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 ("SEC") Regulation Best Interest ("Reg BI") rule, a recent risk alert issued by the SEC for private fund advisers, and the use of virtual meetings.
Here's our top investment adviser compliance articles for the week of June 19th, 2020:
With the June 30, 2020 deadline for the Securities and Exchange Commissions ("SEC") Regulation Best Interest ("Reg BI") rule fast approaching, financial technolocy ("fintech") firms such as RIA in a Box, Morningstar and Redtail, have been deploying new tools to help advisors get ready to comply. While Reg BI is geared primarily toward broker-dealers, RIA in a Box President, GJ King, mentioned that "comments from SEC Chairman Jay Clayton make it clear that investment advisers also need to pay close attention to their fiduciary obligation as it relates to rollover investment recommendations." In addition Mr. King stated, "Advisers still need to be more attuned than ever to acting in a client’s best interest as it relates to rollover investment recommendations as that is likely to be a particular area of regulatory focus not just for broker-dealers but for investment advisers as well."
Jay Clayton, SEC Chairman, has warned advisors and broker-dealers of the importance of taking special care when recommending 401 (k)/IRA rollover and withdrawals, complex or risky products and coronavirus-related investments. Even with the flexibility that the Congress has recently provided investors regarding withdrawals from certain accounts, firms need to be aware and pay close attention to their regulatory obligations. The date for the SEC’s Reg BI is a part of the fiduciary duty battle of getting brokers to abide to the same fiduciary standard as investment advisors. FINRA has taken action as well by aligning its rule with Reg BI. According to FINRA “starting on July 18, firms will be able to use Problem Code 16–Reg BI and new Problem Code 17–Form CRS, when applicable, to report customer complaint information and required documents filed under Rules 4530(f) and (g).” The SEC recognizes that there will be a learning curve for brokerage firms and reps complying with Reg BI and are willing to work with firms unless an egregious violation is found.
3. RIAs Caught Overcharging In Private Equity Funds, SEC Says (Author - Tracey Longo, Financial Advisor Magazine)
On Wednesday, June 23rd, 2020, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released a new risk alert with information on examinations of RIAs that manage private funds. According to the article from Tracey Longo, "While performing recent exams, the SEC uncovered a wide array of questionable fees and conflicts in RIA-managed private equity and hedge funds, conflicts that caused investors to overpay, the agency said." The article provides details on the three deficiency areas mentioned in the risk alert: 1) conflicts of interest, 2) fees and expenses, and 3) policies and procedures related to material non-public information ("MNPI").
4. Report: Advisors Beware of Reg BI's Duty of Care Provision (Author - Davis Janowski, WealthManagement)
With the SEC’s June 30th deadline for Reg BI and Form CRS quickly approaching many broker-dealers and registered investment advisory firms are preparing to meet the requirements enforced by the SEC. The Duty of Care provision is a part of the deadline that can become challenging for firms as it requires all reasonably available product alternatives to be considered when an advisor makes a recommendation. These product assessments must be made at the time of recommendation, which can become problematic from a tracking and monitoring standpoint. Will Trout, Celent’s head of wealth management stated “How do you calculate the cost of that and the holistic best interest principle because cost is an issue—proof will be in the pudding—data needs to be accessible at the time of the decision, meaning you have to show you weighed these factors at the time of the decision.” Advisors have been working diligently over the last year to address these challenges with solutions that will have theirs firms prepared for the June 30th deadline.
5. Advisors Better Get Used To Virtual Meetings, Because They May Be Here To Stay (Author - Christopher Robbins, Financial Advisor Magazine)
Until the recent pandemic, virtual meetings have been slow to catch on. With advisors working from home and not having the ability to meet with clients face to face, virtual meetings have quickly become the new normal. According to the article from Christopher Robbins, "as the world begins to reopen, the financial industry can’t afford to assume that things will return completely to normal." He further details how efficient virtual meetings are for both the client and the advisor which will likely result in virtual meetings continuing into the future.
Don't forget to check out last week's top RIA compliance news articles focus on RIA in a Box's new Cybersecurity Insurance offer, Paycheck Protection Program ("PPP") loans, and a second state requiring Form CRS.