What’s the latest news in the world of regulatory compliance? Welcome to our biweekly recap, where we are giving you our report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser (RIA) compliance and regulatory issues. This week’s recap focuses on marketing documents requested by the SEC during examinations, the results of an SEC vote on the fund names rule, firm classification, the custody rule plan, and succession planning.
Here are our top investment adviser compliance articles for the week of Sept. 22, 2023:
SEC expands rule to ensure fund portfolios match their names (Author – Mark Schoeff Jr., Investment News)
The SEC has voted to expand the fund names rule, ensuring investment fund portfolios align with their labels, but with less stringent criteria for environmental, social and governance (ESG) factors than initially proposed. The amendment requires funds to invest 80% of assets in line with their label’s focus, broadening its application to more funds and investment themes like “growth” or “value” and ESG. The rule aims to enhance investor clarity amidst numerous funds on the market. Funds must periodically review compliance and have a grace period to realign investments. The rule combats “greenwashing” but allows ESG alongside other criteria. It becomes effective in 60 days, with varying compliance timelines based on fund size.
8 Marketing Rule Documents the eEC Requests During Exams (Author – Melanie Waddell, Think Advisor)
Advisers should be attentive to a recent SEC Risk Alert detailing document requests during examinations, with a focus on the Marketing Rule. The SEC recently charged nine investment advisers for advertising hypothetical performance without adhering to the Marketing Rule, resulting in penalties, which included on firm being fined over $1 million for misleading advertisements. The Investment Adviser Association urged the SEC to publish document request lists for compliance assessment. The SEC Division of Examinations has now done so, enhancing transparency. However, the broad nature of document requests may pose challenges. Greater transparency is expected to aid advisors in strengthening their compliance programs.
IAA: Use headcount, not AUM, to classify small firms (Author – Staff Report, Financial Planning)
For regulatory purposes, the Investment Adviser Association (IAA) argues that advisory firms should be considered “small” if they have 100 or fewer employees, a departure from the current criteria used by federal regulators. Currently, the SEC defines small investment advisers as those with less than $25 million in assets under management and less than $5 million in assets on their balance sheet. According to the IAA, this definition excludes the majority of firms. They propose that considering firms small if they have 100 or fewer employees would encompass 92% of registered firms. The IAA also asserts that smaller firms are disproportionately burdened by new regulations, lacking resources and in-house personnel for compliance and cybersecurity.
Trade Groups Plead With SEC to Rethink Custody Rule Plan (Author – Melanie Waddell, Think Advisor)
Over 26 trade groups, including the Securities Industry and Financial Markets Association, Financial Services Institute, and Investment Company Institute, have urged the SEC not to proceed with its Safeguarding Advisory Client Assets proposal in its current form. They emphasized that the SEC should first gain a better understanding of the existing custodial framework. The proposal, which aims to expand the adviser custody rule to cover all client assets, including cryptocurrencies, has raised concerns. The trade groups called for careful evaluation and potential revisions to address shortcomings without altering the entire framework. They stressed that substantial changes should involve a withdrawal and re-proposal to ensure public feedback and maintain market integrity.
Navigating RIA M&A With a Focus on Succession Planning (Author – Craig West, Wealth Management)
Many RIA firms are facing a lack of business succession and exit plans as their owners approach retirement. This poses a significant challenge as these businesses heavily rely on the owner as the primary adviser and rainmaker. Mergers and acquisitions (M&A) have become common in the RIA space, with consistent growth in transactions. However, addressing succession planning is essential, as simply merging firms doesn’t solve the issue of aging advisers. Establishing a corporate structure, implementing a management succession plan, creating an equity ownership plan and developing a strategic financial model are crucial steps to ensure a secure future for RIAs. Additionally, having a well-defined business succession and exit plan is essential as generations retire from the RIA industry.
Check out our previous round up, which focused on a roadmap for SEC examinations, reactions to the DOL’s work on a new fiduciary rule, implications of SEC rulemaking, NASAA’s Exam Validity Extension Program and challenges faced by breakaway RIAs.