More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
This is the first in a two-part series in which Investment Adviser Association Executive Director David Tittsworth reports on what he learned at the IAA's annual compliance conference. In part one, he looks at the legislation, regulation and policies now in place and what's next. In part two, he will look at the SEC's oversight of RIAs.
The Investment Adviser Association (IAA) has convened a two-day comprehensive investment adviser compliance in the Washington, DC area for nearly 15 years. Last week, more than 200 investment advisory compliance professionals from more than 35 states and three countries gathered in beautiful Crystal City, VA to hear the latest and greatest developments. AdvisorOne Super Editor-in-Chief Jamie Green asked me to pen a few lines in my too-long-dormant blog expressing some of my thoughts on what happened during the conference. Here goes…
Given my perch at the IAA, I tend to lump relevant legal, regulatory, and compliance developments in two different big boxes. First, what significant legislative, regulatory, or policy developments are being pursued and what’s coming around the corner? This involves looking at potential debates on Capitol Hill, as well as pending and contemplated regulations from the SEC, DOL, CFTC, Department of Treasury, states, and a myriad of non-U.S. regulatory bodies. Second, what changes and initiatives are being discussed and pursued in the SEC’s inspection and enforcement realm?
Because the SEC is the primary regulator of all IAA member firms, the SEC’s oversight activities can and do have a direct, powerful, and very profound effect on registered advisory firms.
The SEC’s Priorities: 3 Short-Term; 5 Longer-Term
In terms of regulatory policies, I must start by complimenting the SEC on providing more information than I can ever remember about its current and anticipated policy agenda. Norm Champ, the director of the SEC’s Division of Investment Management, and his team, which is in charge of regulatory and policy initiatives governing investment advisory firms and investment companies, has been very open and transparent in terms of outlining what the Division is up to.
At our conference, Mr. Champ described in detail the recent process undertaken by the Division in establishing priorities as well as an outreach program to the advisory profession and investment company boards to seek a better understanding of current industry practices and potential issues that should be on the radar.
This heightened level of openness and transparency from the SEC is most welcome and helpful. It can help all of us who are seeking to read the tea leaves and provides a meaningful opportunity for improved and productive dialogue between the registered community and our regulators.
So what are the SEC’s regulatory priorities? Mr. Champ notes that the there are some unfinished, mandatory items required by the Dodd-Frank Act and other legislation, notably the long-awaited Volcker rule, incentive compensation rules, and regulations under the JOBS Act relating to how and whether private funds can market to accredited investors.
Beyond that, Mr. Champ has specified three short-term priorities and five longer-term priorities. The first category consists of:
- Money market reform regulations
- Promulgating Red Flag regulations governing identity theft requirements
- Long-awaited guidance on valuation issues.
The second, longer-term priorities are:
- reviewing issues of how the Investment Advisers Act applies to private funds
- developing a variable annuity summary prospectus
- streamlining the ETF exemptive process
- enhancing fund disclosures about operations and portfolio holdings
- revising the Division’s 2011 concept release on funds’ use of derivatives.
Additional Priorities, and AML Coming
I note that there is one item not on the list that should be of interest to all investment advisory firms. Early this month, the SEC released a long-anticipated release requesting information on issues relating to fiduciary duties for brokers who provide investment advice to retail customers as well as a longer list of potential areas where broker-dealer and investment adviser rules could be “harmonized.” These latter issues include advertising and other communications, supervision of employees, licensing and registration of firms, licensing and CE requirements for associated persons, books and records, and use of finders and solicitors. We’ll be talking more about this in the weeks and months ahead, but suffice it to say that this request for information could lead to very significant changes down the road.
I also noted during the conference that we expect the Department of Treasury to resurrect an anti-money laundering regulation that will apply directly to all SEC-registered investment advisors. I would look for a proposed rule sometime this summer.
So what should an investment advisory businessperson take away from this? If you’ve read to this point, my guess is that you’re a bit bored and thinking that there’s nothing all that major coming up (similar to the investment adviser compliance program rule of 2003 or major changes to Form ADV 1 and 2 during the past couple of years).
Areas of RIA Specialization Probed, and the Takeaway for All
But the truth of the matter is far more complex. A lot of the regulatory and compliance challenges and issues are specific to certain types of advisory firms and their discrete types of investment activities.
For example, literally several hundred advisory firms are currently dealing with the new, difficult requirements of registering as commodity pool operators and commodity trading advisors with the CFTC. That requiries a complex learning curve regarding CFTC’s evolving requirements, involvement with the National Futures Association and understanding and completing new regulatory forms involving both operational and compliance challenges.
Similarly, advisory businesses with private fund interests (about 40% of all SEC-registered advisory firms) have been dealing with Form PF and other major compliance challenges that will require extensive effort, time, and resources.
Even beyond these more “specialized” areas, it is clear to me how the job of a compliance professional—and the manner in which an investment advisory business contemplates its role as a highly regulated business—continues to be extremely challenging and dynamic.
Discussions at our conference relating to a long laundry list of subjects prove that the duties and responsibilities of all advisory firms—even those that describe themselves as “plain vanilla”—continue to grow in complexity and difficulty. These discussions included issues relating to performance advertising and emerging issues related to social media; continuing disclosure obligations (such as Form ADV, contracts and RFPs); email monitoring and CCO liability; brokerage and trading issues; codes of ethics and personal trading, and much more.
The bottom line is that all advisory businesses need to appreciate and respect the continuing trend toward greater regulation and the need for robust and energetic compliance programs. If for no other reason, given the SEC’s changes in its inspection and enforcement activities, it would be naïve, foolish, and potentially self-destructive to ignore the clear signals requiring proactive and meaningful compliance and regulatory practices and operations.
Take it from a simple guy from Kansas: staying ahead of the curve and understanding that good compliance equals good business practices is just plain common sense.