Each week, 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 the RIA annual review process, the Securities and Exchange Commission’s (“SEC”) guidance for the term “fiduciary”, and the path to independence for advisers managing $500M in AUM.
Here are our top investment adviser compliance articles for the week of April 15th, 2022:
1. How financial advisors can take the stress out of annual reviews (Author – Ryan W Neal, Financial Planning)
An interview with Chris DiTata, Vice President and General Counsel of RIA in a Box, provides guidance to advisors on how to take the stress out of the annual review process. DiTata recommends advisors regularly review and update their policies and procedures manuals throughout the year, in order to avoid the time crunch during an annual review. According to DiTata, advisors of SEC-registered firms should also update their policies and procedures manual to address the initial delivery, review and ongoing obligations for Form CRS.
Regulators will look at how firms complete ongoing compliance tasks, like reviewing client accounts for proper paperwork, testing cybersecurity programs, and performing due diligence on third parties.
2. IAA Working With Regulators To Make ‘Fiduciary’ A Safe Word For Advisors (Author – Tracey Longo, Financial Advisor)
Tracey Longo discusses the efforts of the IAA, combined with regulators, to further clarify guidance on the use of “fiduciary” in customer relationship summaries (“Form CRS”). The article shares how IAA executives believe that the “latest staff guidance makes all financial professionals look alike, which is inaccurate, as RIAs have an all-encompassing, relationship-based fiduciary duty, and dually registered advisors have a transaction-by-transaction duty to investors.”
In fact, only six of 30 RIA firms with AUM between $1B and $3B used the word fiduciary in their form CRS. The goal is to eliminate confusion for RIAs, so they can clearly understand when it is appropriate to use the word “fiduciary” or “fiduciary duty”.
3. SEC Limits ‘Fiduciary’ in Form CRS, Think Tank Argues (Author – Patrick Donachie, Wealth Management)
In March, guidance from the SEC on Form CRS cautioned advisors against the use of the term “fiduciary”, if it could be “extraneous and unresponsive,” or inaccurate or misleading. The SEC also suggests firms should not describe fiduciary status with phrases like “the highest standard”. Industry experts have expressed their concerns about this guidance, suggesting it leaves “no plausible or meaningful way” to describe an investment advisor’s fiduciary status. The article shares how advisors are looking for the SEC to further provide guidance on how to describe being held to fiduciary standard in the context of the form’s prescribed language.
4. Wall Street Says SEC Is Issuing Too Many Rules (Author – Tracey Longo, Financial Advisor)
The SEC has issued 16 proposed rules since the beginning of 2022, prompting concern from industry associations. One industry expert points out the unprecedented limited time frame (less than 60 days) to comment and provide a cost-benefit analysis of the newest rules. Among considering input financial institutions, investors and other interested parties also need time to respond to the protections that the agency proposes. Federal guidance currently states that the public should have at least 60 days to comment, and 90 days for particularly complex rules.
5. Independent paths for advisers managing more than $500 million (Author – Joshua Tomolak, Investment News)
This article explores four paths to independence for advisers who have hit the $500M mark or beyond for AUM. The first option, joining an established RIA platform, provides a familiar environment to individuals looking for support and resources for scalability, which they likely received within a large wirehouse. For those seeking more autonomy, launching an RIA with a service provider can still provide essential business resources like compliance, HR, and billing.
The third path, an M&A partnership, is typically taken by those approaching succession, who require capital to buy out a retiring partner, or are looking for a strategic partner to assist with sub-acquisitions and recruitment. For those seeking total autonomy and control of their practice, launching an RIA with a custodian may be the best option. This article reports that as of 2021, the RIA model is still the fastest growing segment in the industry.
Don’t forget to check out last week’s top RIA compliance news articles that focus on the rapid growth of RIAs, the proposed cybersecurity risk management rules, and the Securities and Exchange Commission’s (“SEC”) proposed climate risk disclosure rule.