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 RIA cybersecurity, new product announcements from fintech providers, and how to create the best contingency plan for your RIA firm.
Here's our top investment adviser compliance articles for the week of September 27th, 2019:
With the ever-growing threat of cyber breaches, the Securities and Exchange Commission (“SEC”) has recognized the need for proper education on cybersecurity and has provided resources. The SEC added a cybersecurity section to its audits to fully drive the importance of the issue home for advisors. They have also created two key steps for RIA's to follow and build a strong defense against cyber criminals. In addition, a checklist is available to make sure a firm is on the right path to avoiding such threats.
2. WealthTech Regulatory Aspects Explained: What should Startups Keep in Mind (Author - Vasyl Soloshchuk, Financial Advisor Magazine)
When a company is just starting out, it is important to make sure all the boxes are checked. In the wealth management industry, according to Vasyl Soloshuck, "every step one takes in the field is highly regulated and is subject to legal prosecution, in spite of the fact that one may have no knowledge of it.you are held accountable in more ways than one." Soloshchuk elaborates, “The journey to a wealthtech startup begins with the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority ("FINRA"). These organizations aim to protect investors from fraud and misbehavior, so they check all the aspects of a new startup before it starts serving clients. Therefore, the first step to registering a robo-advisor is the submission of Form ADV to the SEC…”
Just this past week, RIA in a Box announced a free level of access to their Vendor Due Diligence Platform, which is a part of the MyRIACompliance® platform. After signing up, users can automatically connect with up to five vendors on the RIA Vendor Due Diligence platform. This allows registered investment advisors and vendors to automate document sharing and tracking. GJ King, President of RIA in a Box, stated, “The RIA industry is more dependent on third party vendors than ever before. Given the regulatory focus and how important it if for an RIA firm to perform proper third-party vendor due diligence as part of its cybersecurity program, we’ve spearheaded this new platform to streamline this important process for RIA firms and leading industry vendors.”
4. Mixing fiduciary and nonfiduciary standards can be counterproductive (Author - Blaine F. Aikin, InvestmentNews)
Even though a few months have passed since Regulation Best Interest (“Reg BI”) was finalized, there are still many blurred lines and unanswered questions. In an attempt to clear up any confusion, the SEC released a series of informational videos that aim to explain the difference between brokerage and advisory services. However, much like Reg BI itself, the videos fail to mention that “a broker is not accountable to the customer as a fiduciary whereas an investment advisor is a fiduciary.” As a result, advisors are having a hard time understanding where they stand. Blaine F. Aikin goes on to explain, “Two recent academic studies show that fiduciary accountability leads to lower investment costs and better advice but that mixing fiduciary and nonfiduciary standards can be counterproductive. These studies cast further doubt on the wisdom of the SEC’s current regulatory approach”.
5. There is No Good Excuse for Failing to Have a Contingency Plan (Author - Tammy Robbins, WealthManagement)
There seem to be many reasons why advisors are slow to create a contingency plan. Tammy Robbins has a few ideas as to why this may be, “When it comes to other elements of contingency planning, however, most advisors haven’t been quite as proactive, slow to draw up plans that deal with short- and long-term disability, as well as death. Theories abound for why this is the case. One is that advisors are very protective of the businesses they have built and are uncomfortable imagining anyone else running them. Another is that they don’t want to consider their own mortality.” There are many questions to keep in mind when putting together your plan, and Robbins has listed a few that will start you on the right path.
Don't forget to check out last week's top RIA compliance news articles focusing on the future of the fiduciary standard, how regulation technology (“Regtech”) is changing compliance, and how RIA firms should approach client communication when it comes to texting.