All posts by Richard Chen

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.

What’s the marketing piece that creates the most compliance risk for RIAs?

In my opinion, it’s the website.

With the SEC’s scrutiny of Marketing Rule compliance, I believe the SEC is closely scrutinizing Forms ADV filed by RIAs, and to the extent that RIAs indicate they are referencing testimonials, endorsements, third-party ratings, predecessor performance, hypothetical performance, or specific investment recommendations in their marketing materials, this gives the SEC an impetus to review the adviser’s marketing materials.

The marketing piece most easily accessible to the SEC is the RIA’s website, the address to which is also listed on the Form ADV.

Read more here.

New SEC Proposal on Adviser Oversight

The SEC today proposed a rule that could have a significant impact on advisers that outsource certain advisory or trading functions to third parties.

The new rule would require advisers to conduct initial due diligence and ongoing monitoring of service providers to whom covered functions are outsourced. SEC-registered advisers would have to reasonably identify and determine through due diligence that it would be appropriate to outsource the covered function, and that it would be appropriate to select that service provider, by complying with six specific elements. These elements address: (1) The nature and scope of the services; (2) Potential risks resulting from the service provider performing the covered function, including how to mitigate and manage such risks; (3) The service provider’s competence, capacity, and resources necessary to perform the covered function; (4) The service provider’s subcontracting arrangements related to the covered function; (5) Coordination with the service provider for Federal securities law compliance; and (6) The orderly termination of the provision of the covered function by the service provider.

Read more here.

Marketing Rule and “Promoter” Agreements — What Advisers Should Consider

Advisers paying third parties for client referrals (“promoters”) must determine whether they will need agreements with such promoters in order to comply with the new Marketing Rule and to ensure that any such agreements allow them to ensure compliance with the Marketing Rule’s disclosure, oversight and disqualification provisions pertaining to the use of paid testimonials and endorsements.

Among other things, advisers will want to consider the following with respect to agreements with promoters:

  • Restrictions on the materials the promoter may use to promote the adviser’s services
  • Processes for pre-approval of any materials to be used by the promote to promote the adviser’s services
  • The Imposition of disclosure requirements for any marketing materials to be used by the promoter to ensure compliance with the Marketing Rule
  • The right of the adviser to conduct ongoing due diligence on the promoter’s compliance with the Marketing Rule including the right to inspect books and records
  • Inclusion of representations and warranties to be made by the promoter to ensure that it and its personnel are not disqualified from referring clients to the adviser