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 Securities and Exchange Commission’s (“SEC”) 2022 examination priorities, investing in cryptocurrency, and a recent SEC bulletin emphasizing clients’ best interest requirements.
Here are our top investment adviser compliance articles for the week of March 25th, 2022:
1. SEC’s 2022 Exam Priorities Zero In On Fees And Conflicted Compensation (Author – Tracey Longo, Financial Advisor)
The Securities and Exchange Commission (“SEC”) officially released their 2022 exam priorities earlier this week. These priorities are based on the findings of the SEC’s 3,040 exams performed in fiscal year 2021 and the deficiencies that were discovered. Among other topics, the exams performed this year will “access investor costs, the adequacy of policies and procedures to address conflicts, whether recommendations are in the best interest of clients and whether disclosures allow investors to provide informed consent,” the SEC said. The commission also plans to focus on “cost and reasonably available alternatives as they relate to recommendations being in the investor’s best interest. Examinations will also evaluate the compensation structures for financial professionals.” View the full article for other focus areas.
2. Should Crypto Be Allowed in 401(k)s? (Author – Terence Walsh, ThinkAdvisor)
Terence Walsh discusses the Department of Labor’s (“DOL”) recent compliance assistance release addressing the marketing of cryptocurrency investments to 401(k) plans. This release was in direct response to the recent presidential executive order directing federal agencies “to study the risks and benefits of cryptocurrency in anticipation of releasing new cryptocurrency regulations”. The DOL emphasizes the risks cryptocurrency poses, including the risk of fraud, theft, and loss. Walsh explains further, “that plan fiduciaries who allow cryptocurrency investment options should expect to be subject to investigation and face questions about how those decisions could comply with their duties of prudence and loyalty.” View the full article for more information and the interview Walsh conducted with Robert Bloink and William Byrnes, professors and authors of ALM’s Tax Facts, about the stance the DOL is taking on cryptocurrency.
3. SEC Emphasizes Weighing Costs of Account Recommendations (Author – Mark Schoeff Jr., Investment News)
This article contains insights on the bulletin released by the SEC Wednesday. The bulletin is the first of several that will emphasize best-interest requirements at the heart of standards for RIAs. In a statement Gensler said, “Many rely on broker-dealers and investment advisers to help them choose the investments, strategies, and accounts to meet their goals,” and “It is important that investors can trust that the advice or recommendations they receive are designed to serve their best interests.” Under the Advisers Act, investment advisers have a fiduciary duty to their clients. When it comes to helping a client decide whether to open an advisory or brokerage account, the SEC said brokers and advisers must consider account fees and commissions, as well as fees associated with mutual funds and other investment products and assess reasonably available alternatives. Although the bulletin warned that if clients are put in a more expensive account, it must be justified based on their needs, recommending the lowest-cost account isn’t a requirement under the Advisers Act. Read the article for further insight, bulletin exerts and statements from the SEC.
4.12b-1 Fees in Wrap Accounts Are an SEC Exam Priority in 2022 (Author –Melanie Waddell, ThinkAdvisor)
The agency released exam priorities for 2022 on Tuesday. In fiscal year 2021, the Division of Examinations completed 3,040 exams, a 3% increase from fiscal 2020 and about on par with pre-COVID-19 pandemic examination totals in fiscal 2019. The SEC plans to focus its exams this year on RIA’s use of 12b-1 fees in wrap fee accounts where the RIA may be responsible for paying transaction fees, along with revenue sharing arrangements. RIA exams will focus on whether advisors “are acting consistently with their fiduciary duty to clients, looking at both duties of care and loyalty, including best execution obligations, financial conflicts of interest and related impartiality of advice, and any attendant client disclosures”. The high priority focus areas include: revenue sharing arrangements; recommending or holding more expensive classes of investment products when lower cost classes are available; recommending wrap fee accounts without assessing whether such accounts are in the best interests of clients, including the impact of the move to zero commissions on certain types of securities transactions by a number of broker-dealers; and recommending proprietary products resulting in additional or higher fees.
5. ESG, Reg BI Top SEC’s Examination Priorities (Author – Mark Schoeff Jr., Investment News)
This article also reports on the Division of Examinations’ annual examination priorities report posted Tuesday. In addition to some of the above mentioned, the SEC will focus on how financial advisers use environmental, social and governance (“ESG”) investment strategies. The agency also highlighted assessments of private funds, cybersecurity and cryptocurrency as areas of significant focus. In regards to ESGs, the overall emphasis was highlighted recently by a major climate disclosure proposal. Registered investment advisers and funds are increasingly offering investment and strategies that incorporate ESG factors in order to meet client demand. This surge in demand has the SEC on guard against greenwashing in performance advertising and marketing. The published priority document states, “There is a risk that disclosures regarding portfolio management practices could involve materially false and misleading statements or omissions, which can result in misinformed investors,” highlighting the focus for climate disclosures.
Don’t forget to check out last week’s top RIA compliance news articles that focus on the Security and Exchange Commission (“SEC”) cryptocurrency regulation, proposed climate change risk disclosure requirements, and the path to RIA independency.