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’s (SEC) proposed rule which would make investment advisers responsible for monitoring third-party service providers, the industry response to the proposed rule, the opportunities and requirements which the SEC’s new marketing rule presents to firms and investment advisers’ perspective of cryptocurrencies in light of the SEC’s recent enforcement actions.
Here are our top investment adviser compliance articles for the week of Oct. 21, 2022:
1. SEC wants advisers responsible for subcontractors’ fiduciary compliance (Author – Dan Shaw, Financial Planning)
The SEC recently proposed a rule which would make financial advisers responsible for monitoring third-party service providers to which they outsource “core-advisory services.” This rule would make investment advisers responsible for ensuring there are no breaches of fiduciary duty at the third-party service providers they turn to for help with investing software, investment indexes, regulatory compliance and other functions. If these services are poorly performed, investors could be negatively affected.
The SEC voted 3-2 in favor of the proposal, and the proposed rule is now in a 60-day comment period.
2. New SEC Plan Says RIAs Must Vet Third-Party Services (Author – Melanie Waddell, Think Advisor)
The SEC recently proposed a rule which would prohibit registered investment advisers for outsourcing certain services and functions without due diligence and monitoring the service providers. Although the rule was developed to protect clients, some entities, such as the Investment Adviser Association (IAA) and advisers who would be affected by the rule find it to be burdensome, especially for small firms. Some argue firms, particularly smaller ones, do not have the resources to conduct such thorough due diligence and monitor the services provided through a third-party.
3. Some advisers welcome increased regulatory scrutiny of outsourcing (Author – Mark Schoeff Jr., Investment News)
While some entities and advisers criticized the SEC’s proposed rule, which would require investment advisers to do more to oversee outsourcing, some did not. Some advisers welcome the SEC’s effort to impose minimum due diligence and monitoring requirements for those who turn to third parties for functions such as portfolio management, indexing, trading services and software.
“Scrutiny should not be something that scares advisers away, especially if they’re fiduciaries,” said Tyler Whitehouse, director of financial planning at RMR Wealth.
“I think it’s easier to justify the model if you provide planning prior to and during the engagement,” he said. “It goes back to know your client. If you have a robust compliance department within your RIA, and they can monitor and review this stuff, you’re on third base” in terms of meeting a higher outsourcing standard.
“Financial technology firms deserve stronger vetting,” said Leibel Sternbach, chief technology officer at Fusion Capital Management. He has seen many examples of problems that arise — including miscalculated fees and botched transactions — when functions such as trading, billing, reporting and record keeping are handed off to a third-party firm.
4. SEC Marketing Rule Brings New Freedom, New Requirements: Brian McLaughlin (Author – Jane Wollman Rusoff, Think Advisor)
The new marketing rule for RIAs went into effect on May 4, 2021, and on Nov. 4, 2022, compliance with the new rule becomes mandatory. What is perhaps most exciting about the modernization is that the rule reverses the SEC’s prohibition of testimonials and endorsements, thereby letting advisers market and advertise on social media so long as they’re compliant.
But along with the new, game-changing freedom comes many stringent technical compliance requirements. These include updated disclosures, a written Promoter’s Agreement and Promoter’s Disclosure Statement, adoption of new policies, and addition of a sector to Form ADV that advisers must provide.
5. Crypto Is More Attractive as SEC Gets Aggressive, Investors Say (Authors – Emily Nicolle and Vildana Hajric, Wealth Management)
The SEC has been administering greater enforcement action in relation to the misuse of cryptocurrencies. While the expectation might be that this would intimidate investors from engaging with cryptocurrencies, the response has been quite the opposite.
In a recent survey, 60% of 564 respondents indicated they viewed the recent spate of legal action in cryptocurrencies as a positive sign for the asset class, whose trademark volatility has all but dissipated in recent months. Furthermore, the survey found most investors were slightly more optimistic about cryptocurrencies than they were when they were asked in a survey in July. Almost half of respondents expect the world’s largest cryptocurrency by market value to continue trading between $17,600 and $25,000 until the end of this year — a departure from this summer’s poor outlook, when most said it was more likely to first drop to $10,000 than to climb to $30,000.
In light of such favorable outlooks on cryptocurrencies, it might be worth investment advisers continuing to follow the conversation around cryptocurrencies.
Don't forget to check out last week's top RIA compliance news articles that focus on the SEC new marketing rule, the SEC’s record-keeping regulations, the Financial Industry Regulatory Authority’s (FINRA) new continuing education (CE) requirements, and the succession of a financial advisor.