Top RIA Compliance News Articles for the Week of February 23, 2018

1. Come Forward, or Else, Says SEC on ‘Widespread’ Share Class Problem (Author- Kenneth Corbin, Financial Planning Magazine)

“The commission has announced an amnesty program for advisors who failed to disclose the sale of high-cost mutual fund shares when a no-fee class of shares was available. Now, the leaders of the SEC’s Enforcement Division are following up with a warning to the industry: come forward, or else,” writes Corbin. The SEC held a conference for compliance and legal experts and encouraged them to get the firms they work with to self-report. SEC enforcement co-director Steve Peikin has threatened severe punishment if advisors fail to do so. The SEC also wants misappropriated funds to be given back to investors, and those investors to be clearly aware of their advisors’ fee structures.

2. FINRA Plan on Outside Business Activities to Spark ‘Much Debate’ (Author- Melanie Waddell, ThinkAdvisor)

“The Financial Industry Regulatory Authority (“FINRA”) is likely to get pushback from large independent broker-dealers regarding the proposed rule floated Wednesday to free broker-dealers of liability over investment advisors’ outside business activities,” Waddell reports. Advisors who currently pay broker-dealers for outside business activity supervision will likely be supportive, while on the other hand, broker-dealers may lose out on a major revenue stream. The goal, however, is actually to help broker-dealers. With less supervision on their plates, they can focus on investors, and the potential lack of liability will assist legally. Waddell adds, “Under the proposal, third-party investment advisors would need to receive informed consent for their activities, but the BD would not have supervisory obligations.”

3. SEC Launches Massive Cryptocurrency Probe (Author- Tracey Longo, Financial Advisor Magazine)

Cryptocurrencies and Initial Coin Offerings (“ICOs”) have been a hot regulatory topic as of late.  Tracey Longo reports that several subpoenas from the SEC have been issued, and information is being collected from technology giants and advisors as we speak. Though popular, investing in cryptocurrency is also highly risky. SEC Chairman Jay Clayton is anxious to preempt anything that could go wrong. The SEC is targeting ICOs due to their exemption from standard public offering rules. Longo explains, “ICOs, which can be created to crowd fund everything from space technology to marijuana farming equipment, are specifically used by start-ups to bypass the intense regulation of the capital-raising process.”

4. Interesting Angles on the DOL’s Fiduciary Rule #81 (Author- Fred Reish, FredReish.com)

Reish is sticking to the topic of DOL myths in his 81st article on the topic. He writes that some believe that the DOL fiduciary rule disallows commissions payments. Reish explains that this is untrue. The fiduciary rule, in its current form during this current transition period, only expresses that an advisor should be reasonably compensated. Reish adds, “The Department of Labor has also said, on several occasions, that it expects financial institutions (such as broker-dealers and RIAs) to have policies, procedures and practices that ensure that the form of compensation does not cause advisors to recommend investments that are not in the best interest of the retirement investors.” 

5. Is Technology Helping Advisers Assess Risk? (Author – Ryan W. Neal, InvestmentNews)

Since the crash of 2008, advisors have been attempting to better understand investors’ risk habits. Technology has been the bridge to doing so, according to Ryan Neal of InvestmentNews. While it’s been ten years since the crash, experts say it may be too early to tell if technology is helping the process. “Without a true bear market, it’s hard to know for sure if the digital risk assessments will result in different client behaviors than the old methods,” says Neal. Though questionnaires are useful to advisors, some worry about their accuracy when the market takes a downturn. Neal also argues that traditional risk descriptions such as “aggressive” or “moderate” may be outdated and fail to encompass human emotion. Though some prefer technology, others argue that nothing can replace human judgment. 

Don’t forget to check out last week’s top RIA compliance news articles on the DOL fiduciary rule, the SEC’s crackdown on robo advisors, and cybersecurity.  Be sure to check back next Friday for next week’s top articles! 

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.