Pressures on compliance professionals at advisory firms and broker-dealers continue to mount as the Securities and Exchange Commission, the Obama administration, the Financial Industry Regulatory Authority and the Department of Labor are gearing up to usher in new requirements.
While compliance is increasingly becoming a core function at advisory firms and broker-dealers, with firms hiring more personnel to help in this area, a recent Cipperman Compliance survey found that firms still aren’t devoting enough manpower or funds to their compliance programs.
A recent poll conducted by the Investment Adviser Association found that firms continue to try and keep up with ongoing compliance challenges such as cybersecurity, custody of client assets, advertising/marketing, fraud prevention and compliance with the Foreign Account Tax Compliance Act — but new compliance challenges are lurking around the corner.
Regulators treat the industry as if “we are moonshiners,” said BD recruiter Jon Henschen, in response to recent news that FINRA was scrutinizing brokers’ pay practices for conflicts of interest. “They allow us to continue to operate as long as we pay their extortion money, i.e. FINRA fines. Between compliance rules and company policies becoming so complex and convoluted, many times advisors have difficulty discerning if they are doing something wrong.”
Read on to see five new chores that will only add to firms’ compliance checklist.
1. Mandatory Succession Planning
The SEC’s Division of Investment Management is developing mandatory succession plan rules for RIAs.
The rules, which could come out by year-end, would require investment advisors to plan for market stress and other events that may prevent an advisor from serving its clients – including addressing the risks of losing key personnel, according to Karen Barr, president and CEO of the Investment Adviser Association.
The rules, Barr says, are part of SEC Chairwoman Mary Jo White’s five-part initiative to enhance the SEC’s monitoring of the industry. “Advisors typically already have business continuity plans, but we anticipate that this proposal will go beyond those plans and specify other areas that must be addressed.”
The North American Securities Administrators Association recently adopted its own model rule for business and succession plans, which, while not mandatory, provides a roadmap for those states that choose to regulate succession planning for advisors.
NASAA’s model rule became effective on April 13, and can now be adopted by individual states well as the Canadian provinces, Mexico, the District of Columbia and Puerto Rico. The effective date will depend on the adopting state or region.
Form ADV Changes
The SEC wants advisors to not only provide more information about their use of derivatives in separately managed accounts, but also about their branch office operations and their use of social media.
Tom Giachetti, chairman of Stark & Stark’s Securities Practice Group, says that while Form ADV currently requires an advisory firm to identify its website, the proposed amendment would require an advisor to include any social media platforms it uses.
Requiring more info about firms’ social media will make it easier for SEC examiners to “locate and scrutinize online RIA advertisements,” Giachetti says, while also potentially having a “profound effect upon advisory firms whose representatives are using social media to advertise on behalf of the RIA without properly notifying management.”
The IAA urged the SEC in its recent comment letter on the rule, which was proposed in late May, to not only amend confusing questions about custody, but to also focus a “particularly keen eye” on the disproportionate costs that would be imposed on smaller advisors if the agency moves ahead with its plan to require firms to provide more information about their use of derivatives in SMAs.
Treasury’s AML Rules for Advisors