RIA Compliance and Practice Management Blog

Top RIA compliance news articles for the week of Nov. 4, 2022

Posted by RIA in a Box

Nov 11, 2022 2:53:33 PM

RIA marketing rule

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) Marketing Rule, warnings of potential fraud amid a looming recession, and tips for investment advisers to protect against cyber attacks.

Here are our top investment adviser compliance articles for the week of Nov. 4, 2022:

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  1. SEC exams director warns advisers to strengthen cyber defenses (Author – Mark Schoeff Jr., Investment News)

The SEC proposed a cybersecurity rule for investment advisers earlier this year, which has been met with strong criticism. The rule was developed in direct response to increased cybersecurity threats due to technological advancements. A risk, which the SEC has noted, impacts RIA firms of any size.

However, despite the good intentions of the proposed rule, many advisers and organizations representing investment advisers have criticized the measure for imposing a 48-hour reporting period for cyberattacks. Many argue this turnaround time would be difficult for most firms to meet, especially smaller firms with less resources.

  1. New SEC Marketing Rule: How to Use Testimonials (Author Thomas D. Giachetti, Think Advisor)

The SEC’s new marketing rule for investment advisers went into effect on Nov. 4, 2022. The new rule allows investment advisers to include testimonials in their marketing materials. Although many know that the new rule allows for new tactics, many don’t know how to specifically follow the rule.

Here are some pointers to keep in mind in applying the SEC’s new marketing rule for investment advisers:

  • No “cherry picking.” If an adviser decides to ask clients for testimonials, the adviser must ask all clients, not just those who might provide a positive review.
  • Advisers must document and maintain records indicating all clients have been invited to provide a review, regardless of whether the client has had a positive or negative experience with the firm.
  • Advisers must be fair and balanced when including testimonials in advertising material, and must include any positive and negative testimonials.
  • Testimonials included in marketing materials must accompany disclosures on the same page, which are as prominent as the testimonial itself.
  • The rule outlines three disclosure types: whether a current client gave the testimonial, whether the person who gave the testimonial was paid for providing their testimony, and whether there is a conflict of interest in that person providing a testimony.
  1. Advisers continue to wrestle with SEC marketing rule now in force (Author Mark Schoeff Jr., Investment News)

Investment advisers have had varied responses to the SEC’s new marketing rule. Many advisers don’t thoroughly understand the rule, while others wait to see what their peers will do, but risk their competitors gaining valuable clients by implementing the rule first. With the new rule, investment advisers face great reward and opportunities to exercise their creativity, but also great risk.

The SEC still has not made it clear how it will enforce the new marketing rule. For now, many investment advisers have chosen to watch for the first enforcement cases against violations of the rule, to see what actions to avoid and how to best comply with the rule.

  1. SEC Accountant Warns of Heightened Fraud Risk Amid Recession Fears, Market Selloff (Author – Jean Eaglesham, The Wall Street Journal)

In light of the market selloff and fears of a recession, this article explores potential fraud. Paul Munter, acting chief accountant at the SEC, said, “The current economic environment is subject to significant uncertainties and, historically, that oftentimes leads to heightened fraud risk.”

The warning comes as regulators increase their scrutiny of auditors. The SEC is concerned auditors too often fail to respond adequately to red flags, which point to possible violations. For that reason, now is as good a time as ever for firms to focus on their compliance programs to ensure employees understand the behaviors expected of them and how to do their part to protect the firm.

  1. Don’t Let the Fraudsters Win (Author – Jena Kennedy, Think Advisor)

As technology advances and cybercrimes increase, firms need to pay more attention to cybersecurity. According to a research study, cyberattacks on the insurance landscape increased 50% compared with 2020. A method called “credential stuffing,” a cyberattack method in which attackers use a list of compromised user credentials to breach a system, has proven to be one of the most effective methods of compromising personal data which cybercriminals use.

For that reason, firms should encourage their employees and clients to update their login credentials. Credential stuffing works because people tend to be creatures of habit. They often reuse usernames and passwords across multiple sites, and neglect to perform basic actions which could provide protection, such as changing passwords frequently or using more complicated passwords. Implementing these new behaviors can help save someone from becoming a victim of cybercrime.

Still have questions about the SEC’s Marketing Rule? You aren’t alone. Industry experts have stated that while most firms are prepared for the compliance date (today), there is a certain level of ambiguity that could leave firms susceptible to certain “compliance questions,” which include model fees.

Despite this concern, which many think will lead to the SEC release of additional guidance on the rule, experts believe the industry is ready for the new rule, with firms putting in a “good faith effort” to comply with the new requirements.

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Don't forget to check out last week's top RIA compliance news articles that focus on the Securities and Exchange Commission (SEC) Marketing Rule, the SEC’s continued enforcement actions, and how firms embrace communication apps and remain in compliance.

Topics: RIA Operations, RIA Compliance, RIA Technology

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.

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