From our friends at SEC3:
Regulatory Roundup for September 2024
August Regulatory Updates
From our friends at SEC3 , the August regulatory updates you need to know about:
- More Flack on WhatsApp, Hypothetical Performance SmackDown, A Timely Warning on the Pay-to-Play Rule, and Updates to Qualifying Venture Capital Fund Exemption
- 26 More Firms Slammed with $390 Million in Fines for Failure to Retain Texts and Chats
- Adviser Ordered to Stop Using Hypothetical Performance on Public Website
- Adviser Pays $95,000 Fine for Pay-to-Play Foot Fault in a Timely Reminder this Election Season
- Venture Capital Funds Adjustment for Inflation
Read all about them here.
Common Mistakes in Client Referral Arrangements
According to Richard Chen, RIAs are still making these 3 common mistakes when it comes to client referral arrangements.
1. SEC-registered advisers who pay parties more than $1,000 per year for referrals are sometimes not considering communications made by those referring parties as their own advertisements that are subject to the SEC Marketing Rule. 2. RIAs are not vetting referral sources to ensure they are not statutorily disqualified (i.e., subject to certain criminal or regulatory sanctions).
3. RIAs are still utilizing parties to refer clients for compensation even if those referring parties are not appropriately registered as investment adviser representatives in the states where they are soliciting clients.
RIA Client Referral Mistakes to Avoid
Referrals are often a significant source of new business for many RIAs. However, before entering into such arrangements, advisers should ensure they take proper steps to ensure those arrangements don’t run afoul of applicable laws.
First, make sure that the referring party is properly registered as an investment adviser representative, if applicable. Most states consider a person referring business to an RIA for compensation to be a “solicitor” that is required to register as an investment adviser representative with the state.
Second, make sure the referring party is not statutorily disqualified (i.e., has been subject to criminal or regulatory sanctions) that would prevent them from making such referrals. In addition, the SEC’s Marketing Rule requires that any “promoter” providing any “endorsement” to an SEC-registered RIA must not be statutorily disqualified.
Third, make sure that referred clients are notified of the arrangement to ensure they understand the conflicts of interest associated with the referral.
Read more here.
New SEC Cybersecurity Incident rules for RIAs
The SEC has just finalized rules requiring RIAs to adopt new measures for responding to cybersecurity incidents and notifying clients of such incidents.
RIAs and broker-dealers , among others, will now be required to develop, implement, and maintain written policies and procedures for an incident response program reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information.
The policies and procedures must address assessment of the situation, containment of the situation, and notification of affected clients.
Large advisers (i.e., those with at least $1.5 billion in assets under management) would need to comply with the new rules within 18 months of the publication of the final rules in the Federal Register while smaller advisers would need to comply within 24 months of such publication date.
Read more here.