Category Archives: Regulatory

SEC’s 2022 Investor Advocate Report

SEC regulatory lawyers will want to note the recent filing of the 2022 Investor Advocate Report. The Investor Advocate is an advisory arm of the SEC looking out for the interests of retail investors, but it doesn’t engage in SEC rulemaking. A few things in the Report jump out. First, a statement that suggests the Investor Advocate wants to see more before weighing in on the effectiveness of Regulation Best Interest. Also, the Report includes a table of certain potentially problematic products, practices and trends broken down by regulator: These include performance claims and social media (SEC); Finfuencers and Reassigned Advisory Accounts (NASAA) and Financial Literacy Declines (FINRA). Here is a link to the full report: FY22 OIAD SAR Activities Report (sec.gov)

SEC proposes service provider oversight requirements for investment advisers

On October 26, 2022, the Securities and Exchange Commission (SEC) proposed new Rule 206(4)-11 under the Investment Advisers Act of 1940 (Advisers Act), which would prohibit SEC-registered investment advisers from outsourcing certain services or functions to service providers without meeting minimum requirements. At the same time, the SEC also proposed certain related amendments to Rule 204-2 under the Advisers Act and Form ADV.

Proposed Rule 206(4)-11 (Proposed Rule) would require investment advisers to conduct due diligence prior to engaging a service provider to perform certain services or functions. It would further require advisers to periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider.

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

SEC New Marketing Rule

In a Risk Alert published today on the new Marketing Rule, the SEC announced that there will be a number of upcoming specific national initiatives designed to verify adviser compliance with the new Rule, which requires full compliance by November 4, 2022.

The SEC cited a number of areas which will be reviewed including:

  • Verification that advisers have adopted policies and procedures reasonably designed to prevent violations of the Marketing Rule, including objective and testable means reasonably designed to prevent violations of the rule including conducting pre-reviews and approvals of advertisements, sampling advertisements utilized based on risk, and pre-approving advertising templates
  • Testing whether advisers have a reasonable basis for any statements of material facts in any advertisements
  • Verification that advisers are complying with performance reporting requirements including the proper use of net performance results, appropriate performance measurement periods, related performance, extracted performance, hypothetical performance, and predecessor performance
  • Verification that advisers are maintaining the books and records required by the new Marketing Rule.

Read more here.