More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- 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.
Top exam officials at the Securities and Exchange Commission ticked off for compliance officers the hot-button issues on their radar this year.
Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, told compliance officials during the Investment Adviser Association’s annual compliance conference, held Thursday and Friday in Arlington, Va., that OCIE is closely watching advisors’ use of alternative mutual funds.
One of the fastest growing new fund sectors, alt mutual funds have seen a 63% rise in assets, with total assets now standing at $258 billion, Bowden said. By 2022, he said, 20% of fund assets will be in these funds.
While there’s “nothing wrong with these strategies” per se, advisors are billing them as “bright, shiny objects,” he said, “but they are a sharp object.”
“The use of market valuation for illiquid securities in an open-ended mutual fund, which requires daily valuation and offers daily liquidity is fraught with risk,” Bowden told compliance officials. “If any of you are considering launching a mutual fund that uses alternative investments or strategies, I implore you to evaluate the reasonableness and the effectiveness of your controls.”
In short, he said, “daily valuation and daily liquidity require control and discipline.”
Both Bowden and Jane Jarcho also noted the agency’s focus on wrap fee arrangements (specifically reverse churning). The agency, Jarcho said, is looking to see if these arrangements are being “abused,” and is “focused on fiduciary duties” associated with these products and whether they are suitable for clients. “Advisors need to take action if the wrap fee is no longer appropriate,” she said.
Jarcho also said that OCIE is currently devising an approach to assess advisory firms’ cybersecurity policies and procedures. She said the agency will assess “the level of preparedness and experiences” that firms have had with cybersecurity threats. Actual exams in this area haven’t commenced as of yet, she said, and “firms aren’t supposed to follow any cybersecurity policies per se.”
She added that the agency is currently reviewing as a potential guide the cybersecurity framework issued in early February by the National Institute of Standards and Technology.
“In today’s world, everybody has to be concerned about cybersecurity — there’s no pass for small firms,” Jarcho said.
As to other new and emerging issues, Jarcho revisited the recent launch of the agency’s never-examined advisors initiative. She reminded the conference attendees that the initiative is not directed at newly registered private fund advisors, as they will continue to be reviewed under the agency’s presence exams.
She also clarified that while the SEC has stated that it will focus on those firms that have been registered with the agency for at least three years, “it doesn’t mean that if you’ve been registered less than three years that we won’t be there [to examine you].”
“All [SEC regional] offices are participating” in the initiative, Jarcho said, "so it will be [taking place] throughout the country.” Advisory firms can expect the examiners to take a “risk assessment approach, ask for key documents and [to have] one telephone interview, at the minimum, with the CCO.”
Ultimately, she said, the risk assessment approach will determine “whether we need to put the firm on our exam plan in the upcoming year — or sooner.”
Check out FINRA’s BrokerCheck ‘Hides’ Criminal Records, Has Other Holes, Study Says on ThinkAdvisor.