More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
Social media use among registered investment advisors shot up over the past year, with 80% of RIAs stating they have adopted formal written policies concerning social networking, up from 64% in 2011 and 43% in 2010, according to the seventh annual Investment Management Compliance Testing Survey, released Tuesday.
The survey, conducted by the Investment Adviser Association (IAA), ACA Compliance Group and Old Mutual Asset Management, found social media to be the “hottest” compliance topic, with 54% of firms prohibiting the use of personal social media sites for business purposes, and 52% reporting that their social media testing has increased since 2010.
The second most commonly cited hot compliance topic by RIAs was insider trading, with 74% of firms testing to detect insider trading. More than 30% have increased their testing since last year.
The online survey was conducted from April 23 to May 18 and collected responses from 555 compliance professionals, representing a range of SEC-registered advisors.
The groups say that this year’s survey addressed compliance testing in the context of performance advertising; the Securities and Exchange Commission’s (SEC) pay-to-play rule, which restricts advisors’ and their employees’ ability to make political contributions to government officials to influence the selection of advisors to public pension funds and other government entities; special trading issues; and oversight of third-party service providers.
The survey also contained “trend update” questions about social media, whistleblowing, gifts and entertainment and insider trading.
Other key findings from the survey include:
- Since last year’s survey, compliance testing has increased the most in the areas of pay-to-play, advertising and marketing, personal trading and social media. Seventy-nine percent of firms indicate that they have not decreased compliance testing in any area.
- Fewer than half the respondents claim compliance with Global Investment Performance Standards (GIPS) in presenting performance results. Eighty-five percent of such firms engage a third-party verifier even though verification is not required. Furthermore, 31% of firms that do not claim GIPS compliance engage a third party to review their performance presentations. Overall, 28% of firms have increased their testing of performance advertising since last year.
- Pay-to-play policies are widespread, with only 15% of firms reporting that the rule does not apply to them. Seventy-six percent of firms note that they apply their policies to all employees (as compared with 68% in last year’s survey), and only 12% limit their policies solely to “covered associates” that must be covered under the pay-to-play rule. Seven percent of firm policies prohibit all political contributions, and 60% require pre-clearance of contributions.
- 82% of firms conduct best execution reviews of their securities trades. The most common forensic tests for best execution include review of trade errors, review of best execution policies and procedures, review of an approved broker-dealers list, comparisons to benchmarks, and review of soft dollars or commission-sharing arrangements.