In 2016, we’ve published over 110 blog posts on a variety of registered investment adviser (“RIA”) practice management and regulatory compliance topics. We’ve received over 90,000 visits to our blog this year and many of the most popular posts relate to U.S. Securities and Exchange Commission (“SEC”) RIA compliance risk alerts, rules, and guidance. We help over 1,400 RIA firms stay compliant with our regulatory compliance consulting support and software platform.
Here’s our top 10 SEC RIA compliance blog posts from 2016 in chronological order highlighting topics we are discussing with our clients:
- SEC Announces RIA Examination Priorities for 2016 (January 11, 2016)
On January 11, 2016, the SEC Office of Compliance Inspections and Examinations (“OCIE”) released its annual top exam priorities for the 2016 calendar year. The OCIE is the SEC division which conducts examinations of RIA firms and this list can help investment advisers be better prepared when the time comes for their firm to be examined. In general, the list of priorities for 2016 closely mirrors the agency’s 2015 investment adviser examination priorities. Similar to 2015, the OCIE is focused on three categories: protecting retail investors and investors saving for retirement, assessing market-wide risks, and using data analytics to identify signals of potential illegal activity.
- SEC Create New Office to Improve RIA Examination Capabilities (March 16, 2016)
On Tuesday, March 8, 2016, the SEC announced it created a new office to help strengthen its RIA examination capabilities. The new Office of Risk and Strategy will be housed within the agency’s Office of Compliance Inspections and Examinations. This new office deemed by some industry observers as an “elite unit” serves to centralize the OCIE’s risk assessment, market surveillance, and quantitative analysis capabilities. In addition, the SEC noted that this new group will assist with risk management and general strategy for the OCIE.
On April 19, 2016, the SEC held a national compliance outreach seminar for investment companies and RIA firms. The agenda included 2016 fiscal year exam priorities, potential 2017 fiscal year exam priorities, enforcement cases, examination findings, Chief Compliance Officer liability, cybersecurity, and proposed anti-money laundering requirements. Another topic covered during the seminar was typical investment adviser exam protocol including tips on how an RIA firm should interact with examiners after it receives notice from the SEC that the firm going to be audited, the various types of investment adviser audits, and what a firm should do once it receives a deficiency letter following the examination.
On June 28, 2016, the SEC issued a release announcing the proposal of a new rule that would “require registered investment advisers to adopt and implement written business continuity and transition plans.” The rule would apply to investment advisory firms registered at the federal level and comes a year after after the North American Securities Administrators Association released a similar model rule for investment adviser business continuity and succession planning. Although the SEC has previously stated that it expects investment advisory firms to have robust business continuity plans in effect today as part of a firm’s fiduciary obligation, this new proposed rule would formalize the requirement and provide more prescriptive guidance as to what should be included in such plans.
- SEC Announces Investment Share Class RIA Exam Sweep Initiative (July 13, 2016)
On July 13, 2016 the SEC OCIE announced a new examination program focus on “conflicts of interest tied to advisers’ compensation or financial incentives for recommending mutual fund and 529 Plan share classes that have substantial loads or distributions.” The OCIE is calling this new investment adviser examination focus the “Share Class Initiative.” In the RIA world, this new focus may particularly apply to dually-registered investment advisers that also operate or are affiliated with a broker-dealer “that receive fees from the sales of certain share classes, and situations where the adviser recommends that clients purchase more expensive share classes or funds for which an affiliate of the adviser receives more fees.”
- SEC Increases Qualified Client Threshold for RIA Performance Fees (August 9, 2016)
Effective August 15, 2016, the federal definition of “qualified client” changed to raise the “Net Worth Test” threshold from $2,000,000 to $2,100,000. Passed on June 14, 2016 by Order of the U.S. Securities and Exchange Commission, the change represents a five percent (5%) increase to the Net Worth Test. Notably, many states follow the same framework for the performance-based fee exemption and expressly incorporate the SEC’s qualified client definition into the state’s assessment. This means that the federal Order may also directly affect many smaller state-registered RIA firms without need for legislative or administrative action directly by the state. The adjustment is important because the Investment Advisers Act of 1940 general prohibits an adviser from receiving performance-based fees (compensation based on a share of capital gains on or capital appreciation of a client’s account), but Rule 205-3 carves out an exemption from this prohibition for “qualified clients.”
- An Overview of SEC RIA Examination Statistics and Findings (August 15, 2016)
The overall percentage of investment advisers examined annually by the SEC remains relatively low, however there has been a steady improvement as the number of audits conducted has continued to rise in recent years. The challenge for the SEC OCIE is that the volume and size of federally-registered firms continues to rise. In its 2017 fiscal year budget proposal, the SEC highlights this growth by stating, “from 2001 to 2015, assets under management of SEC-registered advisers increased approximately 210 percent from $21.5 trillion to approximately $66.8 trillion.” The case can also be made that just looking a the raw number of firms audited relative to total number of firms is a bit misleading. Instead, some argue a more relevant benchmark is the percentage of the industry’s total assets under management which are examined annually. When looking at that metric, the SEC has previously stated that the agency examined around 30% of the total assets managed by federally-registered RIA firms during the 2014 fiscal year.
- SEC Releases New RIA Form ADV Filing Requirements Effective October 2017 (September 12, 2016)
On August 25, 2016, the SEC adopted a series of rule amendments that will impact all federally-registered investment advisory firms. In particular, the SEC is requiring additional Form ADV disclosures for investment advisory firms related to separately managed accounts, social media accounts, types of clients, branch offices, and the use of an outsourced Chief Compliance Officer. However, the SEC has delayed the effective date of the new requirements to October 1, 2017. Thus, any SEC-registered RIA filing an amendment beginning on October 1, 2017 will likely be required to provide additional information on the Form ADV Part 1 and other related filings.
- SEC will Audit RIA Firms that Employ Staff with Disciplinary Events (September 12, 2016)
On September 12, 2016, the SEC OCIE staff issued a new registered investment adviser (RIA) regulatory risk alert related to the examination of compliance supervision practices at investment advisory firms that “have employed or employ individuals with a history of disciplinary events, including individuals that have been disciplined or barred from a broker-dealer.” This announcement comes after the SEC earlier this year listed this initiative as a 2016 investment adviser examination priority. It’s clear for some time now that the SEC examination staff has been focused on identifying RIA firms that hire staff members with past disciplinary issues to ensure that proper supervision practices are implemented. However, this National Exam Program Risk Alert provides additional guidance as to what particular risk areas SEC staff will be focused on during examinations.
- SEC Announces Examinations of RIA Firms with Multiple Branch Offices (December 14, 2016)
On December 12, 2016, the SEC OCIE staff issued a new registered investment adviser (“RIA”) regulatory risk alert announcing an initiative to audit RIA firms that operate from multiple office locations. The SEC notes that ” the use of a branch office model can pose unique risks and challenges to advisers, particularly in the design and implementation of a compliance program and the supervision of people and processes in branch offices.” As the SEC highlights, more investment advisory firms continue to implement a business model with multiple branch office locations. This announcement also comes after the SEC earlier this year listed branch office supervision as a 2016 investment adviser examination priority.