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 September 29, 2023.
SEC exam sweep short but not sweet – Author Mark Schoeff, Jr.
The Securities and Exchange Commission (SEC) is conducting an exam sweep of investment advisers’ compliance with the marketing rule. The rule allows advisers to use client testimonials and endorsements for the first time, but the sweep is focusing on other aspects of the rule, such as performance marketing.
The SEC has already penalized several firms for violations. Experts say the sweep is straightforward and advisers should not be surprised by requests to view records. They recommend that investment advisers and applicable firms keep quality and thorough records and documents that substantiate any claims made in their marketing materials.
Pay attention to the SEC’s regulation of private fund advisers – Alternatives Watch
During an interview, COMPLY CEO Amy Kadomatsu underscores the impact of the private market’s growth, focusing on the influx of funds and heightened demand for alternative investment vehicles which has spurred regulators into action.
Looking ahead to the second half of 2023, Kadomatsu advises compliance teams at private market firms to focus on preparing for the SEC’s enhanced regulations for private fund advisers. These regulations come with stringent reporting requirements and modifications to auditing rules, posing a substantial challenge, especially for smaller players in the industry. Kadomatsu emphasizes the SEC’s concentration on issues such as custody, anti-money laundering and know-your-customer rules, asserting that “fostering a deeper understanding of risks and exposure will be critical.” She also notes the importance of addressing electronic communications, archiving and marketing rules, as well as navigating political engagement issues and conflicts of interest, all while ensuring an annual review process that is “well-documented and well-run” to meet the heightened compliance standards.
What advisers need to know, and do now, about bitcoin – Author Thomas D. Giachetti
The recent developments in the regulatory, legal and compliance landscape surrounding bitcoin and the potential introduction of a spot bitcoin ETF have prompted investment advisers to explore ways to incorporate cryptocurrencies into client portfolios. A spot bitcoin ETF is backed by physical bitcoins, and its value is expected to rise with the value of the underlying digital coins.
Integrating a bitcoin ETF into client portfolios entails compliance considerations. For one, advisers must be educated about the speculative nature of cryptocurrency. Additionally, advisers must conduct due diligence to ensure the suitability of such investments for clients, update their policies and procedures, obtain client acknowledgments regarding the speculative nature of cryptocurrencies and amend their brochures to include relevant information about the risks and integration options. As fiduciaries, advisers must prioritize the best interests of their clients, which involves thorough due diligence, client education and transparent disclosure of fees associated with crypto investments.
SEC expands its rule on fund names – Author Melanie Waddell
The SEC has made significant revisions to its Names Rule, aimed at addressing misleading investment company names. SEC Chairman Gary Gensler expressed his support for the rule’s adoption, emphasizing its importance in ensuring that a fund’s portfolio aligns with its advertised investment focus. Gensler stressed the need for truth in advertising to promote fund integrity, stating, “The Names Rule reflects a basic idea: A fund’s investment portfolio should match a fund’s advertised investment focus.” The rule will now apply to a broader range of fund names, including those indicating thematic investment focuses such as “growth” or “value,” or incorporating environmental, social or governance factors. Additionally, funds deviating from the 80% investment policy requirement must return to compliance within 90 days, disclose how they define the terms in their name and indicate which holdings contribute to the 80% requirement.
However, not everyone supports these sweeping changes. Eric Pan, president and CEO of the Investment Company Institute, criticized the final rule, arguing that it encompasses a significant portion of funds and lacks justification. Pan also expressed concerns about the SEC’s deeper involvement in fund investment decisions and the potential higher costs that could burden American retail investors. SEC Commissioner Mark Uyeda dissented, highlighting the significant initial and ongoing compliance costs for funds. Despite these criticisms, supporters of the rule, such as Stephen Hall of Better Markets, believe it will prevent funds from misleading investors, especially in the context of ESG, climate, and sustainability investments and view it as a long-overdue modernization of the Names Rule.
5 Broker behaviors that should raise a red flag – Author Melanie Waddell
There are a number of behaviors that clients should look out for as they consider a broker. If a client meets a broker who engages in any of these behaviors, the client should consider it a red flag:
- Asking for a personal loan.
- Selling promissory notes.
- Using a personal e-mail address, phone number or any other personal contact information.
- Sketchy fund transfer requests, including a request to make a transfer to anywhere other than the firm.
- Requesting to become a beneficiary on a client’s estate.