RIA Compliance BlogThe Securities and Exchange Commission recently proposed a new rule, Regulation E-Delivery, that looks to broaden the ability of financial industry professionals to deliver required compliance and regulatory information and documents to clients and proposed clients. If adopted, the proposed rule would modernize the regulatory framework by superseding the SEC’s current guidance for e-delivery while providing new requirements and conditions for electronic delivery. Continue reading ›
Articles Tagged with Investment Adviser
First Circuit Ruling Gives SEC Victory in Long Fought Case
Earlier this month, the United States Court of Appeals for the First Circuit issued a unanimous decision upholding a circuit court’s ruling in SEC v. Navellier & Associates, Inc.[i] This ruling granted the SEC summary judgment finding that Navellier & Associates, a Nevada based investment adviser, violated Section 206 of the Adviser’s Act.
For the past ten years, we have written about a series of SEC enforcement actions centered around the advertisement of performance returns tied to F-Squared, previously the U.S. largest marketer of ETF-based index products. The F-Squared and related cases not only established the SEC’s position regarding the publication of performance advertising but also recognized an investment adviser’s fiduciary duty when adopting statements made by third parties in advertisements. The SEC’s positions were codified under the new Marketing Rule adopted in 2021.
SEC Announces Examination Priorities for 2024
The Securities and Exchange Commission (SEC) recently released the 2024 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers, investment companies, and broker-dealers during the coming year.
As more advisers have returned to the office, the SEC has ramped up its in-person examinations while also leveraging technologies and virtual options to increase the efficiency of the examination program. Going forward, many advisers may experience a blend of in-person and virtual portions of an examination.
For FY24 examinations, the SEC will place a significant focus on how advisers abide by their duty of care and duty of loyalty under their fiduciary standard. Under this focus, the SEC will place an emphasis on (1) the advice provided to clients for complex or illiquid products, (2) the adviser’s process for ensuring that advice is provided in the client’s best interest, (3) how the adviser addresses conflicts of interests, including economic incentives, and (4) how disclosures are made to clients and prospective clients regarding all materials facts necessary for the clients to make informed decisions. Continue reading ›
SEC Provides Details on RIA Examination Program and Process
The SEC’s Division of Examinations recently released general guidance, in the form of a Risk Alert, for how the registered investment adviser examination program operates, how examination targets are selected, and how the scope of examinations is determined.
With over 15,000 investment advisers registered with the SEC, the SEC has developed a risk-based approach for determining what investment advisers are selected for examination and the depth of the subsequent exam. This risk-based process has allowed the SEC to examine approximately 15% of the registered investment adviser population over the last few years, even as the population of SEC registered has increased by 13% over the last three years.[1]
SEC Announces What to Expect for Newly Registered Investment Advisers
The SEC’s Division of Examinations recently released their Observations from Examinations of Newly-Registered Advisers. Issued as a Risk Alert, the release provides guidance for what investment advisers new to SEC registration should expect, but also warns were previously examined advisers failed to meet the SEC’s expectations.
The SEC typically initiates an examination of new-to-SEC registration investment advisers within the first year of registration. In our experience, this can occur as soon as six months after the registration is approved. The purpose of these examinations is as much informative as it is about enforcing the securities regulations. In the SEC’s own words, “[s]uch examinations allow the staff to: provide advisers with information about the Division’s examination program, conduct preliminary risk assessments, facilitate discussions regarding the advisers’ operations and risk characteristics, and promote compliance with applicable statutes and regulations.”[1]
Investment Advisers and the Annual Updating Amendment Process
For the majority of investment advisers registered with either the SEC or state regulators, annual updating amendment season is once again upon us. Advisers whose fiscal year ends on December 31 are required to file their Form ADV annual amendment within 90 days or by March 31, 2023.
While investment advisers are under a continuing obligation to update their disclosure documents when certain or material information becomes inaccurate, the annual update is a universal requirement designed to ensure that the filing information for investment advisers is up to date. This serves an important function in that it allows clients and potential clients to review the publicly filed ADVs for investment advisers on FINRA’s BrokerCheck and the SEC’s IADP. Additionally, regulators review the filings and the underlying analytics to track industry trends, plan examination targets, and conduct regulatory sweeps.
SEC Proposes Rule on Third Party Service Providers
On October 26, 2022, the Securities and Exchange Commission (“SEC”) proposed a rule that would prohibit investment advisers from using certain third party service providers without additional due diligence and monitoring.
The proposed rule provides an oversight framework for investment advisers designed to ensure that any “covered functions” outsourced to third parties are consistent with the adviser’s obligations to their clients. A “covered function” is a function or service that is necessary to provide investment advisory services in compliance with Federal securities laws, and if the service is not performed or is performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or advisory services.
Colorado Releases Guidance for Financial Planners
For the past several years, regulators at both the federal and state levels have placed a greater emphasis on the advisory fees charged to retail clients and how those fees are calculated and disclosed. We have previously written about these efforts publicized through Risk Alerts, Exam Priorities and Observations, and Staff Bulletins. Recently, the Colorado Division of Securities published an Ongoing Financial Planning Guide that articulated its concerns regarding investment adviser firms that provide continuous financial planning services.
The Colorado Division of Securities stated that it has encountered a growing trend in which investment advisers provide on-going financial planning rather than the traditional hourly or one-time fixed fee models. Under the on-going financial planning arrangement, investment advisers theoretically take a greater role in implementing financial plans, assisting clients with day-to-day financial decisions, updating financial plans, and making themselves available to the client as needed.
Compliance concerns regarding financial planning have traditionally focused on the disclosure of services and fees, including how and when the fees are charged, whether collecting fees in advance triggers custody concerns, and whether collecting fees in advance create a refund obligation. Colorado’s Guidance continues highlighting these areas of focus and expands what it considers to be best practices.
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SEC Releases Staff Bulletin for Account Recommendations
The Securities and Exchange Commission (SEC) recently released a Staff Bulletin regarding the Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors. Since the adoption of Regulation Best Interest, or Reg BI, in 2019, the SEC has issued guidance and best practices for adoption of the policies and procedures expected for compliance with the regulation. We have previously written about the best interest standard applied to retirement rollover recommendations and the SEC’s announcement of the first enforcement case being filed under Reg BI.
The Staff Bulletin, presented in a Q&A format, provides the SEC’s views on how financial professionals can fulfill their obligations to retail investors when making account recommendations. The obligations discussed include the applicable standard for making account recommendations, factors to consider when making account recommendations, how and when cost is a factor, retirement rollover considerations, client account preferences, and developing and implementing a compliance plan reasonably designed to address Reg BI.
While Reg BI and the investment adviser fiduciary standard differ, the SEC points out that both standards require an account recommendation to be in the client’s best interest and prohibits an investment adviser from placing its interest ahead of a client’s interest. Additionally, the SEC states that a firm that does not evaluate sufficient information about a retail investor, it will not have the ability to form a reasonable basis to believe its account recommendations are in the retail investor’s best interest.
Massachusetts Adopts New Rules Mandating Additional Written Fee Disclosure by RIAs
The Massachusetts Securities Division (“MSD”) has announced the adoption of new rules requiring that investment advisers registered with the MSD provide, to clients and prospective clients, an additional one-page stand-alone disclosure document specifically detailing the adviser’s fee schedule. This new disclosure document or “Fee Table” will need to be “updated and delivered consistent with the existing requirements for Form ADV (including the Brochure).” The new rules, which were adopted pursuant to the MSD’s notice and comment process, take effect—and will be enforced—commencing on January 1, 2020.
While only applicable to advisers registered with the MSD, the new rules requiring the Fee Table could portend similar future action by additional states. Moreover, the new rules come on the heels of the SEC’s June 5th high profile standard-of-conduct releases (which we have previously chronicled) that also include a new stand-alone disclosure document for SEC-registered advisers to be known as Form CRS. If the MSD’s actions here are in fact echoed by additional states, it could cause potential headaches for the RIA industry, as this would require RIAs operating in multiple states to conform to multiple differing disclosure document regimes. Additionally, with the new Form CRS (applicable to SEC-registered advisers only) beginning to circulate at about the same time, an assortment of new documents being presented to clients may cause marketplace confusion as well. Continue reading ›