Each Friday, we are giving you our weekly 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 three industry trends that affect advisers, the Securities and Exchange Commission’s (SEC) warnings about firms’ noncompliance with new marketing rule, five rules the SEC intends on adopting this year, responses to the SEC’s new cybersecurity rule and the Department of Labor’s (DOL) recent announcement of a new fiduciary rule.
Here are our top investment adviser compliance articles for the week of Jun. 16, 2023:
3 Tech-driven industry trends advisers already face (Author – Elijah Nicholson-Messmer, Financial Planning)
During the INVEST 2023 conference in New York, Samuel Deane, CEO of Deane Wealth Management, and Wilbur Swan, CEO of Catchlight, highlighted the current impact of technological disruptions on wealth advisers. They emphasized the changes that impact advisers and encouraged advisers to embrace automation and stay ahead of industry shifts. These changes include:
- Increased focus on client relationships.
Technological advancements, such as artificial intelligence, are allowing financial advisers to devote more attention to building and nurturing client relationships.
2. Virtual consultations across the country.
Technology enables wealth advisers to connect with clients virtually, regardless of geographical location. This removes traditional barriers of distance and expands the reach of advisers beyond their local areas.
3. Democratization of investment strategies.
Automation and technology are leveling the playing field by making sophisticated investment strategies accessible to a wider range of clients.
SEC reiterates warnings on marketing rule (Author – Patrick Donachie, Wealth Management)
The SEC is emphasizing its focus on ensuring advisers comply with regulations when using client testimonials, as highlighted in a recent risk alert. The alert comes as examiners have observed deficiencies in this area.
The rule outlines guidelines for the use of testimonials, endorsements and portfolio performance metrics in adviser advertising. The risk alert stresses the need for “reasonably designed” policies for testimonials and endorsements, including proper disclosures and avoiding compensation of ineligible persons. Advisers may face challenges in providing disclosures related to client status, compensation and conflicts. Soliciting reviews on platforms like Yelp and Google Reviews without proper disclosure mechanisms can be risky for firms. Additionally, advisers have limited recourse if reviews contain untrue statements.
The SEC has indicated that it may pursue significant charges rather than issuing small fines for noncompliance.
5 Big rules the SEC plans to finalize this year (Author – Melanie Waddell, Think Advisor)
The SEC is set to finalize several controversial rules by the end of the year, as indicated in their Spring 2023 regulatory flexibility agenda. Despite industry pushback, the SEC is determined to move forward with the following rules:
- Safeguarding Advisory Client Assets
- Investment Company Names
- Private Fund Advisers and Documentation of RIA Compliance Reviews
- Climate Change Disclosure
- Money Market Fund Reforms
These rules, if adopted as proposed, will have significant impacts on investment advisers, their clients, service providers and the markets.
Additionally, the SEC plans to address conflicts of interest related to artificial intelligence and machine learning through proposed rules for advisers and broker-dealers. While the regulatory agenda may be subject to change, the SEC aims to issue the final rules in October of this year.
SEC’s new cyber rule plan needs changes, trade groups say (Author – Melanie Waddell, Think Advisor)
The SEC’s proposed cybersecurity rules will require broker-dealers, investment advisers and asset managers to notify individuals affected by specific data breaches that could potentially lead to identity theft or other harm. The rule would also require financial firms to inform breach victims promptly, enabling them to take necessary actions to protect themselves. Additionally, covered firms would be obliged to notify customers of potential breaches, alongside existing state or federal notice requirements. The plan also strengthens regulatory standards by mandating written policies and procedures to detect and respond to unauthorized access or use of customer information.
The SEC’s plan, which aims to update Regulation S-P, received comments from various organizations before the comment period ended. Better Markets supports the proposal, emphasizing the importance of prompt notification to mitigate potential harm. Industry groups, such as the North American Securities Administrators Association and the Financial Services Institute, have submitted comment letters with suggestions for improvements. They recommend an extended implementation period for compliance and adjustments to certain notice obligations, such as the timeline for providing customer notice.
New DOL fiduciary rule coming in August (Author – Melanie Waddell, Think Advisor)
The DOL has announced a new fiduciary rule will be released in August, as stated in its regulatory flexibility agenda. Lisa Gomez, the assistant secretary of Labor for the Employee Benefits Security Administration, emphasized the importance of this rule, mentioning that the rule aims to reflect changes within the industry, address challenges faced since 2016 and propose updated regulations for defining fiduciaries providing investment advice for a fee.
The amendment “would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest,” Labor’s notice says.
In conjunction with this rulemaking, Labor’s EBSA “also will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors,” the notice states.”