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Investment Advisor Compliance Requirements

Investment Advisor Compliance Requirements.  On June 5ththe SEC approved four agenda items that encompassed the “Reg BI Package.”  These four items are Regulation Best Interest-Standard of Conduct for Broker-Dealers; Form CRS Relationship Summary; Standard of Conduct for Investment Advisors; and Interpretation of “Solely Incidental.”  

This rule impacts federally registered investment advisors.  It is unsure at this point if the individual states will adopt Regulation BI or their own interpretation of the rule. 

Below is a summary of each item of the “Reg BI Package”:

Regulation Best Interest-Standard of Conduct for Broker-Dealers

Regulation Best Interest, substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations, requiring broker-dealers, among other things, to act in the best interest of their retail customers when making a recommendation, including not placing their financial or other interests ahead of the interest of the retail customer. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone.

Broker-dealers will now have to meet four “obligations”: Disclosure Obligation; Care Obligation; Conflict of Interest Obligation and a Compliance Obligation.

Form CRS-Client Relationship Summary

The Form CRS relationship summary will require investment advisors and broker-dealers to deliver a relationship summary to retail investors at the beginning of their relationship.  Firms will summarize information about services, fees and costs, conflicts of interest, standard of conduct, and whether the firm and its financial professionals have any disciplinary history. 

The relationship summary will have a standardized question-and-answer format to promote comparison by retail investors in a way that is different from existing disclosures.  The relationship summary will permit the use of disclosure so that retail investors can easily access additional information from the firm about these topics.  It will also highlight the SEC’s investor education website (Investor.gov) which offers the investing public educational information, including a series of educational videos designed to provide ordinary retail investors with some basic information about broker-dealers and investment advisors.

The relationship summary is to be two pages in length for investment advisors’ firms (four pages in length for dually registered broker-dealers and investment advisors).  The relationship summary will be a part of the Form ADV and will be filed on the IARD system as Form ADV Part 3. 

The relationship summary is to be delivered to retail investors “at or before the time the advisor enters into an investment advisory agreement.”  This includes oral agreements, as well.  The relationship summary is to be updated within 30 days whenever any information in the relationship summary becomes materially inaccurate.  You must then communicate any changes in the updated relationship summary to retail investors who are existing clients within 60 days after the updates are required to be made and without charge.  

There are annual delivery requirements as well, around opening new accounts that are different; recommending a roll-over of assets from a retirement account into a new or existing account or investment; and, recommending an investment advisory service or investment that does not necessarily involve the opening of a new account.  

The definition of Retail Investor as provided by the SEC is:  “A natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” 

The compliance date for filing Form CRS is June 30, 2020.

Here is a link to the instructions for the Form CRS.  I encourage you to review these instructions to better understand what will be required within the Form CRS to meet your investment advisor compliance requirements.

SEC Investment Adviser Interpretations

Standard of Conduct for Investment Advisers

The Investment Advisor Interpretation (SEC IA Interpretation) reaffirms, interprets, clarifies, and provides guidance regarding the fiduciary duty derived from common law that an investment advisor owes to its clients under the Investment Advisers Act of 1940 (Advisers Act). The SEC IA Interpretation provides that this duty is principles-based and applies to the entire relationship between an investment advisor and the client. 

The SEC IA Interpretation also describes the underlying duties that constitute an investment adviser’s fiduciary duty: the Duty of Care and the Duty of Loyalty. It further breaks down the Duty of Careas follows: (i) a Duty to Provide Advice that is in the Best Interest of the Client; (ii) a Duty to Seek Best Execution; and (iii) a Duty to Provide Advice and Monitoring over the Course of the Relationship. The discussion of the “Duty to Provide Advice that is in the Best Interest of the Client” includes a subsection with a detailed discussion on the requirement for a “reasonable belief that advice is in the best interest of the client.”

Click here for the release.

Interpretation of “Solely Incidental”

The broker-dealer exclusion under the Advisers Act excludes from the definition of investment adviser, and thus from the Advisers Act, a broker or dealer whose performance of advisory services is solely incidental to the conduct of her or his business as a broker or dealer and who receives no special compensation for those services. The interpretation confirms and clarifies the Commission’s interpretation of the “solely incidental” prong of the broker-dealer exclusion of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within the “solely incidental” prong of this exclusion if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.

Click here for the release.

My understanding is the SEC is considering FAQs on this new rule.  If so, I believe this will help provide the guidance for investment advisor compliance requirements with Regulation BI.

Ongoing RIA Compliance Requirements

Ongoing RIA Compliance Requirements.  The Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alert on May 23rd concerning the security risks with storage of electronic customer information on network cloud service providers.  

The Summary of Examination Observations includes the following:

  • Misconfigured network storage solutions:  Registered Investment Advisors and Broker Dealers did not adequately configure the security setting on their network storage solution to protect against unauthorized access.
  • Inadequate oversight of vendor-provided network storage solutions:  Firms did not ensure that the security settings on vendor-provided network storage solutions were configured to coincide with the RIA or Broker Dealer’s standards.
  • Insufficient data classification policies and procedures. Firms policies and procedures did not identify the different types of data stored electronically by the firm and the appropriate controls for each type of data.

How to meet your Ongoing RIA Compliance Requirements?  

Review your security settings with your network storage solution to confirm the service is configured in accordance with your firm’s standards.  Review your RIA firm’s policy and procedures to ensure they cover data classification, vendor oversight and security features are being met by your cloud based service provider.  These steps will help your firm meet its requirements.

Investment Advisor Policy and Procedures

Investment Advisor Policy and Procedures.  On April 16, the Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert related to compliance issues with Regulation S-P as identified in recent examinations of SEC registered investment advisors and broker dealer firms.  

Regulation S-P requires firms to initially and annually, provide notice to customers that accurately reflects your firm’s privacy policy and practices regarding safeguarding and use of your customers private non-public personal information.  An opt-out notice is also required that explains the customer’s right to opt out of some disclosures of non-public personal information to nonaffiliated third parties.

The Risk Alert outlines these common deficiencies or weaknesses:  

  • Failure to provide Initial Privacy Notice, Annual Privacy Notice and Opt-Out Notices;
  • Inadequate Privacy Notices not reflecting the firm’s current policies and procedures;
  • Privacy Notices that did not provide customers with an opt-out provision;
  • No written investment advisor policy and procedures to address the administrative, technical and physical safeguards in place to protect customer information;
  • Inadequate policies that did not ensure the security and confidentiality of customer records and information; protect against anticipated threats or hazards to the security or integrity of customer records and information; and, protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to customers.

OCIE strongly recommends that RIA firms review and strengthen their data privacy policies, update their data privacy notification and ensure adherence to SEC data privacy regulations.

Recommended actions:

  • Confirm initial and annual Privacy Notices have been provided to your customers;
  • Review and update (as needed) your Privacy Notice and procedures and Opt-Out notice;
  • Review and update (as needed) your investment advisor policy and procedures for how you safeguard customer’s records and information;
  • Provide trading to all staff regarding data privacy regulations and your investment advisor policy and procedures. 

Contact Registered Advisor Services today for assistance with your investment advisor policy and procedures!

RIA Compliance Requirements

RIA Compliance Requirements.  Now that most firms have completed their Annual Amendment filing this is the perfect time to review your RIA compliance requirements.  One of those requirements is to perform a thorough review of your firm’s RIA policy and procedures manual to confirm if your firm has had a change to how it operates, added new relationships that may create a conflict of interest or more generally to confirm that the procedures your RIA firm has in place are still appropriate for the size and scope of your firm.

Recently, I was doing research on the SEC website and came across a series of questions that the SEC published for investment advisor firms to consider when reviewing their policy and procedures.  It is a terrific list of questions but more importantly provides guidance to firms on what to think about in terms of their testing requirements.  

Here is the link to:  Questions to ask from the SEC when reviewing your policies and procedures-see attachment.  

RIA Compliance Advisor

RIA Compliance Advisor. Now that we are better than half way through the first quarter of 2019, many registered investment advisor (RIA) firms are reviewing their Form ADV Part 1 Annual Amendment. This review is in preparation of updating several sections within that document and submitting it by the deadline of March 31, 2019. These are RIA firms that have a December fiscal year end.

Last year, several new questions appeared on the Form ADV Part 1 Annual Amendment that are worth repeating here.  As a reminder:  Section 5, Information about your Advisory Business – Employees, Clients and Compensation.  Specifically, Question 5K (1) Separately Managed Account Clients.  For purposes of the Form ADV, “Separately Managed Account clients” are generally defined as all of your clients who investment advisors provide investment advice to EXCEPT, private funds, business development company and mutual funds.  Outside of private funds, business development company and mutual funds, all other types of ‘clients’ come under this term.  (i.e., individuals, High Net Worth client, corporations, pension plans, etc.).

The next question that is Question 5K (4). This is the question that is asking the advisor to provide the name of the custodian(s) that holds 10% or more of your client’s regulatory assets under management.  The reporting on the corresponding schedule for Question 5K (4) is to include the name of the custodian/address, CRD/SEC number and the corresponding assets held by that custodian(s).

If you need assistance with your Form ADV Part 1 Annual Amendment filing or any other investment advisor compliance needs, contact Registered Advisor Services, your RIA Compliance Advisor, today for a free consultation!

RIA Registration Exemptions

RIA registration exemptions.  As you consider your new business model for your investment advisory firm, questions will arise around which regulator are you supposed to register your new independent investment advisory firm?  That is, either with the state or federal regulators.  Most new RIA firms will register with their state regulator, in the state where they maintain their principal place of business. 

Other new RIA firms, may avail themselves of a federal exemption and register with the Securities and Exchange Commission (SEC).  The federal exemptions exist and are applicable to investment advisory firms depending upon how your business model will operate and/or the services that will be provided.

This is not a complete list of all the federal exemptions, but some of the more common to consider when thinking about your RIA registration exemptions:

  • Your principal office and place of business is outside the United States;
  • You are a pension consultant with respect to assets of plans having an aggregate value of at least $200,000,000;
  • You are a related advisor that controls, is controlled by, or is under common control with an investment adviser registered with the SEC;
  • You are a multi-state adviser that is required to register in 15 or more states;
  • You are an Internet Adviser relying on Rule 203A-2(e).

Contact Registered Advisor Services today for more information concerning RIA registration exemptions! 

RIA Compliance

RIA Compliance.  The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) has now published its examination priorities for 2019.  Their five themes are included here and below is the detail:

  1. Compliance and Risks in Critical Market Infrastructure
  2. Retail Investors
  3. FINRA and MSRB
  4. Cybersecurity; and
  5. Anti-Money Laundering programs.

Here are the details:

Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. They will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules. 

Retail Investors, Including Seniors and Those Saving for Retirement –OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, broker-dealers entrusted with customer assets, and portfolio management and trading. 

FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. 

Cybersecurity– Each of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. 

Anti-Money Laundering Programs – Examiners will review for broker-dealer compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.

For all the important details and information, click here, for the 2019 Exam Priorities.

Wishing you a joyous holiday season and prosperous New Year!

Registered Advisor Services

Ongoing RIA Compliance Requirements.

Ongoing RIA Compliance Requirements.  Recently, the Office of Compliance Inspections and Examinations (“OCIE”) performed a limited-scope exam initiative of RIA firms to gain an understanding of the various forms of electronic messaging used by investment advisors and their Investment Advisor Representatives.

Their review focused on “electronic messaging” or “electronic communication” which includes written business communications conveyed electronically using, text/SMS messaging, instant messaging, personal email, and personal or private messaging. 

They reviewed communications when conducted on the investment advisor’s systems. Use of “apps”, platforms or when Investment Advisor Representatives use computers or mobile devices issued by the RIA firm; or personally owned computers or mobile devices used by the Investment Advisor Representative for RIA firm business.

OCIE’s examination initiative focused on whether and to what extent advisers complied with the Books and Records Rule and adopted and implemented policies and procedures as required by the Compliance Rule. 

They observed a range of practices with respect to electronic communications, including investment advisors that did not conduct any testing or monitoring to ensure ongoing RIA compliance requirements were in compliance with the RIA firm’s policies and procedures. 

In this risk alert, OCIE identified several areas, including Policies and Procedures, Employee Training and Attestations, Supervisory Review, Control over Devices where RIA firms can best meet their RIA ongoing compliance requirements.  

Click here for the entire Risk Alert.  

To stay compliant your ongoing RIA compliance requirements, contact Registered Advisor Services for a free consultation!

Experienced RIA Compliance Consultants

Experienced RIA Compliance Consultants.  As year-end approaches RIA firms are working through their year-end compliance reviews to confirm they have meet their annual requirements.

Once such a compliance review is completed I believe it is helpful for registered investment advisors to then create a ‘summary report’ outlining the areas of review as well as any ‘findings.’

The level of detail in a summary report may vary and is up to the RIA firm to determine.  Some investment advisors may choose to include a high level of detail and others may only reference the areas covered and material issues.  Working with an experienced RIA Compliance Consultant can help RIA firms determine which is best for the size and scope of their advisory firm.

RIA compliance areas to consider when creating such a report could include:

Outlining new rules and regulations that came about during the year and how your investment advisory firm is prepared to respond.

If the new rules and regulations are not applicable to your investment advisory firm, document that with an explanation as to why.

Identify significant events and material changes and how they may have impacted the investment advisory firm’s policies and/or risks.

Reference the testing documentation and any exceptions.

Finally, note any focus areas for the following year, based on the results of the annual review.

Let Registered Advisor Services be your Experienced RIA Compliance Consultant.  Contact us today for assistance!