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 impact of the government shutdown on the Securities and Exchange Commission ("SEC") new RIA registration process, how the SEC will be monitoring electronic communication, and how the SEC shutdown may also open the door for fraud. Check back each week for the latest list of top stories.
Here's our top investment adviser compliance articles for the week of January 4, 2019:
1. Government shutdown halts SEC processing of new adviser registrations (Author- Mark Schoeff Jr., InvestmentNews)
Those who planned of opening a registered investment advisory firm this New Year will have those plans halted due to the government shutdown. Entering it’s 20th day, the partial shutdown has stalled the majority of the SEC’s work including processing new adviser registrations. Vice President and General Counsel at RIA in a Box, Christopher DiTata, “is advising his clients to concentrate on establishing custodial relationships, doing due diligence on vendors and setting up office operations while waiting for the SEC to reopen,” according to Mark Schoeff Jr. There has been no indication of how long it will take to process new applications once the SEC has reopened as it is unclear how many new applications are accumulating during the shutdown.
2. What You Personally Have To Know About Regulatory Compliance Author - Bill Hortz, Financial Advisor Magazine)
Small to mid-sized firms are often fined by regulators due to the lack of compliance enforcement as often in these firms, the Chief Compliance Officer ("CCO") has another role within the firm leaving compliance neglected or carried out improperly. According to Bo Howell, “The best defense is a good offense, which means ensuring your compliance program addresses all your business operations and it is documented. As Commissioner Pierce noted, a CCO that continually implements and updates their compliance program in response to business and regulatory developments should be in good standing with the SEC and investors.”
Now that Democrats officially took control of the house on Thursday, New House Financial Services Committee Chairwoman Maxine Waters will be focused on Regulation Best Interest ("Reg BI") and ensuring that it is a true fiduciary standard. According to Melanie Waddell, ‘Waters promises to crack down on abusive financial practices, ensure ‘strong safeguards’ are in place to prevent another financial crisis and conduct keen oversight of regulators — including the Securities and Exchange Commission and its much-anticipated Regulation Best Interest.”
- The SEC Is Actively Monitoring Your Online Communications (Author- Tracey Longo, Financial Advisor Magazine)
Due to observations during exams of electronic messaging practices, the SEC Office of Compliance and Inspections and Examinations ("OCIE") issued a new risk alert that regulators will be watchful of those advisers who communicate with clients via new forms of electronic communication. As the volume of communication through social media channels, text, and instant messages has increased, the SEC has commonly found that insufficient compliance procedures have been set in place for these forms of communication. As a precaution, registered investment advisors are highly encouraged to review social media sites, set up alerts of employee or firm name appearances online, and require prior approval by IT or compliance for employees to access firm accounts from personal devices.
The government shutdown and small number of employees working at the SEC is leading to minimal protection for advisers and investors from fraud. Although the SEC states that they, “[have] staff available to respond to emergency situations involving market integrity and investor protection, including law enforcement,” the SEC still will not file lawsuits against those committing fraudulent activity, giving them the opportunity to continue their fraudulent practices. According to Brandon Reif, "You will see a lot of fraud and the commission won't have the time or resources to investigate. The remaining employees won't be able to pick up that workload. It's very dangerous to not have the watchdog keeping an eye on the securities markets.”
Don't forget to check out last week's top RIA compliance news articles on the impact of the government shutdown on the Securities and Exchange Commission's ("SEC") new advisor registration process, fraud and how the SEC will be monitoring electronic communication. Be sure to check back next Friday for next week’s top articles!