Compliance innovation moves fast, but the news moves faster. To keep you and your team up to speed on the latest happenings and goings-on in the compliance world, we’ve aggregated the top five articles from the past few weeks to provide you with an in-depth look at the regulatory ecosystem.
Stay up-to-date and in the know on everything happening in the compliance world as of Feb. 17, 2023.
Top five compliance articles
SEC votes to expand adviser custody rule (Author – Melanie Waddell, Think Advisor)
The US Securities and Exchange Commission (SEC) has expanded the current adviser custody rule to include client assets, such as cryptocurrencies.
The SEC voted 4-1 to approve a proposal under the Investment Advisers Act of 1940 to safeguard client assets in any form that an adviser has custody of, such as privately issued securities, real estate and derivatives.
The rule entrusts safekeeping of client assets to qualified custodians, such as banks and broker-dealers. Comments are due 60 days after publication in the Federal Register. The proposal’s implementation is set for one year for large advisers and 18 months for smaller advisers.
SEC, FINRA priorities: 7 steps to stay compliant (Author – John Manganaro, Think Advisor)
The SEC and the Financial Industry Regulatory Authority (FINRA) have released their examination and enforcement priorities for 2023, with reports collectively totaling over 100 pages. A panel of compliance experts recently discussed the increasing complexity of these reports in a Smarsh webinar and advised on ways for compliance leaders to keep up with evolving expectations. They stressed the importance of ensuring no pressing issues fall through the cracks and provided their top compliance tips for 2023, which are:
- Start with two key questions: does any given section of the regulation in question apply to the specific firm being considered, and if it does, is the firm already reasonably well covered, or is it obvious that there could be a compliance weakness which must be immediately addressed?
- Identify issues cutting across practice areas. Certain issues addressed by the SEC and FINRA guidance likely have firm-wide effects.
- Get firm leadership involved and reiterate employees’ responsibilities and what’s expected of everyone in the firm.
- Be proactive in the exploration and adoption of new communication pathways, and then include them into your firm’s compliance policies and procedures, rather than blanket-banning communication platforms to avoid a violation.
- Know that vendor reviews are critical.
- Make cybersecurity a firm-wide issue.
- Test your firm’s compliance program and immediately make adjustments if you spot any gaps or issues with the program.
Why regulation best execution makes payment for order flow difficult: SEC roundup (Authors – Nick Morgan & Tom Zaccaro, Think Advisor)
In a recent episode of the “SEC Roundup” series, Paul Hastings partners and former SEC senior trial counsels Nick Morgan and Tom Zaccaro discussed two proposed SEC rules with Bloomberg columnist Nir Kaissar.
These rules are expected to bring about significant changes in the way securities transactions are conducted and may discourage commission-free trading which is popular among retail securities traders. According to the experts, there is great debate about whether the proposed rules are meant to protect investors or are a signal that the movement towards the democratization of the capital markets may be coming to an end. They also discussed the compliance obligations imposed on financial firms using payment for order flow under Reg Best Execution.
SEC emphasizes probing marketing rule, Reg BI compliance (Author – Mark Schoeff, Jr., Investment News)
The SEC highlighted several areas of focus for its regulatory examinations in 2023, including the new marketing rule, Regulation Best Interest (Reg BI), private funds and environmental, social and governance (ESG) investing.
The SEC’s Division of Examinations will examine registered investment advisers (RIAs) to ensure compliance with the marketing rule, which overhauled previous rules governing how advisers promote themselves. In addition, the SEC will evaluate whether RIAs have complied with the substantive requirements of the marketing rule, including whether they have a reasonable basis for believing they can substantiate material statements of fact. Examiners will also focus on Reg BI and the fiduciary standard which governs investment advisers, particularly dually registered financial professionals. Other areas of examination will include recommendations concerning complex products, high cost and illiquid products and retirement account rollovers. Private funds and ESG investments and strategies are also drawing attention from the SEC.
Crypto investors brace for more crackdowns from regulators (Authors – Dave Michaels, Alexander Osipovich & David Benoit, Wall Street Journal)
Regulators have started to cut off the supply of products and services which are central to the digital currency industry. New York regulators have shut down new issuance of the world’s third-largest stablecoin, prompting investors to flee the coin and raising worries about the future of crypto exchange.
Banking regulators are quietly pushing banks to cut ties with crypto customers, limiting their ability to plug into the real-world financial system. The flurry of actions came after years of slow-moving investigations and debate in Washington over how to best handle the fast-growing industry. Some observers detected a shift in officials’ tone after the cryptocurrency collapse in November 2022, which strengthened the hand of politicians and regulators calling for tougher enforcement. Now crypto executives are bracing for more regulatory lawsuits and investigations, and investors have started to flee suspected targets.