Each Friday, 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) sweeping examinations of its communication and record-keeping regulations, how advisers will approach compliance in 2023, the SEC’s new Regulation Best Execution rule, how firms perceive the SEC’s environmental, social and governance proposed requirements and the SEC’s plans to overhaul the way stocks are traded.
Here are our top investment adviser compliance articles for the week of Dec. 9, 2022:
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SEC’s sweep of RIAs for “off-channel” communications heats up (Author – Tracey Longo, Financial Advisor)
The SEC intends to implement sweeping examinations regarding how firms use unauthorized communication channels to conduct business. The SEC will look into communications like personal emails, texts and social media chats which are taking place on unapproved devices or channels, or without required firm surveillance and record keeping.
According to Brian Rubin, a former SEC enforcement attorney and now a partner at Eversheds Sullivan, and Amanda Oliveria, an associate in litigation and securities enforcement at the firm, these are the SEC’s requests to firms as it relates to these upcoming exams:
1. Policies and procedures related to communications platforms and devices.
2. Perform frequent internal audits of communication records.
3. Offer effective training to employees.
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The Contradictions of 2022 and Emerging Trends for 2023 (Author – Mindy Diamond & Louis Diamond, Wealth Management)
An annual report of 2022 indicated clients wanted more from their advisers, advisers wanted more from their firms, and firms wanted more from their advisers. Essentially, 2022 was a year in which the constituents of investment firms had greater expectations, and this put greater pressure on investment advisers. Although the hard numbers from the survey aren’t yet available, here are the top ways in which the pressure impacted how investment firms will address compliance in 2023:
1. Advisers are becoming more introspective about the value their firms give clients. As a result, they are placing greater emphasis on compliance to ensure they maintain their clients’ trust and remain in good graces with regulators.
2. Firms look to standardize practices and eliminate risk where possible, which means they’ll become more heavy-handed with compliance and oversight.
3. A greater investment in compliance programs at firms could mean less adviser control, as well as an expected uptick in heightened supervision and terminations for compliance violations.
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SEC Proposes New Best-Execution Rule, Draws Criticism (Author Melanie Waddell, Think Advisor)
The SEC recently proposed a Regulation Best Execution rule. This rule would set the regulator’s best-execution standard for client trades. Under the rule, “specifically, in any transaction for or with a customer or a customer of another broker-dealer, a broker-dealer (or a natural person who is an associated person of the broker-dealer) would be required to use reasonable diligence to determine the best market for security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions,” the agency said.
Although the SEC is excited about this proposed rule, many who might be affected by the rule are not. Those who oppose the rule argue it doesn’t differ enough from the Financial Industry Regulatory Authory’s (FINRA) Regulation Best Execution rule, and therefore isn’t necessary. Others argue that while such a rule might be a step in the right direction, it’s unclear whether it would protect investors.
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Managers stop calling some assets ESG ahead of SEC rules (Author Emile Hallez, Investment News)
A recent survey indicated that in light of anti-greenwashing proposals, investment advisers appear to be rethinking the assets they consider ESG. This shift in mindset doesn’t mean the assets will be managed differently than in the past. Instead, this shift appears to reflect how seriously investment advisers take compliance, especially in light of the SEC’s fund naming and marketing rules. Investment advisers want to ensure they are adhering to the demands of their regulators.
This diligence is also reflected in other survey responses. For instance, investment advisers indicated their top three reasons for considering ESG were:
• Their firm’s mission (83%).
• Client demand (79%).
• Risk (79%).
Adhering to the SEC’s proposed ESG regulations is predicted to be expensive for some firms, but there appears to be an understanding that it’s worth doing.
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SEC plan calls for overhaul of the way stocks are traded (Author – Bloomberg News, Investment News)
The SEC took steps toward a widespread revamp in the way stocks are traded, and set forth four proposals. Not much is known about the proposals, but according to Chair Gary Gensler, they could boost transparency and competition. The proposals could affect everything from order routing to pricing and disclosures which brokers must make to clients. The proposals were developed because, according to Gensler, “Today’s markets are not as fair and competitive as possible for individual investors – everyday retail investors.” The proposals are meant to address these issues and improve a system that hasn’t been touched in almost a decade.
The agency will soon have an internal meeting about them.
Don’t forget to check out last week’s top RIA compliance news articles which focuses on preventing elder abuse scams, a ComplyConnect spotlight and succession planning.