RIA Compliance

SEC Announces Examination Priorities for 2025

November 11, 2024 | Charlie Jarrett

The SEC recently announced its annual Examination Priorities for the 2025 year. This annual release provides insight into the areas that the SEC plans to highlight when inspecting investment advisers, investment companies, broker-dealers, and other entities subject to examination by the SEC’s Division of Examinations. For investment advisers, the 2025 priorities largely are unchanged from the announced 2024 priorities, which we have previously discussed.

For FY25, the SEC again intends to focus on investment advisers who have never been examined, newly registered investment advisers, and investment advisers who have not been examined recently.

SEC Announces Enforcement Results for 2023

December 7, 2023 | Charlie Jarrett

With the end of the federal government’s fiscal year, the Securities and Exchange Commission (SEC) once again recently released results from the enforcement program, covering November 2022 through October 2023. The release included cumulative totals and highlighted individual cases and enforcement areas of concentration. The annual release serves as a roadmap for where the SEC is spending its resources, and what conduct will likely lead to enforcement actions.

During fiscal year 2023, the SEC’s Enforcement Division filed 3% more total enforcement actions than during 2022. This included an 8% increase in “stand-alone,” or original actions, along with increases in the number of “follow-on” administrative proceedings. These “follow-on” actions are typically filed after an associated criminal, civil, or other regulatory action, and look to impact an individual’s ability to conduct business in the securities industry.

Investment Advisers and the Annual Updating Amendment Process

January 6, 2023 | Charlie Jarrett

For the majority of investment advisers registered with either the SEC or state regulators, annual updating amendment season is once again upon us. Advisers whose fiscal year ends on December 31 are required to file their Form ADV annual amendment within 90 days or by March 31, 2023.

While investment advisers are under a continuing obligation to update their disclosure documents when certain or material information becomes inaccurate, the annual update is a universal requirement designed to ensure that the filing information for investment advisers is up to date. This serves an important function in that it allows clients and potential clients to review the publicly filed ADVs for investment advisers on FINRA’s BrokerCheck and the SEC’s IADP. Additionally, regulators review the filings and the underlying analytics to track industry trends, plan examination targets, and conduct regulatory sweeps.

SEC Releases 2022 Examination Priorities

April 21, 2022 | Charlie Jarrett

The Securities and Exchange Commission (SEC) recently released the 2022 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers during the coming year.

While the SEC notes the continued impact of COVID-19 on investment advisers and the investment industry, the SEC reported an increase in examinations conducted during FY21, with the total number of completed examinations close to the pre-pandemic levels of FY19.

For FY22 examinations, the SEC will place a significant focus on (1) private funds; (2) environmental, social, and governance (ESG) investing; (3) standards of conduct: Regulation Best Interest (Regulation BI), fiduciary duty, and Form CRS; (4) information security and operational resiliency; and (5) emerging technologies and crypto-assets. Many of these focus areas, such as ESG and Regulation BI, are carried over from previous years and mark a multi-year emphasis for the SEC.

SEC Updates Form CRS Disciplinary Guidance

October 16, 2020 | Bryan Gort

Last week the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) released updated guidance to the disciplinary disclosures section of Form CRS. The purpose of Form CRS is to provide a succinct summary of the business of the Investment Adviser or Broker-Dealer to provide a retail investor with the proper information to make an informed decision regarding whether an investment advisory or brokerage relationship is in the best interest of the investor. Form CRS also provides a platform to generate questions for clients to ask their financial professional to spark a conversation regarding the disclosures. Likewise, the purpose of the disciplinary section of the Form CRS is to give an overall indication as to whether the firm or its financial professionals have disciplinary history to disclose.

The SEC and FINRA place a high level of importance on ensuring that firms adequately disclose their disciplinary history to provide full and accurate disclosure to retail investors. Since June 30, 2020, the required implementation date of Form CRS, the SEC and FINRA have examined investment advisers to determine compliance with the guidance regarding Form CRS and Regulation BI. In its examinations, the regulators determined that many investment advisory and brokerage firms were either not providing a response to the disciplinary section or providing more details than the section’s instructions require. The following are summaries of the updated guidance on Form CRS disciplinary disclosures:

Massachusetts Adopts New Rules Mandating Additional Written Fee Disclosure by RIAs

June 25, 2019 | Parker MacIntyre

The Massachusetts Securities Division (“MSD”) has announced the adoption of new rules requiring that investment advisers registered with the MSD provide, to clients and prospective clients, an additional one-page stand-alone disclosure document specifically detailing the adviser’s fee schedule. This new disclosure document or “Fee Table” will need to be “updated and delivered consistent with the existing requirements for Form ADV (including the Brochure).” The new rules, which were adopted pursuant to the MSD’s notice and comment process, take effect—and will be enforced—commencing on January 1, 2020.

While only applicable to advisers registered with the MSD, the new rules requiring the Fee Table could portend similar future action by additional states. Moreover, the new rules come on the heels of the SEC’s June 5^th high profile standard-of-conduct releases (which we have previously chronicled) that also include a new stand-alone disclosure document for SEC-registered advisers to be known as Form CRS. If the MSD’s actions here are in fact echoed by additional states, it could cause potential headaches for the RIA industry, as this would require RIAs operating in multiple states to conform to multiple differing disclosure document regimes. Additionally, with the new Form CRS (applicable to SEC-registered advisers only) beginning to circulate at about the same time, an assortment of new documents being presented to clients may cause marketplace confusion as well. Continue reading ›

State Securities Regulators’ Association Adopts Model Information Security Rule for RIAs

June 5, 2019 | Parker MacIntyre

The North American Securities Administrators Association—also known as “NASAA”—a cooperative association consisting of the chief securities regulators for each of the 50 United States, as well as Canadian and Mexican jurisdictions, has recently voted to adopt a model information security rule. NASAA’s new model information security rule could—if widely implemented by the individual NASAA Member jurisdictions—ultimately have a broad impact on the compliance programs of state-registered investment advisers.

Among its many roles as a confederation of individual regulators, NASAA frequently drafts and circulates “model rules” to its Members, who eventually vote on and adopt these draft rules for use by the various Member jurisdictions. A “model rule” is a familiar regulatory tool, which essentially provides a template upon which laws, rules, and other regulations can be drafted. For example, many of the individual states’ securities acts are variants of the Uniform Securities Act of 2002, a model act created by a group of legal scholars, regulators and veteran attorneys. NASAA’s new model rule is just such a template for regulators. Individual states and other jurisdictions may—at their discretion—adopt it in whole, in part, or not at all. That said, we believe that, especially given the growing importance of cybersecurity issues, it will be used more likely than not as the states come around to developing rules to parallel those already in place at the federal (SEC) level. Continue reading ›

New OCIE Risk Alert Urges Advisers to Review Their Data Security Procedures

May 31, 2019 | Parker MacIntyre

In its latest Risk Alert, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) heeds advisers and broker/dealers to take a fresh look at their policies and procedures in the area of electronic customer record storage in light of shortcomings discovered by OCIE’s staff as part of recently-conducted regular examinations. These shortcomings include weak or misconfigured security settings on a network storage device that, in the worst-case event, could result in unauthorized access to customer information.

OCIE Risk Alerts are highly useful resources for compliance professionals to consider as these published notices serve as a window into not only the recent experiences of OCIE staffers out in the field, but also the thinking of OCIE management as to where it will be directing its staff to focus on in future examinations. In other words, if the management of OCIE warrants it important enough to publish a Risk Alert on an particular topic, registrants can be assured that future exams will likely focus on deficiencies in that area.

This most recent Risk Alert zeros-in on deficiencies uncovered by examiners with respect to how advisers and brokers are protecting their customers’ electronic records—specifically, records kept in the “cloud” or on other types of networked storage solutions. OCIE defines cloud storage as the “electronic storage of information on infrastructure owned and operated by a hosting company or service provider.” Obviously, such storage systems may be especially vulnerable to hacking or other nefarious activities, and as such, warrant robust protections. Continue reading ›

SEC Commissioner Fears that Non-Public Guidance from Agency Staffers May Amount to “Secret Law”

May 7, 2019 | Parker MacIntyre

In a recent speech, an SEC Commissioner took the opportunity to voice her concern that the prevalence of non-public guidance now being conveyed by SEC staffers to certain market participants and their counsel is tantamount to what she terms “secret law” which, in her opinion, “crosses the line” of propriety.

SEC Commissioner Hester M. Peirce’s well-crafted speech, given in Washington at the recent SEC Speaks 2019 event, invokes imagery of the children’s novel The Secret Garden to posit her belief that the abundance and importance of non-public guidance being provided and relied upon by certain of the SEC’s divisions and offices has created a secret garden of its own within the SEC’s walls. As an example, she cites her hearing that “staff simply will not accept certain applications for entire categories of products or types of businesses for reasons not found in our rules.” Additionally, she notes hearing that “one particularly complex set of Commission rules does not matter much in practice because firms operate instead under a set of published and unpublished letters and other directives from staff.” She also references firms being examined “against the terms of draft no-action letters and notes of telephone calls with Commission staff.” In all of these cases, Peirce fears that the “line has been crossed” and that such activities amount to “secret law.”

That such “sub rosa guidance,” as she terms it, amounts to “secret law,” is in Peirce’s opinion undeniable. As she points out, while it is true that courts would be reluctant to defer to such staff guidance in a legal proceeding, it nonetheless does “as a practical matter, bind market participants, affecting the scope of their rights and obligations and limiting the range of permissible activities.”

SEC Identifies Common Compliance Issues with Reg S-P Privacy Notices and Safeguarding Policies

April 30, 2019 | Patricia Klusmeyer

The SEC’s Office of Compliance Inspections and Examinations recently conducted examinations of privacy notices and safeguarding policies of SEC-registered investment advisers and broker-dealers adopted pursuant to Regulation S-P. As a result of these examinations, the SEC issued a Risk Alert identifying common deficiencies that are important to keep in mind when adopting, implementing and reviewing compliant privacy notices and effective safeguarding policies.

Regulation S-P requires financial institutions such as investment advisers and broker-dealers to adopt written policies and procedures to safeguard nonpublic personal client information. These policies must be reasonably designed to protect the confidentiality and security of nonpublic personal client information from any anticipated threats or hazards and any unauthorized access or use. The policies should address administrative, technical, and physical safeguards.

Investment advisers and broker-dealers must also provide initial and annual privacy notices to their clients describing the types of information collected and disclosed, the types of affiliated and non-affiliated third parties the information is disclosed to and, unless exempted from the opt-out notice requirement, an explanation of the client’s right to opt out of disclosure of nonpublic personal information to a non-affiliated third party. The privacy notice should also generally describe the firm’s safeguarding policies and procedures.