RIA Compliance and Practice Management Blog

Top RIA Compliance News Articles for the Week of April 24th, 2020

Posted by RIA in a Box

May 1, 2020 3:38:56 PM

Top_Compliance_Articles_of_the_week-17Each week we’re giving you our weekly report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser ("RIA") compliance and regulatory issues. This week's recap focuses focus on the recent release of the North American Securities Administrators Association's ("NASAA") annual report, a rise in cybersecurity deficiencies, and the Securities and Exchange Commission's ("SEC") guidance for advisors on disclosing PPP loans on their Form ADV. 

Here's our top investment adviser compliance articles for the week of April 24th, 2020:

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1. State-registered investment advisers need better cybersecurity: NASAA (Author - Mark Schoeff Jr., InvestmentNews) 

The NASAA has released its 2020 Investment Adviser Section Annual Report, which reports on findings from 2019 as well. According to the report, “26% of advisers had deficiencies related to cybersecurity,” which is up from the 23% reported in 2017. Alex Glass, Indiana Securities Commissioner and chair of the NASAA Investment Adviser Section stated, “Our coordinated examinations show that overall deficiencies in just about every category except cybersecurity have decreased since 2015. NASAA’s new model rule requires investment advisers to adopt policies and procedures regarding information security and to deliver its privacy policy annually to clients. This represents a significant step toward enhancing the cybersecurity and privacy practices of state-registered investment advisers.”

2. SEC Clarifies When Use of “Advisor” Violates Reg BI  (Author - Melanie Waddell, ThinkAdvisor)

In an updated FAQ, the SEC has addressed the difference between when a broker-dealer can use the term “advisor” and when they cannot. The SEC stated that broker-dealers “may use these terms when they are acting in a role specifically defined by federal statute that does not entail providing investment advisory services or retail customers, for example, as a municipal advisor, commodity trading advisor, or advisor to a special entity”. However, if a broker-dealer is using “advisor” in a name or title while giving investment advice to retail customer without also being a registered investment advisor (“RIA”), that would be a violation of Regulation Best Interest’s (“Reg BI”) disclosure obligation. To break it down, a broker-dealer with an affiliated RIA is prohibited to use the term “advisor” in any messaging or client communication, while a broker-dealer that is also a state-registered advisor is free to use the term.

         3. SEC Requiring Advisors to Disclose PPP Loans (Author - Tracey Longo, Financial Advisor Magazine)

The SEC has recently announced that if advisors have taken a Paycheck Protection Program (“PPP”) loan, they must disclose this information on their Form ADV. Tracey Longo explains, “The PPP loan program is part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES), signed into law in late March, that provides loans aimed at small businesses. The loans are forgivable if they’re used largely to cover payroll”. In addition, the SEC’s Division of Investment Management recently updated its FAQs concerning the Coronavirus, stating that as fiduciaries, “advisors are required to disclose to clients all material facts related to their advisory relationships with clients, including PPP loans. The circumstances leading advisors to seek PPP loans or other types of financial help are material facts. These disclosures should include the nature, amounts and effects of such assistance”.

         4. FSI Hits SEC for “Regulation by Enforcement”  (Author- Patrick Donachie, WealthManagement)

Patrick Donachie discusses the petition created by the Financial Services Institute (“FSI”) and several other advocacy organizations that speaks out against the SEC Share Class Selection Disclosure Initiative. The petition argues that the “fees for high-cost mutual fund share classes unfairly subjects brokers to de facto rules and regulations the agency never passed”. Donachie quotes Barbara Roper, the Director of Investor Protection at the Consumer Federation of America, who has stated that, “the FSI’s illustration of the SEC’s actions as an attack on 12b-1 fees as an ‘absurd’ characterization”. Roper continues, stating, “Their objection isn’t regulation through enforcement. Their objection is enforcement of regulation. It’s a very cynical campaign.”

           5. Many Advisors Still Plagued by Cybersecurity Deficiencies (Author - Tracey Longo, Financial Advisor Magazine)

With the completion of NASAA's annual report that examined 17,533 state-registered advisors, regulators reported that they found fewer regulatory deficiencies compared to past years. However, cybersecurity was the only area that increased, with cybersecurity related deficiencies being 26% of the examinations reported compared to 23% in 2017. Tracey Longo explains, “Cybersecurity is a priority for state securities examiners, who believe that smaller companies are ‘the low hanging fruit for cybercriminals.” Moving forward, NASAA aims to help advisors better understand cyberthreats and to make sure they are as prepared as possible. NASAA stated, “Further progress in the coming year will include developing presentation materials for state regulators to offer registrants, including instructions on how firms can prepare and plan to meet demands in a shifting landscape of cybersecurity threats.”

Download our How to Manage Cybersecurity with the Coronavirus Disruption  Infographic

Don't forget to check out last week's top RIA compliance news articles focuses on the SEC's shareclass disclosure initiative and disclosure of loans through the Paycheck Protection Program, NASAA's continuing education requirement, and regulation for robo-advisors. 

Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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