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 senior clients, robo advisors, mutual fund share class regulatory issues, and cybersecurity. Check back each week for the latest list of top stories.
Here's our top investment adviser compliance articles for the week of March 8th, 2019:
1. SEC Exams to Focus In On RIAs With Many Senior Clients (Author- Tracey Longo, Financial Advisor Magazine)
Tracey Longo writes that the SEC examination staff has observed significant weaknesses in RIA firm's policies and procedures as they relate to protecting elderly clients. As such, the SEC is placing a heavy focus on firms who serve a large number of elderly clients in its examinations. According to Tracey Longo, “With the number of seniors expected to double in the next three decades, the SEC said it is scrutinizing firms that have higher numbers of senior investors and senior assets.” Areas of focus for those with senior clients include diminished capacity procedures, retirement transitioning, communication, and the death of a client.
2. Advisors to Return $125M in 12b-1 Fees Under SEC Share Class Initiative (Author- Melanie Waddell, ThinkAdvisor)
79 investment advisors including Wells Fargo Advisors Financial Network and Wells Fargo Clearing, Next Financial, and Deutsche Bank have been ordered by the SEC to return $125 million to clients for directly or indirectly receiving 12b-1 fees for investments selected for clients without adequate disclosure. On Monday, the SEC issued these orders as part of its Share Class Disclosure Initiative which was designed to discover and eliminate abuses related to the sale of mutual fund shares. According to Melanie Waddell, “The SEC’s orders found that the investment advisors failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.”
3. 5 Reasons You're Not Reading This Cybersecurity Article (Author - Sid Yenamandra, InvestmentNews)
Sid Yenamandra of Entreda walks through reasons why that despite the threats that cybersecurity pose to advisory firms, it is still an unpopular topic for financial advisors. These reasons include trust in yourself, staff, never before suffering a breach, feeling breaches are inevitable, liability insurance, or the issue is simply being ignored. Whatever the reason, Yenamandra urges that advisors must continue to remain informed on cybersecurity topics as a breach can have massive financial and or reputational damages on your firm. To conclude, Yenamandra notes, "Learning how to protect your business requires you to explore new fields, including those that lie outside your comfort zone."
After nearly 10 years of robo advisors playing a role in the financial advisor industry, regulators are prepared to more aggressively examine algorithms and penalize those that are not in compliance. In 2017, the SEC issued guidance targeting robo investors on how to disclose services, potential conflict of interests, and fees to clients. The SEC first carried out enforcement actions against two robo advisors in December, and continues to try to ensure that the software and algorithms are doing what they are intended to do. Sean Alloca quotes Boris Khentov, senior vice president of operations and legal counsel at Betterment stating, “It’s a commonsense concept, but it was the first time it was explicitly spelled out, he says. “It’s not a business function anymore — it’s a compliance function. That’s where the regulators are turning because that’s where the action is.”
5. SEC Reg BI's Economic Analysis Too Weak, Will Face Legal Challenges: SEC's Jackson (Author- Melanie Waddell, ThinkAdvisor)
On Thursday at the Investment Adviser Association’s ("IAA") conference in an interview with IAA President Karen Barr, SEC Commissioner Robert Jackson spoke on the economic analysis supporting the SEC’s advice-standards package stating that the analysis is “too weak and that it will face legal attacks.” When asked about a timeline on a final ruling, Jackson noted that although the shutdown did cause a delay, it is fair to expect a release in the near future. In Jackson's view, the economic analysis conducted is not thorough enough to weigh the cost and benefits for investors, and the Reg BI standard as it stands today, is not clear enough making it hard for both advisors and investors to understand.
Don't forget to check out last week's top RIA compliance news articles on the SEC examination program and forthcoming guidance, the SEC's Reg BI rule, and why RIAs should expect examiners to scrutinize fees. Be sure to check back next Friday for next week’s top articles!
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.