Each 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 on the Securities and Exchange Commission's ("SEC") latest risk alert, increased spending on cybersecurity as a result of COVID-19, and how long it truly takes to start a RIA firm. Here's our top investment adviser compliance articles for the week of August 7th, 2020:
1. SEC Highlights Compliance Risks Amplified by Pandemic (Author - Mark Schoeff Jr., InvestmentNews)
This past Wednesday the SEC Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alert calling for advisors to pay closer attention. The alert focuses on how business is being conducted with clients and the possibility of over-billing because of challenges directly linked to COVID-19. The SEC shared an example, “market volatility and financial pressure on firms may be increasing conflicts of interest, such as recommending inappropriate rollovers from company retirement plans to individuals retirement accounts, borrowing or taking loans from clients or commending high-fee investments that benefit advisers and brokers.” The risk alert also points out the higher risk that comes with the increased use of telecommunications, mainly “regarding access to systems, investor data protection, and cybersecurity”.
As we are starting to see an increase in advisors wanting to establish their own RIA, it is important that they are aware of what that process looks like. Advisors can potentially launch their RIA in a four to six-month time frame if they are properly prepared. A few very important tasks that should be addressed early on are establishing a legal counsel to review and ensure all of their documents are properly prepared, a marketing firm to assist in the creation of their brand, logo and website, and an IT firm so they can have phone lines and numbers secured. The custodial householding spreadsheet is another part of the process that can be very time consuming, which is why it is important to be working with your established legal counsel on it early on. Advisors that have done their due diligence and addressed these task should see their new RIA launching in that four to six month time frame.
3. SEC Clarifies Use of ‘Advisor,’ ‘Adviser’ by Dually Registered Firms (Author - Melanie Waddell, ThinkAdvisor)
Melanie Waddell explains how the SEC has offered guidance relating to Regulation Best Interest (“Reg BI”) in a recent frequently asked questions (“FAQ”). The FAQ addresses the appropriate use of the term “advisors/advisers”. According to the SEC, an individual or business may distribute content that describes themselves as “financial advisors,” “advisers” or “advisors” as long as they are a registered investment advisor (“RIA”) or are dually registered.
4. SEC Warns Advisors, Brokers About Charging Excessive Fees During Shutdown (Author - Tracey Longo, Financial Advisor Magazine)
As the country aims to create a sense of normalcy amidst COVID-19, OCIE has a message for advisors. According to an SEC risk alert issued on August 12, 2020, it appears that advisors may be up charging clients and offering conflicted advice to close the gap in their yearly revenue because of the economic shutdown due to COVID-19. The OCIE has named the top three violations they have seen: 1) Advisory fee calculation errors, including valuation issues that result in over-billing of advisory fees, 2) Inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts, and 3) Failures to refund prepaid fees for terminated accounts. Overall, the SEC urges firms and advisors to address these issues now to set a precedent on how to conduct business in a post-COVID world.
5. Wealth Management to Spend $24 billion on Tech Annually by 2023: Study (Author - Nicole Casperson, InvestmentNews)
As a result of the increase in telecommunications and switch to remote work, the wealth management industry is expected to spend more than ever before on technology and cybersecurity in the next few years. Celent’s “Wealth Management Technology Forecast 2020” study predicts that investments in telecommunication (collaboration and onboarding tools, two-factor authentication, etc.) and cybersecurity will increase with a compound annual growth rate of 5% each year until 2023, taking the current annual industry spending of $21.4 billion to $24 billion.
Don't forget to check out last week's top RIA compliance news articles that focus on upcoming changes to the SEC's advertising rule, how the financial industry is increasing their spend on cybersecurity, and whether or not work from home will be the new normal for advisors.