Category Archives: Regulatory

Compliance, Regulatory, Standard of Care

RIA Client Referral Mistakes to Avoid

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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.

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Compliance, Enforcement, Regulatory, Standard of Care

New SEC Cybersecurity Incident rules for RIAs

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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.

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Compliance, Enforcement, Regulatory

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

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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.

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Compliance, Enforcement, Regulatory

Unfinished Business: IAs Are Potentially Back on the Hook for AML and Counterterrorism Reporting Requirements

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In its latest attempt, the U.S. Department of Treasury, Financial Crimes Enforcement Network (“FinCEN”), will require certain investment advisers to implement compliance measures to detect and report suspected money laundering and the financing of terrorism. The newly proposed rule brings investment advisers under the purview of the Bank Secrecy Act (“BSA”), which requires financial institutions to implement risk-based anti-money-laundering and counterterrorism programs to protect the national security of the United States and aid law enforcement in the fight against money laundering. If the proposed rule is finalized, FinCEN could require investment advisers to collect records, such as those related to fund transfers, and file suspicious activity reports with FinCEN. The proposed rule would also allow information sharing between FinCEN and the SEC, who will be delegated with examination authority over investment advisers for compliance with the new rule.

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Compliance, Regulatory

The Dealerization of America by the SEC

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On Tuesday, February 6, 2024, the United States Securities and Exchange Commission promulgated final rules relating to changing the definition of dealer pursuant to the Securities Exchange Act of 1934. See SEC.gov | SEC Adopts Rules to Include Certain Significant Market Participants as “Dealers” or “Government Securities Dealers”. This definitional change is a watershed moment in securities regulation.

Although the SEC has for several years now sought to expand the definition of dealer in certain markets, most notably the convertible debt market, this is the first time the SEC has taken advantage of its rule- making ability to dramatically shift decades of precedent.

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