Each week, 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 the Securities and Exchange Commission ("SEC") proposed rules for environmental, social, and governance ("ESG") disclosures, compliance deficiencies with the Department of Labor's ("DOL") PTE 2020-02, and the role "information providers" may play in giving investors investment advice.
Here are our top investment adviser compliance articles for the week of June 10th, 2022:
1. SEC Seeks Comment on 'Information Providers' Acting as Advisors (Author – Melanie Waddell, Think Advisor)
This article explores the role "information providers" such as index providers, model portfolio providers, and pricing services in relation to investors in today's market. The SEC seeks information and feedback to determine if and when these providers might be considered investment advisers. SEC Chairman Gary Gensler has expressed support for the agency's information request, as the SEC needs to clarify how the existing regulatory rules should apply to information providers when they provide investment advice. The deadline for feedback on this matter is August 16th, 2022.
2. Wall Street And The SEC Are Headed For Clash On Commission-Free Trading (Authors – Claire Ballentine, Lydia Beyoud, Financial Advisor)
Authors Claire Ballentine and Lydia Beyoud highlight concerns the SEC has about commission-free trading in the US equities market. Online trading platforms like Robinhood follow a payment-for-order flow, which involves selling clients’ trade orders to market-making firms like Citadel Securities and Virtu Financial Inc. for execution. However, the SEC has raised concerns about the quality of the execution and whether investors actually get the best price. SEC Chairman Gary Gensler proposed an auction mechanism so that major market making firms could compete to fill retail orders versus purchase them from online trading brokerages. Other industry experts weigh in on a possible regulatory overhaul of commission free trading, suggesting investors would pay more fees without the pay-for-order-flow.
Financial firms are already showing signs of compliance failures with respect to the DOL's PTE 2020-02. Such deficiencies include 1) Failure by firms to provide sufficient acknowledgement they are acting in a fiduciary capacity, 2) Failure to disclose conflicts of interest, and 3) Failure to have policies and procedures to mitigate conflicts of interest of firms and individual advisers. The DOL is looking for firms to correct the violations and notify the agency via email within 30 days after making the correction. By failing to correct these violations, a firm can face penalties and loss in compensation. The article also points out that many firms still do not realize that the rule applies to them.
4. ESG Plan Fails to Protect Retail Investors: SEC Roundup (Authors – Nick Morgan and Tom Zaccaro, Think Advisor)
In this week's episode of the SEC Roundup, Nick Morgan and Tom Zaccaro invite George Washington Law School Professor of Corporate Governance Larry Cunningham to discuss the SEC's proposed rule on public ESG disclosures. The rule would require registrants to provide climate-related information in their registration statements and annual reports. Cunningham shares excerpts of the comment letter he and other industry experts sent to the SEC. Cunningham explores who the specific individual investors are, which demand disclosures related to ESG investments.
5. SEC’s ESG integration proposals divide industry (Author –Emile Hallez, Investment News)The SEC's proposal on ESG disclosures aims to eliminate attempts of greenwashing, ensuring funds invest according to the parameters they use to label themselves ESG. This rule aims to distinguish whether integration funds should include ESG in their names, or if there are other words to help protect investors from being misled. Industry experts weigh in on the implications and complexity of this rule.
Don't forget to check out last week's top RIA compliance news articles that focus on the SEC's proposed rules for RIA cybersecurity, the North American Securities Administrators Association ("NASAA") arbitration model rule, and exploring the future of cryptocurrency regulation.