These Compliance Issues Are Top of Mind for Regulators. Are You Ready?

Advisors aren’t fans of the SEC’s new cyber rules for advisors. Barr told SEC Commissioner Caroline Crenshaw during the IAA event that IAA’s members “take cybersecurity very seriously; it’s very important to them,” Barr said. “They already believe that the cybersecurity policies and procedures are required under the compliance program rule.”

IAA intends to submit “extensive” comments on the rule, Barr told Crenshaw. Comments are due to the agency by April 11.

William Birdthistle, director of the SEC’s Division of Investment Management, noted at the IAA even that “assets in separately managed accounts and private funds have swollen to around $43 trillion and $18 trillion, respectively, and include individuals, institutions, governmental and private pension funds, and nonprofit organizations.”

Approximately 46 million individuals currently receive services from RIAs, Birdthistle noted, with nearly 15,000 advisors reporting more than $110 trillion in assets under management.

Birdthistle noted that he’s interested “in considering ways to bring order to the new frontier of crypto assets and the expanding use of digital technology.”

He noted that “the expanding opportunities to invest in securities directly using digital platforms, such as robo-advisors, online brokerages, and mobile investment apps and portals, also present challenges.”

SEC Marketing Rule

Gail Bernstein, general counsel at IAA, stated at the event that IAA and its members have identified a lot of “interpretive” issues with the marketing rule that need further guidance. However, advisors “should not wait” until guidance is issued before they start getting their policies and procedures ready to go, she said.

Advisors will also have to contend with new Form ADV requirements related to the marketing rule, she said.

Bernstein told me in an email that for advisors with a Dec. 31 fiscal year end, their Form ADV filing in March 2023 must include responses to new Item 5.L.

“The new item asks if any of the adviser’s advertisements include performance results, specific investment advice, testimonials, endorsements, or third-party ratings,” Bernstein explained. “If so, the adviser must report whether it provided cash or non-cash compensation in connection with their use. The adviser must also report if it used advertisements with hypothetical performance or predecessor performance.”

Sanjay Lamba, associate general counsel at IAA, told me Monday that when it comes to the SEC’s advertising rule, advisors need more clarity regarding performance advertising, “which is a big chunk” of the rule. Some examples include how to calculate net performance fees.

Other questions remain concerning placement of performance advertising, Lamba said, as well as the definition of advertising, which is “pretty expansive” and also includes “indirect advertising.”

Christine Ayako Schleppegrell, senior counsel at the SEC, said at the IAA event that while the agency may consider further guidance on certain advertising rule topics, advisors should move ahead with compliance.

The law firm Eversheds Sutherland released in mid-February a marketing rule checklist for advisors to use as they prep for the Nov. 4 compliance date. Cliff Kirsch, partner and head of the Investment Services practice group at Eversheds, said in releasing the checklist that “legal and compliance personnel at advisory firms who are tasked with making sure their firms are in compliance with the new rules have a big job ahead of them over the next few months.”

Robo-Advisors in the Crosshairs

Adam Aderton, co-chief of the SEC’s Asset Management Unit, housed within the Division of Enforcement, noted at the IAA event that the agency has levied five actions against robo-advisors, three of them since last June.

“We follow where the money goes,” Aderton said. “Robo-advisors are projected to have something like $1 trillion in assets under management in the next couple years. So I think it’s quite likely that we’ll continue to see actions in that space as assets go that way and particularly areas like startups where they don’t have as robust of a compliance infrastructure as they try to get into a new area.”