To keep you and your compliance team up to speed on the latest happenings and goings-on in the compliance world, we’ve gathered the top five articles from the past few weeks. We have selected the most relevant and important compliance news articles related to the financial services industry and regulatory issues.
Stay up-to-date and in the know on everything happening in the compliance world as of Jun. 9, 2023.
Firms brace for SEC spotlight on electronic communications – Author Bill Simpson
The regulatory environment in 2023 continues to be active, with regulators like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) imposing fines for record-keeping violations. The Department of Justice is adopting an aggressive approach to missing text messages, indicating a need for firms to strengthen their policies and procedures. Between the focus on record-keeping and marketing practices, compliance teams are encouraged to monitor and audit their compliance programs for potential violations.
This regulatory posture extends beyond the United States, as the UK Parliament is considering a bill that would hold organizations liable for fraudulent actions by their employees. Organizations conducting business in the UK could face unlimited fines based on the severity of the fraud. The Financial Conduct Authority (FCA) in the UK has warned against employing “finfluencers” on social media without due care. Protecting investors from fraudulent or misleading communications is a key focus across jurisdictions and regulatory bodies.
3 best practices for avoiding a fiduciary breach – Author Alan Pfeffer
Recently, retirement plan committees have faced numerous lawsuits for breaching their fiduciary duties. To reduce the risk of fiduciary breaches and improve retirement plan efficiency, retirement plan committees should do the following:
Assess the reasonableness of administrative fees.
Many fiduciary breach lawsuits have highlighted excessive administrative fees, causing participants to overpay for plan expenses. To avoid this mistake, plan committees should regularly evaluate the magnitude and reasonableness of fees. Conduct annual assessments and compare fees with similar plans to ensure participants are not being overcharged.
Regularly evaluate the investment lineup.
Operating prudently under the Employee Retirement Income Security Act of 1974 (ERISA) requires diversifying the investment lineup. Relying solely on a single investment company or mutual fund family suggests a lack of prudence. Instead, select optimal funds from a broad range of investment managers or fund families, avoid having investments from the same firm used for record-keeping and regularly vet the investment lineup quantitatively and qualitatively.
Offer less expensive alternatives.
Fiduciaries must manage retirement plans for the participants’ benefit, not the plan sponsor’s. Some committees have been sued for selecting higher share classes to reduce operating costs for the sponsor, neglecting the participants’ best interests. It is essential to choose the lowest-cost version of funds available to mitigate the risk of a fiduciary breach.
By implementing these best practices and prioritizing the needs of plan participants, retirement plan committees can reduce the risk of fiduciary breaches. Committees unsure of their responsibilities can seek guidance from outside fiduciaries with expertise in retirement plan governance matters.
Study Up! SEC Reg BI Bulletins Will Be Used in Exams, Compliance Pros Say – Author Melanie Waddell
Compliance officials at FINRA’s conference drew attention to the bulletins on Regulation Best Interest (Reg BI) the SEC recently released. Although the bulletins don’t create new rules, they provide valuable guidance for firms, highlighting what examiners will consider during examination.
The officials highlighted the potential use of the bulletins as a reference point during compliance examinations, where examiners may question firms about their adherence to the guidance. The recent bulletin focused on the Care Obligation and extended it to investment advisers.
Compliance officers praised the bulletins as helpful tools that complement Reg BI and provide insight into examiners’ expectations.
FINRA: ‘Persistent’ Noncompliance on Crypto Communications – Author Patrick Donachie
A preliminary analysis of a targeted exam conducted by FINRA revealed that FINRA-registered firms have displayed a persistent and high level of non-compliance with rules regarding communications related to crypto assets. Ira Gluck, a senior director at FINRA’s Advertising Regulation Department, presented the findings at the regulator’s annual conference.
The analysis found that communications related to crypto assets were non-compliant at four times the rate of other products, with the majority of communications failing to comply with applicable rules in a substantive way. Gluck also drew attention to misleading comparisons to traditional banking products and false claims of safety and protection in crypto asset investments.
The next steps for FINRA will depend on the complete analysis, which could potentially result in interpretive guidance, rulemaking or enforcement referrals for serious violations. However, FINRA clarified that it will not make determinations on whether a particular crypto asset is a security, leaving such decisions to Congress, the SEC and other regulators.
Harnessing the growing compliance burden – Private Equity Wire
In an interview with Private Equity Wire, Amy Kadomatsu, CEO of COMPLY, highlighted the challenges faced by compliance officers in keeping up with reporting regulations and the increasing complexity of the industry.
Kadomatsu emphasized the significant challenges posed by siloed data sets and disparate platforms, stating that “siloed data sets, which often live in various Excel spreadsheets or disparate platforms, present significant challenges because compliance personnel must review multiple reports to achieve a comprehensive view of potential red flags.”
As the market pressures firms to reduce operational costs the SEC intensifies regulatory and enforcement activities. Kadomatsu noted this and said, “While most of the market is dealing with pressures to reduce the costs of their operations due to a muted M&A and IPO environment, the SEC is ramping up its regulatory and enforcement activities in a way that indicates compliance teams should be increasing their spending.” For example, the recently approved amendments to Form PF will require that new, detailed information be filed regularly and, in some cases, more frequently for certain fund stress events.
Additionally, she highlighted the increasing compliance obligations for private equity firms and the growing need for a trusted and comprehensive compliance partner like COMPLY, stating, “The ongoing regulatory focus on private fund advisers, expanding global regulatory requirements to protect consumers and the rapid advancement of technology is creating a perfect growth environment for firms that provide comprehensive tech-based solutions and are supported by in-house regulatory experts like COMPLY.”