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's") focus on dually registered firms, the aftermath of the GameStop stock market frenzy, and whistleblowing.
Here's our top investment adviser compliance articles for the week of January 29th, 2021:
1. SEC to Scrutinize How Dual Registrants Explain Services, Select Accounts (Author – Kenneth Corbin, FinancialPlanning)
Earlier this week, several compliance experts convened for an online presentation discussing Regulation Best Interest (“Reg BI”) and how dually registered firms must explain their business models and fee structures within the customer relationship summary, or Form CRS. The main focus for regulators will be the way these firms distinguish how their services are delivered, and to make sure this is done in a clear and concise way. This can be quite the challenge for these firms since “Reg BI is now jointly overseen by the SEC and FINRA but dual registrants still must satisfy the fiduciary standard to which the SEC holds advisors, as well as applicable state regulations,” Corbin explains. During the presentation, Clifford Kirsch stated that “if you’re active in this space, part of the challenge is you’re dealing with a regulatory scheme that often speaks to one another, but at times overlaps or at times contradict one another, so it’s a real dynamic area.”
Throughout 2020, Kevin R. Keller touched based with multiple industry leaders to discuss how they were adapting to our new reality and how they planned to move forward. One area that was at the top of everyone’s list was investing in technology and making the switch to digitized documentation and telecommunications. “Firms that had invested in technology saw those investments pay off. Digitizing essential paperwork and other compliance best-practices helped ensure a seamless transition for their employees and allowed them to focus on what matters: the relationships with their clients. Firms behind the curve had to quickly adopt such programs,” Keller says. For many advisors, taking client communication virtual not only increased their interaction with clients, but strengthened the overall relationship as well. According to a survey by Natixis that focused on the pandemic, 54% of financial professionals cited frequent communication as a critical factor in successfully growing client relationships.
3. SEC Hunts for Fraud in Social-Media Posts Hyping GameStop (Author – Ben Bain, Daniel Avis, Financial Advisor Magazine)
In the wake of the GameStop stock frenzy, SEC investigators are scouring social media and online message boards for any sign of foul play during last week’s events. “The scrutiny is being done in tandem with a review of trading date to assess whether such posts were part of a manipulative effort to drive up share prices. The regulator is specifically on the hunt for misinformation meant to improperly tilt the market,” a source close to the matter explains further. Several government employees have expressed their concern as well, including newly appointed Treasury Secretary Janet Yellen. “Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” the Treasury Department stated earlier this week.
4. Whistleblowers’ Big Bucks Come with Big Risks for Financial Advisers (Author – Mark Schoeff Jr., InvestmentNews)
Mark Schoeff Jr. discusses several whistleblower cases within the last few years and what an advisor should take into account if they are considering stepping forward with allegations. “Stepping forward incurs big risks for advisers. Even if they’re kept anonymous by the SEC, their firms may ferret them out, which could lead to losing their jobs. Legal fees also can add up, if the whistleblower needs to retain counsel,” the article explains further. Not all advisors are able to withstand the professional or financial toll when considering becoming a whistleblower, but those who were able to and successful in their search for justice do not regret it. As a result, the SEC has awarded more than $738 million to 134 individuals since issuing its first award in 2012. That includes 28 awards for more than $176 million since the beginning of October. Whistleblowers can be awarded 10% to 30% of sanctions greater than $1 million if the SEC determines their information was crucial in making the case.”
As the SEC awaits the confirmation of Gary Gensler as Chairman, the Institute for the Fiduciary Standard and the Financial Services Institute ("FSI") prepare their positions regarding the definition of "best interest" across the industry. FSI and other consumer advocates are calling for a stricter standard for all financial advisors. However, on the other side of the argument the FSI and independent wealth managers believe Reg BI works and already provides a strong standard across the industry.
Don't forget to check out last week's top RIA compliance news articles that focus on the SEC's new ad rule, top RIA compliance issues in 2021, and deregulating private markets.