In 2018, 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 165,000 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 1,700 RIA firms stay compliant with our regulatory compliance software platform and consulting support.
Here’s our top 10 RIA compliance blog posts for from 2018 for SEC-registered RIA firms in chronological order highlighting topics we are discussing with our clients:
- SEC Announces 2018 RIA Examination Priorities (February 8, 2018)
On February 7, 2018, the SEC Office of Compliance Inspections and Examinations (“OCIE”) released its annual top exam priorities for the 2017 calendar year. The OCIE is the SEC division which conducts examinations of RIA firms and this priority list can help investment advisers be better properly prepared for a regulatory examination. In general, the list of priorities for 2018 closely mirrors the agency’s past 2015, 2016, and 2017 examination priority lists as well as recently issued risk alerts. For 2018, OCIE was focused on five categories: matters of importance to retail investors, including seniors and those saving for retirement, compliance and risks in critical market infrastructure, Financial Industry Regulatory Authority (“FINRA”) and municipal Securities Rule Making Board (“MSRB”), cybersecurity and anti-Money laundering programs
- Key 2018 SEC RIA Examination Frequency and Enforcement Statistics (February 13, 2018)
On February 12, 2018, the SEC submitted its budget request for the 2019 fiscal year. The budget request contains a wealth of valuable data as it relates to RIA compliance examinations conducted by the agency. Previously, we reviewed the key insights from the 2017 and 2018 fiscal year budget requests. Better use of data, a movement towards more limited scope exams, and a reallocation of examination staff allowed the SEC to significantly increase its audit frequency rate for 2017 despite continued growth in the number of federally-registered investment adviser firms.
On April 12, 2018, the SEC OCIE released a new National Exam Program Risk Alert listing the most commonly found RIA advisory fee and expense compliance issues in recent regulatory examination deficiency letters. SEC OCIE staff notes, “advisers should review their practices, policies, and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in this Risk Alert.” In particular, this risk alert focuses on deficiency letters issued over the past two years while conducting over 1,500 investment adviser examinations and follows a February 8, 2017 SEC risk alert highlighting the most common RIA audit deficiencies unrelated to advisory fees and expenses.
- SEC Proposes a new Form ADV Part 3 Requirement: the Form CRS (April 18, 2018)
On April 18, 2018, the SEC released a new rule proposal that includes a new requirement for RIA firms to provide a brief relationship summary to retail investors known as the Form CRS. In particular, the new proposed Form CRS would require RIA firms to inform retail investors about the type of relationship and services, fiduciary status, fees and costs, comparison to services available from a broker-dealer, conflicts of interest, disciplinary information, SEC contact information, and “key questions to ask.” The new proposed Form ADV Part 3 would be in addition to the currently required Form ADV Part 1 and Part 2 Brochure.
With the SEC’s increased scrutiny on share class selection and disclosure, investment advisory firms should approach this common regulatory issue with increased focus and clear understanding of the latest guidance and perspective. In particular, the SEC remains focused on how 12b-1 fees that are passed along to investors influence how the RIA selects investments, particularly when those fees compensate advisers and related persons. Share class selection is in the spotlight for the SEC; it should be in the spotlight for any RIA firm that is in a position to choose between different share classes for its clients.
- SEC Risk Alert Flags Most Common RIA Best Execution Issues (July 12, 2018)
On July 11, 2018, the SEC OCIE released a new National Exam Program Risk Alert outlining the most common compliance issues related to the RIA regulatory requirement to seek to obtain “best execution” for client transactions. SEC OCIE staff notes, “an adviser must execute securities transactions for clients in such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances.” In particular, this risk alert provides examples of the most common regulatory compliance deficiencies related to the best execution requirement as observed by SEC OCIE staff during recent regulatory examinations.
- The SEC’s View on an RIA’s Fiduciary Duty (August 8, 2018)
On April 18, 2018, the SEC released a series of rule proposals highlighted by the new Regulation Best Interest (“Reg BI”) and the Form CRS – Relationship Summary, otherwise known as the Form ADV Part 3. While the proposed Reg BI has received the most attention to date from the broker dealer and RIA communities, what has received less attention is that along with the release of these new rule proposals, the SEC also released its latest views on an RIA’s fiduciary duty which “reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.”
- SEC Risk Alert Flags Most Common RIA Cash Solicitation Issues (November 5, 2018)
On October 31, 2018, the SEC OCIE released a new National Exam Program Risk Alert outlining the most common RIA compliance issues related to Rule 206(4)-3 (the “Cash Solicitation Rule”). SEC OCIE staff notes an investment adviser required to registered under the Investment Advisers Act of 1940 (the “Advisers Act”) “is prohibited from paying a cash fee, directly or indirectly, to any person who solicits clients for the adviser (a “solicitor”) unless the arrangement complies with a number of conditions.” In particular, this risk alert provides examples of the most common regulatory compliance deficiencies related to the cash solicitation rule as observed by SEC OCIE staff during recent regulatory examinations.
- SEC RIA Enforcement Actions Increased 31.7% in the 2018 Fiscal Year (November 12, 2018)
On November 2, 2018, the SEC released its 2018 enforcement report which highlights the 821 enforcement actions pursued during its most recent fiscal year. This latest annual report shows continued focus from the SEC “on the Main Street Investor” and it seems likely that such focus is unlikely to change in the coming years. During the 2018 fiscal year, the SEC filed 490 stand alone enforcement actions, 210 follow-on administrative proceedings, and 121 enforcement actions related to delinquent filings. Stand alone enforcement actions pursued against investment advisers or investment companies totaled 108 which represents a 31.7% annual increase compared to the 82 stand alone enforcement actions filed in the 2017 fiscal year.
- SEC RIA Regulatory Enforcement Focus: Improper Client Fee Billing (November 28, 2018)
On November 19, 2018, the SEC Division of Enforcement announced that it settled claims with a RIA firm “that it charged more than 290 client accounts higher advisory fees than those in its fee schedule. According to the SEC release, like many advisory firms in the industry, this RIA firm charged clients advisory fees calculated based on a percentage of the assets under management (“AUM”). The firm’s fee schedule included a series of “breakpoints” that reduced advisory fees charged to a client as the total amount of that client’s AUM increased. The fee schedule was incorporated and disclosed in the firm’s client advisory agreements, distributed as a separate document by client request, and disclosed on the firm’s Form ADV Part 2A. The SEC order found that from early 2010 to early 2018, the advisory firm inconsistently applied the advisory fee “breakpoint” discounts.
- SEC Risk Alert Flags Electronic Messaging Issues (December 18, 2018)
On December 17, 2018, the SEC OCIE released a new National Exam Program Risk Alert reminding RIA firms of their obligations related to the use of electronic messaging. According to the risk alert, the “OCIE conducted this initiative because it noticed an increasing use of various types of electronic messaging by adviser personnel for business-related communications.” The OCIE staff shares their recent observations from these focused audits with the goal to help RIA firms improve their electronic messaging systems and policies and procedures.
- SEC Outlines 2019 RIA Examination Priorities (December 24, 2018)
On December 20, 2018, the SEC OCIE released its annual top exam priorities for the 2019 calendar year. In general, the list of priorities for 2019 contains many similar focus areas as highlighted in the agency’s 2016, 2017, and 2018 examination priority lists as well as recently issued risk alerts. For 2019, the SEC is primarily focused on six categories: compliance and risk at registrants responsible for critical market infrastructure, matters of importance to retail investors, including seniors and those saving for retirement, FINRA and the MSRB, digital assets, cybersecurity, and anti-money laundering programs. These six categories are nearly identical to the five 2018 focus areas except for this year’s new additional focus on digital assets.