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 guidance on Regulation Best Interest’s Care Obligation, the SEC’s sweep of advisers’ off channel communications, the publication of the 2023 Chief Compliance Officer Playbook, the approval of the Small Entity Update Act and the SEC’s newly adopted amendments.
Here are our top investment adviser compliance articles for the week of May 5, 2023:
4 Advisor Tips in SEC’s New Reg BI Guidance (Author – Melanie Waddell, Think Advisor)
The SEC has issued guidance on Regulation Best Interest’s Care Obligation, primarily focusing on broker-dealer compliance. However, the alert also provides important information for advisers. The guidance discusses how advisers and brokers should comply with their care obligations when providing investment advice to retail investors. Founder and President of FrontLine Compliance, Amy Lynch, recommends that advisers pay attention to four key items in the SEC’s bulletin:
- Advisers can’t rely on a firm-approved list of investments.
- Firms must train advisers on their products (and document it well).
- Making the best choice from a narrow list is not enough.
- For dual registrants, account type matters.
Lawyer Breaks Down SEC’s Sweep of Advisors’ Texts (Author – Melanie Waddell, Think Advisor)
The SEC is expected to scrutinize more firms regarding record retention of off-channel communications, including text messages. Off-channel communications are an SEC examination priority for 2023, and the industry’s trade groups have argued that the SEC’s sweep exceeds its authority. However, the SEC’s authority to enforce business communication retention is derived from the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The SEC has interpreted the recordkeeping rules broadly, and it is unlikely to issue formal guidance on the definition of “business related.”
COMPLY Playbook Attempts to Equip CCOs For Ardent Regulators (Author –Michael Madden, Wealth Solutions Report)
COMPLY has released its 2023 Chief Compliance Officer Playbook, which provides insights into the financial advisory landscape, reviews the key rulings of 2022 and outlines expectations for 2023. The playbook highlights significant 2022 cases brought by the SEC in five key areas: Reg BI, books and records, pay-to-play, cryptocurrency and Form CRS. It also covers proposed and adopted rules for the year. The guide includes an interview with COMPLY’s Chief Regulatory Officer, John Gebauer, and updates on the SEC and FINRA’s outlook for 2023.
Bill to Ease Regulatory Burden on Small Advisors Sails Through Committee (Author – Mark Schoeff Jr., Investment News)
The US House Financial Services Committee has approved the Small Entity Update Act, which aims to ease the regulatory burden on small investment advisory firms by directing the SEC to conduct a study and carry out a rulemaking on the definition of a “small entity.” The bill would require the SEC to adjust its regulations to avoid undue burdens on small businesses, and to define the term “small entity” more specifically. The Investment Adviser Association supports the bill, arguing that the current SEC definition of a small advisory firm is outdated. The bill will now move to the full House for a vote.
SEC Approves Stronger Reporting Requirements for Private Fund Advisors (Author – Mark Schoeff Jr., Investment News)
The SEC has approved a new regulation to increase reporting requirements for investment advisers to private funds regarding events that could affect funds’ valuation and potentially pose wider market risks. The changes aim to give the SEC and the Financial Stability Oversight Council a better grasp on changes at private funds that could harm investors or destabilize the broader markets.
According to the article, “Under the new rule, advisors to hedge funds that have at least $1.5 billion in assets under management must file a report within 72 hours of a “trigger event,” such as extraordinary investment losses, significant margin and default events, and substantial withdrawals and redemptions, among other occurrences.
Private equity fund advisors with at least $150 million in assets under management must file an event report within 60 days of the end of a quarter on trigger events, including removal of a general partner, fund terminations and the occurrence of an advisor-led secondary transaction.
Advisors to private equity firms with at least $2 billion in assets have to include information in their annual report regarding investment strategies, use of leverage and clawbacks of general partners’ performance compensation or limited partners’ distributions.”
Don’t forget to check out last week’s top RIA compliance news articles recapping wealth management industry conferences you should attend this year, the impact of AI on cybersecurity and more.