Can this be true? A law that reduces an advisor’s regulatory burden? Believe it or not, the answer is yes! But, does it make sense for advisors to take advantage of this morsel?
On Dec. 4, 2015, the Fixing America’s Surface Transportation (FAST) Act became a law. Whether you approve or disapprove of omnibus bills that throw everything and the kitchen sink at lobbyists and constituents is another subject entirely, but the key takeaway is that this ill-named omnibus bill amended Section 503 of the Gramm-Leach-Bliley Act (GLBA). The GLBA previously required registered investment advisors and private funds to deliver annual privacy notices to their clients.
Instead, the FAST Act now provides a carve-out from the annual delivery requirement for investment advisors and private funds so long as they meet the following two conditions:
The investment advisor or private fund cannot share nonpublic information with nonaffiliated third parties (except with limited exceptions for necessary service providers, such as custodians, or in discussing a pending acquisition or merger).
The investment advisor or private fund has not revised its privacy policies since it provided its clients its most recent privacy notice.
Advisors and private funds must meet both of these conditions if they wish to avoid sending out a privacy notice on an annual basis. That being said, these institutions must continue to provide initial privacy notices to clients prior to entering into a relationship.
Why Advisors Should Still Send an Annual Privacy Notice
While I certainly appreciate that the elimination of any regulation is a plus, especially one that is vastly ignored by recipients (the overwhelming majority of advisors do not share information with any third parties, other than for the express purpose of serving their clients), perhaps advisors should consider passing on this opportunity. Why?
Within 120 days of an advisor’s fiscal year-end, the advisor must make an annual written offer of its most current brochure (Part 2A of Form ADV), together with a corresponding summary of any material brochure changes or, in lieu of the offer, provide the current brochure.
That offer letter can accomplish so much more than merely sharing the brochure. It can also confirm the client’s current investment objective. It puts the onus on the client to advise of any changes in his or her financial situation or investment objectives, and to impose any reasonable restrictions on the advisor’s current services. It can also confirm that the client is getting the account custodian’s regular statements, and is an opportunity to enclose the annual privacy notice.
With that in mind, is the inclusion of the privacy notice really a burden? I would submit that the reasonable response is no.
Furthermore, there is a new invention called the Internet (thanks, Mr. Gore) that makes this annual offer burden so much easier; so much so that you should really never have to lick another envelope again, potentially saving many dollars.
In order to deliver the brochure electronically, you must first make sure that the client has agreed, in writing, to accept delivery of required regulatory notices and documents electronically. If the client has, retain an electronic delivery receipt of all documents delivered electronically for your records.
Alternatively, place the offer or Part 2A in the client portal (if you have one). You still must maintain proof of electronic delivery authorization and notice that the offer or Part 2A is in the portal.
One last note to advisors: Do not let clients of advanced age tell you they do not use email or are not on the Internet — they are on Facebook several hours per day!
— Read “SEC to Move Examiners From BDs to RIAs in 2016: Chief White” on ThinkAdvisor.