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 rapid growth of RIAs, the proposed cybersecurity risk management rules, and the Securities and Exchange Commission’s (“SEC”) proposed climate risk disclosure rule. Here are our top investment adviser compliance articles for the week of April 1st, 2022:
1. SEC Exam Priorities Race to Keep Up With Record Growth of RIAs (Author – Tobias Salinger, Financial Planning)
This article provides insight from Douglas Kamin, a managing director with compliance firm Foreside, and additionally contains a slideshow summary of the SEC’s 2022 Examinations Priorities and the key takeaways for advisors. The SEC has released its examination priorities every year for the past decade. There was a 3% increase in exams in the last fiscal year to 3,040 overall, with more than 2,000 deficiency letters prompting firms to return more than $45 million to their clients. The slideshow additionally highlights the following: SEC Milestones; Total Examinations and Deficiencies; Share of RIAs facing examination each year; Regulator seeking more Enforcement and Examinations staff; A word on the word ‘compliance’; and a typical RIA exam description. While all these topics reinforce these examinations are increasing in frequency, the priorities provided can be utilized as a roadmap for RIA firms to strengthen their compliance program. Lastly the article gives great summaries of the following priorities for RIA firms: Private funds; ESG criteria; fiduciary duty and Form CRS; Information security; and Emerging tech and crypto assets.
2. SEC Warns Advisors on Rollovers Under Reg BI (Author –Melanie Waddell, ThinkAdvisor)
This article discusses a just-released SEC guidance bulletin that was published in Q&A form. The SEC is warning broker-dealers and advisors to use caution when recommending rollovers out of a retirement plan to retail clients, in accordance with their obligations under Regulation Best Interest and the Advisers Act fiduciary standard. “The guidance makes clear that a careful consideration of a rollover recommendation includes a consideration of leaving the assets in the plan,” Micah Hauptman, director of investor protection for the Consumer Federation of America, told ThinkAdvisor in an email. The SEC states that “when making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest”. Specific factors are also “potentially relevant to rollovers that should generally consider when making a rollover recommendation to a retail investor,” the SEC states. Hauptman also noted on Twitter that a key point in the guidance is that “BOTH Reg BI and fiduciary duty are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest”.
3. What Advisory Firms Should Be Doing On Cybersecurity (Author – Tobias Salinger, Financial Planning)
In this article, Tobias Salinger discusses the rising threats from malware, hacks, phishing, and other breaches in depth, and how the SEC has given advisors even more reasons to focus on their cybersecurity programs. Recently proposed rules would create “cybersecurity risk management” standards for all RIAs, such as new disclosures on Form ADV. In the thorough article Salinger discusses high stakes for safeguards, new potential regulations, and 3 steps RIAs should take to move forward in strengthening cybersecurity at their RIA firms. Here is a quick summary of a 3 step round up of action items. First, RIAs should test their systems regularly as to avoid bad actors gaining access to client data or a regulator alleging deficiencies. Second, put together a comprehensive cybersecurity policy, and more specifically an incident response plan. Lastly, any loopholes in firms’ systems should be patched regularly, firms should prohibit external data access in the time between the announcement of a patch and implementation of it, according to experts. Read the article further for more insights on strengthening cybersecurity programs at your RIA firm.
4. Flat Fees Gain Traction Among Advisers Critical of Asset-based Pricing (Author – Jeff Benjamin, Investment News)
Jeff Benjamin discusses the recent push for flat fee models in place of the popular asset-based fee model and what advisers across the industry have to say. Benjamin spoke with Sara Grillo, an industry marketing consultant and strong supporter of flat fees, expresses how this fee model has become the latest way to express added value. “It’s not the fee as much as how the fee is communicated. A flat fee is beneficial for a client with a larger portfolio that might be sick o having the fee vary every year, and it is a much more transparent model. With a flat fee, you can’t get away with the fee being invisible, and I believe those flat fee advisers are better for that because it manifests itself towards a higher level of communication with the client,” Grillo explains further. View the full article at the link above for further commentary from industry leaders
5. What Advisors Need to Know About the SEC’s Climate Risk Disclosures (Author – Emma Smith and Alex Acosta, Financial Planning)
Between the release of the SEC’s 2022 Exam Priorities and a recently proposed climate risk disclosure rule, the industry’s impact on climate change has been brought into the spotlight. This new rule would require “foreign and domestic public companies to disclose within their financial reports an array of climate-related information. Specifically, the SEC wants companies to detail how the various risks associated with a warming climate – such as those arising from extreme weather events, regulatory actions or changing customer expectations – stand to materially impact their operations, strategy and outlook.” These disclosure rules are a direct response to the increased awareness of climate change within recent years and the public wanting to know more about the environmental footprint of industry leaders. In the past, advisors have hesitated to adopt environment-centric regulations. However, moving forward “conversations around climate risk should form part of an advisor’s fiduciary duty to their clients.”
Don’t forget to check out last week’s top RIA compliance news articles that focus on the SEC’s 2022 exam priorities, investing in cryptocurrency, and an SEC bulletin emphasizing clients’ best interest.