Each Friday, we are 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 how wealth management firms can keep compliant in 2023, the Securities and Exchange Commission’s (SEC) regulatory power, the agency’s decision to award a whistleblower $5 million for reporting misconduct, the Certified Financial Planner (CFP) board’s decision to ban a dozen advisers for either neglecting or misleading clients and the challenges firms may face in trying to comply with the SEC’s new marketing rule for investment advisers.
Here are our top investment adviser compliance articles for the week of Jan. 13, 2023:
5 ways for wealth management firms to keep compliant in 2023 (Author – Dan Shaw, Financial Planning)
• Stay up to date on what proposed regulations are up for adoption this year which might apply to them, like the SEC’s proposed outsourcing rule. This enables firms to anticipate what changes they may have to make to their compliance programs.
• Keep mandatory reports and documentation in a convenient place for chief compliance officers (CCO) to easily access during examinations and visits from regulators.
• Ensure your firm has measures in place to protect online data.
• Monitor employees’ electronic communications on email and messaging services.
The SEC has been met with questions regarding the extent of its regulatory power. Many of the regulators’ proposed regulations have been met with these questions from governmental entities as well as financial organizations.
For instance, shortly after the SEC shared its outsourcing proposed rule, the Investment Adviser Association (IAA), Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) each expressed concern that the SEC exceeded its authority by adding new due diligence and monitoring obligations to outsourcing.
ICI general counsel Susan Olson said, “The proposal includes requirements that are outside the SEC’s authority under the federal securities laws and the cost-benefit analysis is wholly inadequate.”
SEC awards whistleblower over $5 million for enforcement help (Author – Austin Weinstein, Bloomberg)
The SEC awarded more than $5 million to a whistleblower who the agency says helped it bring a successful enforcement action. According to the SEC, the person followed the proper process of reporting the concern and internally reported concerns prior to submitting information to the SEC. The person provided information and “substantial” assistance to an SEC investigation, which helped the agency shape its investigative strategy, identify witnesses and draft document and information requests.
Creola Kelly, Chief of the SEC’s Office of the Whistleblower, said, "The whistleblower in this case provided helpful information and substantial ongoing assistance, saving the SEC time and resources during its investigation.”
In line with its whistleblower policy, the SEC protects the confidentiality of whistleblowers and does not disclose any information which could reveal a whistleblower’s identity.
CFP bans use of credential by advisers accused of neglecting, misleading clients (Author – Mark Schoeff, Jr., Investment News)
The CFP Board of Standards recently announced it set forth a dozen public sanctions to advisers who, according to the organization, neglected or mislead clients. According to the CFP:
• One adviser allegedly recommended unsuitable investments to a client and then failed to monitor her portfolio or meet with her.
• One adviser claimed, in an ad, his retirement program could raise all the money needed for a nest egg in three to five years.
• One broker allegedly impersonated clients.
Under these sanctions, financial planners cannot use the CFP credential.
The CFP board sets and enforces the educational, competency and ethical standards for the approximately 95,000 CFPs in the United States. The actions of the CFP board reflect the serious attitude that regulators and organizations take to advisers who do not do their due diligence in serving their clients. These attitudes also reflect their dedication to protecting the market and participants’ trust.
New SEC marketing rule FAQ could be “problematic,” compliance pro says (Author – Melanie Waddell, Think Advisor)
When the SEC updated its question-and-answer guidance on its new marketing rule, some found the agency’s directive on displaying gross and net performance “problematic.”
According to the SEC, firms which use extracted performance must show both gross and net for the extracted investments shown. However, according to Amy Lynch, founder and president of FrontLine Compliance, “This could be problematic from a practical perspective in that firms do not already calculate performance on an investment-by-investment basis at the net level. They don’t do this because fees and expenses are not typically attributed at the investment level.”
Similarly, Sanjay Lamba, associate general counsel at the IAA in Washington, said advisers “may face practical challenges in presenting net performance that aren’t specifically addressed by the FAQ.”
Some believe while the new marketing rule has provided investment advisers with greater opportunities to be creative in how they design their marketing materials, it has presented additional requirements which may be difficult for advisers to meet, especially as SEC examiners prepare to conduct planned examinations soon.
Lamba said hopefully SEC examiners “consider the timing of this FAQ and permit advisers adequate time to carefully review and update their marketing materials and compliance programs, as necessary, in light of the FAQ.”
Don't forget to check out last week's top RIA compliance news articles recapping the SEC's proposed rule about outsourcing and independent contractors, the various opinions surrounding the proposal, and how investment options can change in light of the U.S. Department of Labor’s (DOL) recently proposed rule concerning environmental, social and governance (ESG).