practices or institutional knowledge developed to conduct a rigorous independent review process.

In these instances, Bates can be an invaluable resource. We have assisted clients by reviewing work that has been performed internally, or by a third-party, replicating the results and verifying the conclusions. Before making a major decision that could impact the future of the business, it pays to ensure that the analysis driving that decision is error free. Bates Group provides its corporate clients with that assurance by validating the work performed by others.

We have performed an internal investigation on behalf of a large financial institution into the trading activity across the entire trading platform of a financial instrument. The dataset spanned multiple years, included over 6,500 FAs and covered tens of thousands of clients (all equating to 25+ million transactions). During the course of the investigation, we partnered with counsel and utilized our industry expertise to determine the appropriate metrics and presentations that allowed them to reach the necessary conclusions. We also played an instrumental role working with both the IT and the product (at issue) branch of the firm to extract the necessary data; which included performing diagnostics on the data to confirm accuracy/completeness. Our product and services were extremely influential as the investigation transitioned into responding to the regulatory inquiries.

We have analyzed real estate investment trust (REIT) transactions covering a five-year period of time to determine whether the transactions met various suitability guidelines. In performing our analysis on millions of records we created testing protocols that allowed us to determine which, if any, of these transactions violated the individual requirements of the suitability guidelines. The results of our analyses were provided to the broker-dealer and state regulators.

Bates reviewed cancellation activity on behalf of a major broker-dealer following self-reporting to FINRA around weaknesses within the trade system utilized that made the in-place cancellation reason flags unreliable.  The technology team was tasked to find inconsistencies in cancellation practices by various departments across the firm and to determine if activity patterns related to cancel activity reflected malicious behavior by individual reps.

Over 2 million cancellations were matched across over 121 million transactions to identify the original trade and the correction that was made after the cancellation occurred. Identification fields were used in the initial matching processes, but completion of the project required that Bates develop, test, and implement a more complex logic to match trading to cancellations based on fields, such as account, CUSIP, or trade date, that the transactions had in common. Each set of matches was categorized according to what changed between the original trade and the last corrected trade and the information was summarized for the client in a variety of reports including by rep, by correction reason, by region, etc. to facilitate identification of 1) bad actors, 2) inconsistent usage requiring re-training, 3) areas requiring a full system overhaul.

Our staff has performed complex regression analysis to investigate the impact of trades and orders on stock prices. Prior to performing such analyses, we collected and standardized millions of records of orders and activity data from the client. Data were processed in a cost-efficient manner such that any additional analysis for a particular stock was automated.

We have researched and analyzed various open-end fund complexes to deduce investment strategy, trading patterns, alleged mispricing, and expense to shareholders. Our staff reviewed a dataset of portfolio trades by the portfolio managers as well as trades by investors.

We also have experience performing a microeconomic study that utilized billions of records including trade and order data for all companies listed on an exchange. Data were also merged with market maker quote data to conduct a comprehensive study on how market makers reacted to investor activity.

During this type of engagement, our expert consultants will work with your firm to evaluate the cybersecurity safeguards currently in place as well as which investment adviser cybersecurity policy practices and safeguards fall short of industry standards or fail to meet regulatory requirements. This type of assessment is performed through interviews with key members of the staff, a virtual or physical facility walk‐through, document reviews, etc. The assessment results in a deliverable to your firm, describing gaps between operations and regulatory requirements and industry standards, as well as the potential risks associated with each gap. The report provides a list of recommended actions needed to close gaps in a firm’s cybersecurity policy and practices and reduce risk to a level deemed acceptable by the client

This type of engagement measures the ability of your firm’s technical infrastructure to withstand an attack launched by someone seeking to undermine the security of the systems or any data stored within them. During this type of assessment, security engineers use a variety of technical tools coupled with manual testing techniques to discover, describe and test weaknesses in the system. The result of this type of testing is a technically detailed report that documents vulnerabilities and weaknesses that could be exploited to compromise the confidentiality, integrity or availability of a firm’s systems and data. Our deliverable contains detailed technical proofs of concept and, like all our reports, recommended steps that should be taken to eliminate vulnerabilities and reduce risk

The documentation of a thorough cybersecurity policy and a complete set of procedures is essential to maintaining a robust cybersecurity program and demonstrating compliance. Working with your firm, our team of experts can craft cybersecurity policies, operating manuals, or provide an investment adviser cybersecurity policy template describing the steps that staff need to take to protect your confidential data and support regulatory compliance.

Staff training is a critical component of a healthy cybersecurity program. Our team will work with your firm to provide cybersecurity training that covers industry standards and will help them understand critical areas of risk so they can implement appropriate processes. The training is designed to enhance your team’s overall understanding of your investment adviser's cybersecurity policy and security best practices as well as threats to your environment.

All Registered Investment Advisers (“RIA”) are required to have a compliance program that addresses certain regulatory requirements; written policies and procedures, designated chief compliance officer, annual program review, as well as other elements. The effective administration of an RIA's compliance program is challenging.

Bates Compliance’s Annual Compliance Program Support provides the following core services:

• Annual Updating Amendment
• Annual program review
• Annual compliance meeting
• Compliance program calendar
• Policy and procedures manuals and Code of Ethics (initial drafting or editing/review of existing documents)
• Regulatory filings (13F, 13H, U4, U5)
• Block of general consulting hours

This service assists the RIA with the administration of their compliance program. The core annual support services are designed to help address the main elements of a compliance program. It does not include the performance or testing of any specific compliance policy or procedure tasks. Bates provides additional tailored services to be added to the core services depending on a RIAs needs, and clients have the option of adding in those activities which would be identified and scoped separately as a service. 

All SEC-Registered Investment Advisers (“RIAs”), as well as those engaging in established best practices, are required to perform an annual review of the firm’s Compliance Program. Bates will conduct the SEC required Annual Review to test and assess the adequacy and effectiveness of your policies and procedures, fulfilling the requirements under Rule 206(4)-7 of the Investment Advisers Act of 1940. Although the rule requires only annual reviews, advisers should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments. 

A Bates Annual Review Consists of:

• Introduction and Initial Firm Review
• RIA Document Request
• Analysis, Interviews, and Follow-up Requests
• Report Drafting
• Delivery of Report and Exit Interview

This service is available for a wide range of clients, from small, one-member firms to the largest in the industry. Bates can scale to deliver a review consistent with the complexity of your RIA business model. Bates annual review report will help RIAs identify areas of weakness and provide recommendations for improvements. Whether you desire a third-party review perspective occasionally or establishing an ongoing review relationship with someone who knows your RIA business model, the Bates Annual Review service is tailored to your needs.

Regulatory registration is determined by several factors depending on a firm’s business model, assets under management, location of firm and clients, and type of investment offering. Before providing investment advice and receiving compensation, it is critical that a firm operate with the appropriate registration.

Bates Compliance provides the following registration services:

• Initial Firm Registration (SEC or State)
• Exempt Reporting Adviser Registration
• Transition Registrations -- State to SEC, SEC to State, ERA to SEC

All Registered Investment Advisers (“RIAs”) are subject to examination by their regulatory authority (state securities division and/or the SEC). Bates helps clients prepare for a regulatory examination and supports them in addressing any deficiencies reported as the result of an exam.

Our Mock Regulatory Exam service provides firms the opportunity to experience a dry run of the examination experience. The examination follows a routine regulatory exam process with periodic evaluation points to help RIAs assess their preparedness.

Bates Compliance will, generally, conduct this mock exam under the following stages:

• Introduction and Initial Firm Interview (presentation)
• Evaluation of Firm Interview
• Mock Exam Document Request
• Evaluation of Firm’s Document Production
• Personnel Interviews (examine like interviews of select RIA personnel)
• Evaluation of Personnel Interviews
• Exit Interview and Summary of Preparation Recommendations

This is a preparatory service for RIAs wanting to test their readiness for a regulatory examination. Clients have the option of adding on an analysis of business activities or the adequacy or testing of policies, procedures, or practices contracted as separate services. In the wake of an actual regulatory exam, Bates can assist in analyzing the results and remediating any findings.

Annual Updating Amendment (AUA)

All Registered Investment Advisers (“RIAs”) are required to file their Annual Updating Amendment (“AUA”) within 90 days after their fiscal year end. Bates Compliance assists our clients in the following ways:

• Review the RIA’s client base to confirm firm registrations and notice filings are made in the appropriate jurisdictions.
• Review Preliminary and/or Final Renewal Statement to confirm adequate funding is available in the RIA’s account.
• Update the RIA’s Form ADV 1, ADV 2A, Form CRS (if applicable), ADV 2Bs and other documents as needed through communications with and data provided by the RIA.
• Upload/Submit all required documents via the IARD Portal.

This service assists RIAs with all required updates to various filing documents. New registrations in additional jurisdictions, IAR registration, or writing new regulatory disclosure content, are distinct from the AUA program, and may be added as a separate service.

Form U4:

Representatives of investment advisers must be registered with the appropriate jurisdictions and/or self-regulatory organizations (SROs). The Form U4 (Uniform Application for Securities Industry Registration or Transfer) is used to establish that registration. FINRA, other self-regulatory organizations (SROs) and jurisdictions use the Form U4 to elicit employment history, disciplinary and other information about individuals to register them.

Bates will prepare a draft of Form U4 based on information provided by the RIA/IAR and submit the registration.

Registered individuals are under a continuing obligation to update changes to information required by Form U4 within a specified amount of time by filing an appropriate amendment, as prescribed in the FINRA By-Laws. Bates can assist with the application of those requirements and submit the updated filing(s).

Form U5:

Form U5 is the Uniform Termination Notice for Securities Industry Registration. Investment advisers must use this form to terminate the registration of an individual in the appropriate jurisdictions and/or self- regulatory organizations ("SROs"). A Form U5 must be submitted within 30 days of the individual’s employment end date and generally must be filed electronically. Firms are also required to provide the individual with a copy of their Form U5 within 30 days.

Bates can assist to draft and file the Form U5, as needed for individual registration termination.

Form 13F:

Registered Investment Advisers ("RIAs") with investment discretion of over $100 million or more of equity securities that trade on an exchange (Section 13(f) securities) must report those holdings quarterly by filing a Form 13F. The Official List of Section 13(f) Securities shows the securities that firms must report on Form 13F. The list is published quarterly. 

Bates will prepare and submit the Client’s Form 13F including:

• Identification of qualified securities
• Multiple manager reporting
• Preparation of XML Information Table
• Submission of XML Table on EDGAR

This service assists the RIA with identifying, uploading, and submitting reporting data. It does not include evaluating an RIA’s holdings.

Registered Investment Adviser (“RIA”) compliance programs will at times need resource assistance or added expertise. Whether it is a change in compliance program personnel, changes in the business, or application of regulatory requirements, RIAs may need temporary assistance - Bates Compliance can help.

Bates Compliance provides “As-Needed” compliance program support on a project or hourly basis, including:

• Vendor Due Diligence
• Business Continuity Plan Development 
• Compliance Program Training
• Marketing and Advertising Reviews

This is a temporary service to support a RIA’s periodic need for assistance with compliance program administration. Each service includes a statement of work and is engaged as a project with an estimated beginning and end date. Bates consultants and our subject matter expert affiliates can provide experience in the many areas of regulatory compliance.

Registered Investment Advisers (“RIA”) may desire a third party or an Independent Compliance Consultant (ICC) to help remediate a compliance violation or program deficiency. These reviews may be the result of an internal audit finding, in anticipation of a regulatory action, or in response to a regulatory proceeding. Due to the nature of an independent compliance consultant review, they may be performed through a firm’s outside counsel and/or as prescribed by a regulator. 

Many Bates consultants and experts are former regulators and are very familiar with regulator expectations.

Bates will, depending on the specifics of the circumstance or regulatory order, conduct this review consisting of the following stages:

• Introduction and Initial Review of the Violation
• Request and Analysis of Related Documentation
• Interviews with Relevant Parties
• Drafting of Report
• Delivery of Report and Remediation Recommendations

This service is generally in response to a specific program weakness, deficiency, or violation. For ICC’s involving regulatory orders, they typically include an initial review with a follow up review a year later. An ICC performed under a regulatory order results in a review report with remediation recommendations that is provided to both the RIA and the regulator. For non-regulatory ICC’s, the review and report is typically coordinated through the firm’s outside counsel.

Bates may involve other practice areas (such as our Data Analyses and Analytics) as well as our Bates subject matter expert affiliates to provide particular experience to the review service.

All Broker-Dealers (“BDs”), as required by FINRA Rule 3120, are required to review & test annually, their system of supervisory procedures and internal controls. This is a review to ensure the adequacy and effectiveness of the compliance controls and to provide a summary of the test results and significant identified exceptions. The review will also consider rule changes, as well as recently regulatory developments.

This, generally, includes an evaluation of the following:

• Has the firm designated one or more principals who are responsible for the establishment, maintenance, and enforcement of a system of supervisory control procedures that:
  • Test and verify that the firm’s supervisory procedures are reasonably designed with respect to the activities of the firm and its associated persons to achieve compliance with applicable securities laws and regulations?
  • Provide a summary of the test results and significant gaps found; and
  • Create additional or amend supervisory procedures where the need is identified by such testing and verification.

Bates Compliance will supplement the documents reviewed with interviews with key personnel to ensure that the written report accurately reflects firm practices. Upon completion of the review, Bates will create a written report for management that includes the required CEO certification.

FINRA Rule 3310 requires that Broker-Dealers (“BDs”) conduct independent Anti-Money Laundering (“AML”) program testing on a calendar year basis or more frequently if circumstances warrant. The independent testing must be conducted by a person with working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations. 

Bates independent AML review is designed to meet the requirements of FINRA Rule 3310, the Bank Secrecy Act, and the USA PATRIOT Act.

Bates assessment of the adequacy and effectiveness of the AML Program will include a review of the following:

• AML Program Governance
• Key personnel experience
• A sampling of Know Your Client (“KYC”) information
• A review of the firm Customer Identification Program (“CIP”)
• OFAC/SDN sanction list screening
• Transaction monitoring and surveillance
• Suspicious Activity Reporting (“SAR”)
• Employee Training

Upon completion of the review, a written report will be provided that details Bates’ observations and recommendations for improvement, where applicable.

The Exchange Act requires that any Broker-Dealer (“BD”) effecting securities transactions by means of interstate commerce be registered.  BDs are subject to regulation by the SEC, FINRA and any other Self-Regulatory Organization (“SRO”) in addition to the states where they do business.  Unless a registration exemption is available, state laws require registration of any BD doing business from or with residents of their state and the representatives doing business within the state. 

Bates Compliance will aid in the drafting and submission of all required documents to register as a Broker-Dealer. Bates takes a holistic approach to the registration process by first working with your firm to design, create and implement the BD’s supervisory program prior to completing registration. FINRA will expect the firm is meeting all the regulatory requirements upon approval.

The BD will receive upon completion a host of various documents that include, but are not limited to:

• Reserve the name of the BD with FINRA
• Prepare Super Account Administrator Entitlement Form
• Member Firm FINRA Contact Form
• Provide a list and samples of all documentation required to file form NMA (New Member Application)
• Provide the project plan for the BD registration process
• Schedule regular calls to review the progress of the project plan
• Develop financial requirements, initial deposit, and funding process
• Prepare FINRA Form NMA and all required documentation
• Assist in preparation of the Business Plan and the Business Continuity/Disaster Recovery Plan
• Prepare Written Supervisory Procedures
• Prepare the Continuing Education Needs Analysis and Training Plan
• Assist with development of Anti‐Money Laundering Procedures
• Identify required experience and licensing requirements, based on the business model
• Prepare and submit Forms U4 for Principals
• Prepare and submit Form BD
• Prepare and submit Form BR
• Assist in preparation of the initial fidelity bond application
• Prepare Principals for FINRA’s pre‐membership interview
• Attend FINRA’s membership interview (If desired)
• Prepare and submit state applications, as requested

Bates may involve other practice areas as well as our subject matter expert affiliates to provide particular experience to this service.

Broker-Dealers (“BDs”) must conduct a review of its Office of Supervisory Jurisdictions (“OSJs”) and non-OSJ branches that supervise non-branch locations at least annually. All non-supervising branch offices must be inspected at least every three years. All non-branch offices must be inspected periodically depending on the nature and complexity of the branch’s business, volume of business, and number of associated persons assigned to the branch.

Bates branch inspections includes verification of policies and procedures related but not limited to:

• Safeguarding of customer funds and securities
• Maintaining required books and records
• Supervision of supervisory personnel
• Transmittal of funds or securities
• Changes in customer information
• Transaction review and reporting
• Sales practices
• Advertising and other communications
• Client complaints
• Cybersecurity

An inspection report will be produced that summarizes the findings and provides recommendations, if applicable. If a firm is utilizing an audit platform (e.g., RegEd AuditTrax), Bates will use the firm platform.

Bates Compliance may involve other practice areas as well as our subject matter expert affiliates to provide particular experience to this service. 

Broker-Dealer (“BD”) compliance programs will at times need resource assistance or added expertise. Whether it is a change in compliance program personnel, changes in the business, or application of regulatory requirements, BDs may need temporary assistance.

Bates provides “As-Needed” compliance program support on a project or hourly basis for various program needs such as, but not limited to:

• Providing interim support for vacant compliance department positions
• Creating, updating, or reviewing compliance program related documentation:
  • Written Supervisory Procedures
  • Business Continuity Plans (“BCP”)
  • Anti-Money Laundering Program
  • FINRA applications and reports
  • Client notices and applications
• Performing marketing and advertising reviews
• Performing other tailored supervisory procedure reviews and testing
• Developing and delivering compliance related training
• Supporting vendor due diligence activities
• FINRA examination support

This is a temporary service to support a BD’s periodic need for assistance with compliance program administration. Each service includes a statement of work and is engaged as a project with an estimated beginning and end date. Bates consultants and our subject matter expert affiliates can provide experience in the many areas of regulatory compliance.

Keeping investment advisers up‐to‐date on Rules and Regulations is a crucial part of maintaining a robust compliance culture. Bates Compliance and Regulatory Alerts provide firms with keen insights on what is changing and what they can do to stay compliant.

In a well-publicized bankruptcy involving a broker-dealer, we managed millions of data points across competing databases. With our IT team and in-house programmers, we efficiently searched each database and succeeded in tracing the movement of the firm’s assets under management (customer funds) in the weeks prior to  bankruptcy. In turn, this enabled our team to identify and illustrate when assets had been used inappropriately.

In another matter, the compliance department of a major broker dealer retained us to investigate allegations that an individual financial advisor was “parking” stock purchases in customer accounts, only to cancel these trades and move them to his personal account when the stocks went up. By analyzing internal trade correction records, error reports, trade confirmation slips, time and sales reports, and email correspondence, we quickly identified and documented each unauthorized transaction, allowing our client to promptly resolve this investigation.

Bates is also available to assist you in creating and auditing your AML policies and procedures and meeting your annual AML certification requirements, and our Internal Investigations team can quickly assist you in investigating suspicious activity.

These cases often begin with simply trying to piece together what happened within the account.  Knowing how different types of derivatives behave, and being able to identify a strategy when it is in place, is crucial to these matters. Our team includes professionals who have practical knowledge of all types of derivative products and trading strategies, and includes individuals who have previously held regulatory roles governing these types of accounts.

The simplest of these derivative strategies involves writing naked puts, in which the seller of the put option does not have an existing position in the underlying entity. As a result of general declines in equity markets beginning in 2008, these previously successful strategies suddenly turned into large losses. Often, the positions were rolled forward into more contracts at higher prices, delaying the occurrence of losses within the account. 

Bates conducted statistical analysis to determine the likelihood that the underlying asset would experience declines of the magnitude seen during that time period, and then combined these probabilities with the characteristics of the put option (time to expiration, moneyness at issuance, premium received) to determine a probability weighted expected profit from each trade.  Our understanding of the intent behind different strategies enables us to produce innovative analyses which capture an ‘a priori’ view of each investment.  When a major Wall Street firm was left with massive exposure as a result of naked put writing in one set of accounts, Bates was able to analyze the account records and locate additional assets to meet the liabilities generated by the put writing.

The 2008 Credit Crisis severely impacted investors’ views of structured products. In assessing structured products cases, it is important to stress several key facts: these products were not designed to fail and presumably were added to client portfolios only after a careful suitability analysis of the client’s investment objectives. In short, the fact that a security or product is “structured,” let alone declined in value, does not mean it was ill-advised or unsuitable.

Bates Group has a long history of analyzing structured products and the role they may play in investors’ portfolios. We begin by searching our proprietary database to review product prospectuses and the precise mechanics of each product’s design. Next, we model how the security performs in relation to the underlying assets. This allows us to accurately analyze complex hypotheticals, including, for example, how investing in the underlying asset itself versus the structured product would have impacted investment performance. It also allows us to accurately assess the impact of declines in credit quality and decisions made by investors during the life of the investment. Just like all structured products, leveraged ETFs can play an important role in an investor’s portfolio, and it is essential to analyze ETFs from this perspective, taking due notice of recent guidance from FINRA regarding these securities.

Bates has extensive experience in bringing our substantial market expertise to bear on topics that require a higher level of understanding of markets themselves. Claims related to insider trading, collusive trading strategies, and market and price manipulation often require a trained eye to locate. Because our experts are seasoned market participants from major investment banking and financial institutions who have been responsible for sales and trading of numerous asset classes, we can provide the sophisticated analytical look these types of cases require. Our experts have participated in all aspects of securities and derivatives creation, production, underwriting, syndication, marketing and trading. They have also worked closely with issuers, underwriters, institutional and individual investors, and have created and monitored portfolios, measured risk and acted as market makers.    

In the context of market-related claims, we have been asked to review the activities of the parties involved as to: collusive trading, price manipulation, spreading of rumors in the marketplace (and the effects of those rumors on securities prices), the use of Credit Default Swaps to influence market prices, effects of shorting securities, the effects of dissemination of research on the marketplace, and the abuse of media and its influence on securities markets.

Our experts are also able to examine and testify on topics including:

• General Market Practices
• Trading Strategies
• Trade Execution
• Securities Pricing and Reporting
• Manipulative Trading
• Day Trading
• Churning
• Secondary Trading
• Proprietary Trading
• Unauthorized Trading
• Rule SHO Violations
• Hedging Practices
• Definition of Market Maker
• LSTA Practices
• Hedge Funds
• Broker Operations
• Asset Allocation
• Suitability
• Fiduciary Responsibilities
• Due Diligence
• Supervisory
• Roles and Responsibilities
• Wrongful Dismissal
• Sales Practices
• Marketing
• Disclosure
• Trading Operations
• Trade Clearing
• Trade Settlement
• Trade Documentation
• Margin
• Collateral, Swap Contracts
• Derivatives
• Structured Products
• Structured Settlements
• TIC Investments
• Auction Rate Securities
• Asset Backed Commercial Paper

Our Standard Analysis has been designed to offer maximum flexibility to our clients in generating additional schedules that speak to the specific issues at hand in a given case.  Two of our supplemental schedules that are most regularly requested speak to damages, or the mitigation of damages, as it relates to account performance.  They are hypothetical analysis and standstill analysis.  Both answer relatively straight forward questions, but with a degree of mathematical precision that allows all parties involved to use concrete numbers when talking about damage related issues of the case.  

Our hypothetical analysis matches the cash inflows and outflows that occurred in the accounts with an investment in 'something else' in order to come up with comparable performance data over the same time period.  Allegations will often center around the idea that the client 'should have been invested in something else'.  The 'something else' can be anything from a specific bundle of securities, to broad indices, to mutual funds, and our hypothetical analysis allows us to say in real terms (using the clients actual behavior) what their investment performance would have been and compare that to the actual account performance. Hypothetical analyses can also be used to pinpoint specific points in time where an account may have deviated from its prior performance, which can be helpful in mitigating damages down to only a certain period, with the client agreeing that prior performance was acceptable to them.  

Our Standstill Analysis is another frequently requested supplemental schedule that provides insight into how a group of securities would have performed had the securities remained in an investor’s account and not been sold or transferred away. Often times allegations center on the poor performance of securities that were transferred away from an account, and knowing their current value is invaluable to determining the extent of damages assessed.  Conversely, clients will allege that they were advised to sell a security which has since outperformed the market.  Bates can help you analyze the impact of this decision, for a single security or across groups of securities, at multiple points in time.  A Standstill Analysis will help you determine the precise effects upon the ultimate performance of an account based upon an investor’s decisions to follow or ignore his or her investment advisor’s recommendations related to selling or holding securities.

There are many other offerings in our supplemental reports category, including margin analysis, A vs B mutual fund share comparisons, risk analyses (using standard deviation, Beta, or other measures), trading activity charts, and client communication flow charts.  With over 30 years of industry experience, we've created reports that can help analyze most situations, and we are confident in our ability to create new ones as demanded by a particular case or new issue.

Bates Early Case Assessment allows your company, or your client, to benefit from our experience. In many cases, while the issue may be new to the company seeking our services, we may have consulted another financial institution on the same issue before. We provide guidance to our clients on how to resolve these matters, as well as insight into what other actions were generated (an arbitration, regulatory investigation, etc.) by the issue (or similar issues).

Should the complaint progress into an arbitration proceeding or a regulatory investigation, having already used Bates for early case assessment will be a substantial benefit during the life cycle of your legal matter. Having the consultant or expert’s viewpoint early on, and any analysis or narrative work that we have already performed, can be used and built upon, in the subsequent proceedings. Knowing the facts, and having numbers on hand, can provide great value in successfully resolving complaints and subsequent actions.

Retained on behalf of the regulatory division of a major broker/dealer to respond to an SEC inquiry that focused on the investments in a group of mutual funds. Spanning 30 funds that were traded across 1,200 accounts, we traced the P/(L) on the 1,000+ purchases that were at issue. Allocating the trading and account transfer activity between those purchases/sales which were at issue (as opposed to those which were not) proved to be the paramount task. With the assistance of our in‐house programming team and the use of our proprietary programs, we were able to successfully navigate through the hundreds of thousands of lines of transactions to ultimately arrive at a clear and concise summary with which our client was able to respond.

Retained to assist inside counsel of a large independent broker‐dealer and RIA custodian to respond to a State regulatory inquiry related to annuity switches. We assisted counsel by providing an independent review of each annuity switch and providing an analysis of hypothetical contract value and living benefits assuming the original contract had continued to be in force and not exchanged.