AdvisorAssist Blog

Updated Marketing Rule FAQ Targets Performance

2025-03-19T10:34:00.001-04:00

Updated Marketing Rule FAQ Targets Performance

True to its word, the SEC has taken steps to enhance regulatory efficiency and transparency, as evidenced by its most recent updates to the Marketing FAQ on March 19, 2025.

Background: The Marketing FAQ was first published in 2021 to address key questions regarding the new Marketing Rule. It has been updated, as needed over the years, to provide necessary guidance on how RIAs can ensure continued compliance to the rule.

Updated Guidance: The SEC's current version of the Marketing FAQ serves as a guidance tool for registered investment advisors specifically related to the usage of gross performance, as follows:

Gross Performance of Extracted Performance Figures

Definition - Extracted Performance: Refers to the performance of a single investment or a group of investments taken (“extracted”) from a private fund or portfolio, rather than the performance of the entire portfolio.

Guidance - The SEC will allow the display of gross performance of extracted investment or groups, without net, so as long as the following conditions are met:

Extracted Performance is clearly labeled as gross performance

Please Note: Advisors must clearly disclose what is extracted and the period of the performance

Extracted Performance is accompanied by the total portfolio’s gross and net performance and is presented with at least equal prominence to the extracted performance

Please Note: Equal prominence means that the SEC wants to ensure that the performance presented facilitates comparison between the extracted performance and the total portfolio performance.

Gross and net performance of the total portfolio is calculated over the period that encompasses the timeframes used for extracted performance.

The SEC believes that if the above conditions are met, displaying the gross performance of extracted performance would not be considered misleading, provided that the data is truthful, accurate, and not intended to mislead clients or investors.

Gross Portfolio or Investment Characteristics

Definition - Portfolio or Investment Characteristics: Specific metrics or attributes that describe an investment portfolio or individual investments. These characteristics may provide insight into risk, composition, or other performance-related factors (e.g. yield, volatility, Sharpe Ratio) but are not necessarily categorized as performance. Guidance - The SEC will not recommend enforcement over the use of gross portfolio or investment characteristics, without net characteristics, so as long as the following conditions are met:

The gross characteristic is clearly labeled as calculated without fees and expenses.

Please Note: Advisors must clearly define the characteristic and disclose the period of the characteristic

The total portfolio’s gross and net performance is presented alongside the characteristics and with at least equal prominence to facilitate comparison between the characteristics and portfolio.
Portfolio performance over the period that encompasses the timeframes used for the gross characteristic.

The SEC is of the belief that the attempt to display net characteristic figures may be confusing and inadvertently misleading. Therefore, the guidance above is designed to help meet the spirit of the SEC’s intent of ensuring that investors are not mislead.

A Cautionary Tale: Cash Sweep Programs

2025-02-28T10:37:00.001-05:00

A Cautionary Tale: Cash Sweep Programs

Recent enforcement actions by the Securities and Exchange Commission (SEC) have placed advisors' cash management programs under scrutiny. While previous attention was given to insufficient disclosures regarding revenue sharing in the SEC's Cash Sweep Program Initiative, a new concern has emerged regarding rising interest rates and fiduciary duty. Specifically, Wells Fargo and Merrill Lynch were cited for failing to establish and implement written policies and procedures governing their cash sweep programs. It was found that Wells Fargo Advisors and Merrill Lynch, or their affiliates, determined the interest rates offered in their bank deposit sweep programs (BDSPs). Consequently, during periods of rising interest rates, the yield differential between these BDSPs and alternative cash sweep vehicles reached nearly 4 percent.

“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider their clients’ best interest when evaluating potential sweep options for cash held in advisory accounts and to ensure that cash held in an advisory account is properly managed by financial advisers consistent with a client’s investment profile.”

This case highlights two key considerations for advisors: managing cash sweep vehicles and cash as an asset. Custodians often limit sweep options, which are meant for transactions—not investments. In a rising rate environment, alternatives like money market funds or CDs may better serve clients' cash holdings.

In most cases, custodians generate revenue from client assets held within sweep vehicles. While custodians are obligated to disclose this practice to clients, advisors also bear the responsibility of disclosing any revenue-sharing arrangements or incentives related to them. Failures related to this disclosure continue to be a widespread deficiency within the industry. For more information on the Cash Sweep Program Disclosure Initiative, you can review our When Revenue Becomes a Conflict Blog Post.

If your Firm is concerned about its policies and procedures surrounding bank deposit sweep programs or other cash management related positions, please contact AdvisorAssist today!

A Cautionary Tale: A Lesson Regarding Upcoming AML Regulation Adherence

2025-01-23T17:25:00.000-05:00

A Cautionary Tale: A Lesson Regarding Upcoming AML Regulation Adherence

Anti-Money Laundering requirements are coming down the pipeline for Registered Investment Advisors (RIAs) in 2026, and although these regulations have existed for other counterparts of the financial services industry for years, RIA requirements were simplistic in comparison. As the RIA industry endeavors to adopt policies and procedures to comply with the upcoming AML/CFTC regulations, we remind Advisors to be mindful about marketing or inferring compliance when only adopting partial compliance, or none at all. As a reminder, you can review the AdvisorAssist Blog to learn more about these impending requirements:

Adopted Rule: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers
Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

“This case reinforces the fundamental duty of investment advisers to say what they do and do what they say,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “

In January 2025, the SEC released enforcement action against an RIA for misrepresentations related to its AML procedures and for compliance failures resulting in the payment of a $150,000 civil penalty for willfully violating the Investment Advisers Act of 1940 and related rules. From at least October 2018 until January 2022, the RIA stated in offering and other documents provided to prospective and existing private fund investors that the firm was voluntarily complying with AML due diligence laws, despite those laws not applying to investment advisers, including by conducting specific types of AML due diligence on prospective investors and conducting ongoing AML due diligence monitoring on existing investors. The RIA in fact, did not always conduct the AML due diligence as described, including with respect to an entity owned by an individual publicly reported to have suspected connections to money laundering activities.

This incident was communicated by the Enforcement Division only days before the SEC released charges against LPL Financial with anti-money laundering violations for long-standing failures in its customer identification program, and restricting high-risk accounts (cannabis-related and foreign accounts) which were prohibited under LPL’s AML policies. This is not the first Custodian to encounter such a fine as we consider the activity of Merrill Lynch or Raymond James. It is imperative that RIAs consider these findings as components of their ongoing vendor due diligence, and reliance for AML/CFTC obligations. Additionally, if your policies and procedures outline your process of complying with AML laws, make sure you have documentation to support your assertions.

Electronic Communications: Trending Fines in the Industry

2025-01-14T08:00:00.001-05:00

Electronic Communications: Trending Fines in the Industry

Over the past three years there has been a resounding increase in violations surrounding the Securities and Exchange Commission's ongoing recordkeeping initiative due to failure to preserve electronic communications. 2025 started out with January’s release of twelve Advisors charged $63.1 million for electronic communication record-keeping deficiencies, which can now be compacted with the violations and fines reference below, again emphasizing that the SEC is taking off-channel communications seriously and that the requirement CANNOT continue to be ignored.

Electronic Messaging Archiving - It's Not Just Emails.

Aside from commonalities among the fines referenced below, there appears to be a misunderstanding throughout the industry regarding what needs to be archived:

It is imperative to understand that electronic communications are not solely communications Supervised Persons have with clients/prospective clients, but also external partners, vendors, and the public. This means any communication that is sent or received on behalf of the Advisor falls under the books and records scope.
The SEC is clearly making a stance that “internal” electronic communications, among Supervised Persons, are required to be archived.
Electronic communications can occur through various means throughout the day. Supervised Persons are communicating, internally or externally, any level of business communication through the following vendors, it must be archived:

Text Messaging
Messaging Applications (WhatsApp, Messenger, WeChat, etc.)
Social Media (Twitter, Instagram, Linkedin, etc.)
Video and Audio Conferencing Apps with Chat Features (Zoom, Microsoft Teams, Google Meet, etc.)

“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust.” Securities and Exchange Commission Chair, Gary Gensler

A Review of Past Fines and Considerations

September 2024's release, twelve firms were charged $88 million for electronic communication deficiencies following August 2024's release of twenty-six firms were charged with longstanding failures by the firms and their personnel to maintain and preserve electronic communications totaling $392.75 million in civil penalties. September 2023's release announced ten firms charged for widespread and longstanding failures to maintain and preserve electronic communications, totaling $79 million in fines and penalties. September's release came on the tailwind of August 2023's release where the SEC charged eleven firms with penalties totaling $289 million. The fines and penalties from 2024 and 2023, in conjunction with the total fines and penalties from 2022, brings the tally to over $2.16 billion and over 90 enforcement actions. In reviewing these enforcement actions, the commonalities are: In reviewing these enforcement actions, the commonalities are:

Failure to reasonably supervise, with a view to prevent and detect violations of federal securities laws.
Failure to maintain and preserve business communications, whether it be internal or external communications.
Inadequate policies, procedures, and controls that are compliant and designed to detect and prevent violations.

RIAs have a fiduciary responsibility to their Clients, and recordkeeping has been vital to preserve that integrity. As technology continues to advance, so should the policies and procedures of every RIA to ensure all communications are being maintained. So, how does an Investment Advisor effectively mitigate their risk? Really, an Advisor has two options:

The Advisor opts to completely ban the use of personal devices and/or other various off-channel communication applications. Examples of certain control measures that can be put into place regarding this policy are:

Written policies and procedures stating that personal devices and other various off-channel communication applications can not be used for business purposes, and have supervised person’s attest to those policies.
Enhance review of supervised electronic communications (i.e email) to ensure that off-channel communication is not occurring with clients or members of the firm alike.
Provide training for all supervised person’s of the Advisor regarding what is and is not acceptable, and the ramifications for violations.

The Advisor opts to allow for the use of text-messaging and other electronic communication methods with appropriate policies and procedures in place. Examples of certain control measures that can be put into place regarding this policy are:

Written policies and procedures regarding personal devices and/or electronic communication applications may be utilized on an approved basis by the Chief Compliance Officer.
Advisors undergo a due diligence process for vendors they seek to utilize as part of the firm’s communication platform. This includes the reviewing the messaging platform for supervised person use, ensuring there are supervisory capabilities, and understanding the archiving set up.
Provide training for the supervised persons who use the platform and compliance reviewers who supervise the platform, and the ramifications for violations.

Advisors in need of a solution, should start with current vendors they utilize to determine if they can bundle their email, social media, website, and texting platforms which, in turn, streamlines supervision and cost as well.

Whether an Advisor allows the activity or not, having the appropriate testing and supervision measures in place is the best line of defense. Effective supervision, due diligence and proper training are key when it comes to mitigating risk. If you are questioning whether your supervised persons are utilizing personal text messaging or emails to communicate with clients, or that your policies, procedures, and controls are inadequate please contact us today!

Investment Advisor Representative Continuing Education

2024-12-30T13:07:00.000-05:00

Investment Advisor Representative Continuing Education

Investment Advisor Representatives (IARs) have their hands full at year end with such items as required minimum distributions, end of year tax loss harvesting, client gifting, annual meetings, and the list goes on! A requirement, introduced in 2020, has added a yearly addition to certain IARs via the NASAA Model Rule on Investment Adviser Representative Continuing Education. Continuing education (CE) is required for every IAR registered in a jurisdiction that adopts the Model Rule. The program applies to all registered IARs of both state-registered and federal covered investment advisers in adopted jurisdictions.

IARs are free to select an approved course provider, along with applicable classes that interest them or align to their business model, so long as the IAR obtains 12 CE credits each year - 6 credits of Products and Practices and 6 credits of Ethics and Professional Responsibility. States which currently require IAR CE as of December 31, 2024:

Arkansas (effective in 2023)
California (effective in 2024)
Colorado (effective in 2024)
Florida (effective in 2024)
Hawaii (effective in 2024)
Kentucky (effective in 2023)
Maryland (effective in 2022)
Michigan (effective in 2023)
Minnesota (effective 1/1/2025)
Mississippi (effective in 2022)
Nebraska (effective in 2025)
Nevada (effective in 2024)
New Jersey (effective in 2025)
North Dakota (effective in 2024)
Oklahoma (effective in 2023)
Oregon (effective in 2023)
Rhode Island (effective in 2025)
South Carolina (effective in 2023)
Tennessee (effective in 2024)
Vermont (effective in 2022)
Washington, D.C. (effective in 2023)
Wisconsin (effective in 2023)
U.S. Virgin Islands (effective in 2025)

IARs have an annual deadline to complete their CE requirement. Should they not complete their CE by December 31st the IAR will pay the registration renewal fee and become “CE Inactive”. This status will allow the IAR to continue doing business, but should the IAR not complete the CE requirement by end of year the IAR will be unable to renew his or her registration and become a status of “Fail to Renew”. If you are CE Inactive, courses completed in the current year will apply to the past year’s deficiency – so you will want to work with your provider and Firm to ensure you are covering prior/current year requirements. IARs should be aware of particular nuances to the Model Rule and CE requirements, which can be reviewed on both the NASAA FAQ and also the Program Handbook:

Newly Registered IARs: Newly registered IARs will be required to meet CE requirements by the end of their first full calendar year following the year in which they first become registered.

IAR Multi-State Registration: An IAR is responsible for the requirements of each state they are registered in during that year, whether it is a home state or additional state, whether they add the in-scope state registration halfway through the year, or whether they withdraw from an in-scope state during the year – requirements apply. For additional considerations regarding in-scope/out-of-scope states, we urge IARs to review the NASAA FAQ for scenario examples, or reach out to state regulators.

Professional Designations: Although there are no exemptions to CE requirements, it would be prudent to work with a provider who can assist IARs in taking classes that cover the requirements for their professional designations and count toward state CE requirements as well.

Dually Registered IARs: Currently, FINRA CE content meets NASAA eligibility to count toward the six credits of Products and Practices credit hours. Dually registered IARs should work with their BD Firm to determine if additional training, such as Annual Firm Element classes, are approved to count toward their completion requirements for IAR CE.

When an IAR completes courses, the vendor/provider reports course completion to FINRA, NASAA’s vendor for program tracking. The responsibility of tracking the vendor/provider’s submission falls on the IAR and regulators urge IARs to open a FinPro account for CE tracking purposes. Advisors can also pull CE reporting through FINRA Gateway to monitor IAR annual completions.

As additional states adopt the Model Rule, CCO’s and other compliance professionals can review the NASAA Investment Advisor Representative Continuing Education training webinar for additional information, or reach out to their AdvisorAssist consultant.

SEC Marketing Rule Examination Sweep Deficiencies

2024-09-09T13:33:00.000-04:00

SEC Marketing Rule Examination Sweep Deficiencies

September 9th, 2024 Update: Press Release

On September 9th, 2024 the U.S Securities and Exchange Commission (“SEC”) announced charges against nine Registered Investment Advisors (“RIAs”) for violations of the Marketing Rule as part of the SEC’s ongoing Marketing Rule Sweep Exam efforts. All nine firms agreed to settle, totaling over $1.2 million in combined damages. These actions demonstrate the SEC’s zero-tolerance policy for marketing violations. Additionally, the continuation of these sweep exams codifies the SEC’s dedication to promoting compliance and accountability, indicated Corey Schuster, Co-Chief of the SEC’s Division of Enforcement’s Asset Management Unit.

The deficiencies identified by the SEC in this tranche of enforcement cases are as follows:

Disseminated content that claimed to provide “conflict-free advisory services”, which the firms were not able to substantiate.
Disseminated content that could not be substantiated regarding awards provided to firm principals.
Disseminated content that claimed to contain two testimonials, but neither came from current clients.
Advertised endorsements not fully disclosing that an “endorser” was a paid, non-client in videos, on social media, and on physical objects such as bags and flags.
Advertised third-party ratings, some of which were more than five years old, without disclosing the dates on which the ratings were given or the periods of time upon which the ratings were based.

As stated in the rule, firms are permitted to include testimonials, endorsements, and third-party ratings provided that each activity is conducted within the scope of the intentions of the Marketing Rule and adhere to the guidance provided within the Additional Resources below when drafting and reviewing marketing materials ahead of distribution.

________________________________________________________________________________________

April 12, 2024 Update : Press Release

Five additional registered investment advisors have been added into the Marketing Rule examination sweep deficiency list, bringing the total enforcement actions to over $1 million in combined penalties.

Hypothetical performance continues to be a sore spot, as each of the Advisors advertised hypothetical performance to the general public on their website. Hypothetical performance can be enticing to both current and prospective clients, but unless the Advisor adopts and implements policies and procedures designed to ensure the performance is relevant to the financial profile and goals of the intended audience, the Advisor will be in clear violation of the Marketing Rule. This would suggest, that because an Advisor can not control the audience of public websites and social media, an Advisor should not be publishing hypothetical performance through these mediums or should only do so in a controlled environment, such as a portal to target specific investors.

Additional performance violations consisted of making false and misleading statements in advertisements, advertising misleading performance, and the inability to substantiate performance data. These violations inevitably led to record keeping violations for the Advisor. Furthermore, there was an additional violation for fail

________________________________________________________________________________________

September 11, 2023 Update: Press Release

On September 11, 2023, the SEC announced charges against nine Advisors for hypothetical performance advertising violations as part of the SEC’s initial sweep into Marketing Rule Violations. These charges related to promoting hypothetical performance on the Advisor’s websites to the general public without adopting and/or implementing policies and procedures as required by the rule. Additionally, two firms were found to have failed to retain appropriate copies of the advertisements within the Firm’s books and records. All nine firms agreed to settle, were censured, and must pay $850,000 in combined damages.

Gurbir Grewal, the SEC’s Director of the Division of Enforcement, emphasized the Commission’s view that hypothetical performance advertising poses an elevated risk to prospective investors, and the importance of firms adopting policies and procedures under the new rule to mitigate this risk. He also made it clear that until the Commission is satisfied that that is the case, they will continue their ongoing sweep to ensure investment advisor’s compliance with the Marketing Rule. AdvisorAssist reminds Advisors that the Marketing Rule is applicable to SEC-registered firms and certain State-registered firms who have adopted it. Under the rule, an Advisor is permitted to include hypothetical performance in an advertisement, provided that the Advisor:

Adopts policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement
Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating the hypothetical performance
Provides sufficient information to enable the audience to understand the risks and limitations of using hypothetical performance to make investment decisions.

Important Note: Hypothetical performance should only be distributed to clients and/or prospective clients who have access to the resources to independently analyze such information and who have the financial expertise to understand the risks and limitations of such types of presentations.

Maintain the relevant data and documentation that supports the hypothetical performance figures presented.

This is the tenth hypothetical performance related violation the SEC has released in less than a month, the first which you can review in the AdvisorAssist blog post released in August 2023.

Marketing Rule violations were the most common deficiency in the AdvisorAssist 2023 SEC Exam Report, and considering the SEC’s stance on continuing targeted examinations, Advisors are urged to review AdvisorAssist's blog post regarding the need for a retrospective review of all marketing pieces, the AdvisorAssist SEC Sample Marketing Exam Request, and to take advantage of our Mock Examination Services should they have concerns or feel the need to enhance current procedures.

If you have any questions or concerns please contact your consultant to discuss!

SEC Remains Vigilant on Share Class Selection as Deficiencies Rise

2024-08-12T10:39:00.000-04:00

SEC Remains Vigilant on Share Class Selection as Deficiencies Rise

For over six years, mutual fund share classes have been a major risk consideration for Registered Investment Advisors (RIAs), and priority for the U.S Securities and Exchange Commission (SEC). Throughout this period, AdvisorAssist has consistently updated RIAs on the SECs’s share class selection risk priority, and subsequent disclosure Initiative. Given the SEC’s continued focus on mutual fund share class selection, we wanted to bring your attention to the increased number of RIAs receiving deficiencies for continuing to operate with lack of disclosure and/or inadequate policies and procedures regarding share class selection. As a fiduciary, an RIA can not place the Advisor’s financial interests ahead of their clients. Violations of an Advisor’s Duty of Loyalty is where regulators continue to maintain that, if the Advisor reaps financial benefit from clients, there will be regulatory action. In addition, even if the Advisor does not stand to financially benefit, under the Duty of Loyalty obligation, rendered advice needs to be in the client’s best interest. Failure to adhere to the Duty of Care and Duty of Loyalty standards, Advisors can be subject to the following disciplinary action items:

Cease-and-Desist Order and Censure
Disgorgement and Prejudgment Interest
Civil Penalties
Individual Liabilities

Regardless of disciplinary actions, Advisors may be pressured by the SEC to refund clients based on perceived harm to clients, due to the Advisor not adhering to their fiduciary obligations. This can be a material financial impact on an Advisor depending on the severity of potential harm to clients, and you can review results of this financial impact from our prior Blog Posts or through the various releases of the SEC Share Class Initiative. At AdvisorAssist, we remind clients that as part of your fiduciary duty to clients, Advisors should endeavor to purchase the lowest-cost share class available when recommending a particular mutual fund. Further, Advisors must maintain policies and procedures that align with the Advisor’s actual business practice. AdvisorAssist encourages Advisors to perform forensic reviews of their share class selection policies and procedures, while periodically reviewing their mutual fund holdings. Regardless of whether a higher cost share class was purchased or transferred in, if a client is invested in a share class that is potentially not the lowest cost, there is a very important need to ensure the firm has proper documentation substantiating why the client is holding the position. If the Advisor determines and/or discovers that there is no substantive reasoning to support the holding of a higher cost share class, the Advisor should promptly begin to convert the mutual fund to its lowest cost share class. In certain instances, substantive reasoning regarding why a holding isn't converted to the lowest share class may include, but is not limited to:

Tax implications
Dollar-cost averaging
It does not meet the minimum investment/the fund is closed to new investors
Investment time horizon
The availability of lower share classes at the custodian

By clicking here, you will find an example of a common deficiency letter related to Share Class Selection. Should you have any current questions or concerns regarding Share Class Selection, please reach out to your Consultant.

Books and Records: Trade Affirmation, Allocations, and Confirmations

2024-05-21T13:25:00.001-04:00

Books and Records: Trade Affirmation, Allocations, and Confirmations

Contributed By - Thomas Yates

Managing Partner and Director

AdvisorAssist, LLC

The U.S Securities and Exchange Commission’s (SEC) amendments to the record-keeping requirements, Rule 275.206(4)-2, for registered investment advisors, focuses on maintaining accurate and up-to-date records of allocations, confirmations, and affirmations related to securities transactions subject to Rule 15c6-2(a) as described in our initial AdvisorAssist Blog post. AdvisorAssist has been evaluating and monitoring industry guidance and best practices, regarding the amendment, since May 2023. During our evaluation, AdvisorAssist held discussions with each custodian and/or executing broker-dealer (herein “Custodian(s)”) to understand each Custodian’s process to assist RIAs in complying with this new rule, At this time, here is a summary of what RIAs are required to do:

Books and Records Requirement

Advisors are required to archive:

Date and time stamp indicating when the trade allocation and trade affirmation occurred.
Details, sent or received, about each:

confirmation received,
any allocation made, and
each affirmation.

The intention is to have accurate and current records for trades for securities transactions subject to Rule 15c6-2(a), as defined below. RIAs should validate and confirm that all email communications, platform instructions, or any other mode of communication related to client transactions is archived, and that RIAs are able to produce evidence of the communications and/or instructions upon request.

Transactions under Rule 15c6-2(a) are “All Securities”, with certain exemptions, as follows:

Exempted Securities (e.g. Private Funds)
Government Securities
Municipal Securities
Commercial Paper
Bankers’ Acceptances
Commercial Bills
Security Based-Swaps

Settlement Cycle’s Impact on Process

The settlement cycle for transactions will now be reduced to one business day (T+1), which means all Custodians should be updating their process to adhere to the new settlement cycle requirement. Separately, a Custodian is mandated to maintain timestamped records of trade allocations, confirmations and affirmations, as described above. Due to this requirement placed on your Custodian, the information required for RIAs to archive should already be maintained on their respective platforms.

Furthermore, the SEC has provided commentary that RIAs may rely on third parties, e.g. Portfolio Management platforms, to maintain records on this. However, these third parties are not responsible for RIAs books and records, and while the data may exist, they can not assume responsibility on the RIA’s behalf for maintaining records. In addition, depending on the third party, data may only be readily available for a period of time that could impact the RIA’s ability to retrieve the requested data in a timely manner and may not allow for RIAs to comply with this rule.

How To Comply: Variations in Process Among Custodians

While AdvisorAssist remains in discussions with each Custodian, we also suggest that RIAs take the following steps to comply with this new rule:

Reach out to their Custodians and ask them the following question: Can you provide instructions on how I can download a report, at least annually, date and time stamp of all trade allocations, confirmations and affirmations?

Are bulk downloads available, and for what time period?
Is batch reporting available?
Is any level of automation available to our Firm for generating these items?

Once these reports are received, save them into a dedicated folder where all books and records are kept, and ensure that this data is backed up!
Use this opportunity to perform forensic testing for trade accuracy purposes, making sure trades were executed and/or allocated as intended.
If any transaction activity is conducted via email, make sure that emails are archived and that email communications include any confirmations or additional transaction details sent by or received from custodians and/or broker-dealers. RIAs should separately log these communications so that they can ensure timely retrieval of these records upon request from a regulator.

As we continue discussions with Custodians, and have further guidance from the SEC, we will communicate this information out. Should you have any current questions or concerns, please reach out to your Consultant.

SEC Adopts Important Rule Amendments to Regulation S-P

2024-05-20T14:50:00.003-04:00

SEC Adopts Important Rule Amendments to Regulation S-P

Contributed By - Thomas Yates: Managing Partner and Director, AdvisorAssist, LLC

Philip Coniglio : President & CEO, AdvisorDefense, LLC

On May 15th, the U.S. Securities and Exchange Commission adopted amendments to Regulation S-P, which requires registered investment Advisors (RIAs) to adopt written policies and procedures to safeguard customer records and information (the “safeguards rule”). These amendments aim to enhance the policies and procedures of RIA’s regarding the protection of client sensitive information, especially policies on incident response, client notification, disposal of client sensitive information, and service provider due diligence.

“Over the last 24 years, the nature, scale, and impact of data breaches has transformed substantially,” said SEC Chair Gary Gensler. “These amendments to Regulation S-P will make critical updates to a rule first adopted in 2000 and help protect the privacy of customers’ financial data. The basic idea for covered firms is if you’ve got a breach, then you’ve got to notify. That’s good for investors.”

While AdvisorAssist, LLC and AdvisorDefense, LLC are closely monitoring how this rule will be further interpreted, we anticipate more clarity from the SEC. As feedback comes in, we will continue to analyze and formulate guidance to help ensure adherence to amendments to the Safeguards Rule. That said, here is our current synopsis:

Compliance Date

Mandatory compliance, 60 days after posting on the federal registrar, Advisors have the following timeline to comply with the amendment:

Advisors with at least $1.5 billion or more in assets under management (AUM): 18 Months
Advisors with less than $1.5 billion in AUM: 24 Months

Enhancements to Regulation S-P

Incident Response Program - The amendment requires that Advisors adopt policies and procedures that are reasonably designed to detect, respond to, and recover from unauthorized access to, or use of, client data. Further, these policies must include the following:

Assessment: Advisors will evaluate the nature and scope of the breach and/or incident;
Containment: Implement remedial measures to prevent further incidents and/or unauthorized access; and
Notification: Policies must be in place to notify affected clients as soon as possible, but no later than 30 days after detection of the incident and/or breach, and ensure proper information is disclosed to the client.

Service Provider Oversight - As a component of the Incident Response Program, RIAs must implement policies and procedures designed to oversee Service Providers, through due diligence on and ongoing monitoring. The amendment defines “Service Provider” as any person or entity that receives, maintains, processes, or otherwise is permitted access to customer information through its provision of services directly to a covered institution. RIAs must ensure that Service Providers have controls in place to protect against unauthorized access to, or use of, client information. Service Providers must provide notification to Advisors regarding unauthorized access to client information, as soon as possible, but no later than 72 hours after becoming aware of the breach. Customer Notification Requirement - RIAs must notify affected individuals promptly when sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization. Notices must include:

Comprehensive details about the incident.
Specifics on the type of data that was breached.
Instructions for affected individuals on how to address the breach and protect themselves.

An exception to the customer notification requirements exists when an RIA can evidence that sensitive customer information has not been, and is not reasonably likely to be, used in a manner that would result in substantial harm or inconvenience.

Privacy Policy Delivery Requirements - RIAs are no longer required to deliver an annual privacy policy to clients, provided:

The RIA does not share nonpublic personal information with non-affiliated third parties (other than as permitted under certain enumerated exceptions, e.g., to service providers who perform services on behalf of the RIA, or as necessary to administer a transaction requested or authorized by an individual).
The RIA has not changed its privacy policies and practices from the policies and practices that were disclosed in the most recent privacy notice sent to individuals.

Books and Records - Maintenance of written records documenting compliance with the requirements of the Safeguards Rule and Disposal Rule.

Safeguards Rule: Policies and procedures to safeguard client records and information
Disposal Rule: Policies and procedures for the proper disposal of consumer report information in a manner that protects against unauthorized access to or use of such information

How AdvisorDefense, LLC Can Help! AdvisorDefense’s service is to provide Cybersecurity Consulting and managed security services, specifically for Registered Investment Advisors. AdvisorDefense’s CEO, Philip Coniglio, is an experienced in-house Chief Information Security Officer for multiple RIAs, and led security at one of the largest RIAs in the nation. Driven to provide cybersecurity guidance to RIAs of all sizes, AdvisorDefense can assist in the readiness for compliance with these amendments. We are currently working to further our guidance and communications on Regulation S-P and its impact on RIAs, which will include a full breakdown of requirements and guidance to adhere to the regulation, but should you have any questions, please reach out to your Consultant!

Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

2024-05-13T16:07:00.002-04:00

Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz

Senior Compliance Consultant

AdvisorAssist, LLC

On May 13, 2024 the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly proposed customer identification program (CIP) requirements for RIAs and ERAs on the tailwind of the February 2024 proposal to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA). If adopted, the rule will require RIAs and ERAs to implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable, and maintaining records of the information used to verify a customer’s identity. The below list is the proposed required minimum amount of client information that would be required to be collected per a CIP, however, verification methodologies may require additional documentation and data:

Name – referring to the client’s full legal name, but aliases or DBAs may be required to be obtained.
Date of birth for an individual or the date of formation for any person other than an Individual.
Residential or business address, unless other stipulations apply as proposed.
Identification number (SSN, TIN, legal identifiers) dependent upon whether the individual is domestic or foreign.

Clients will be informed of the Firm’s identity verification policies through a CIP customer notice, which may be presented on websites, in account applications, agreements, or through other written or verbal communications. The Firm must establish a reasonable belief in the true identity of its clients using either documentary or non-documentary verification methods, or a combination of both, as outlined in their risk-based procedures. Documentary methods include government-issued IDs for individuals and entity-proofing documents like certified articles of incorporation for businesses. Non-documentary methods involve checking financial statements, comparing client information against fraud databases, verifying information through third-party sources like credit reports, and checking references with other financial institutions. The Firm's verification policies must address situations where typical ID verification is challenged, such as when:

An individual cannot present a valid government-issued photo ID.
The investment advisor is unfamiliar with the presented documents.
The advisor does not obtain documents for verification.
There is no face-to-face meeting with a customer.
Circumstances suggest an increased risk of identity verification failure.

In such cases, the Firm's CIP (Customer Identification Program) must include procedures for handling these situations, potentially escalating to filing a Suspicious Activity Report (SAR) if a reasonable belief in the customer’s identity cannot be established. Under this proposed provision, an investment advisor would be required to retain the information obtained about a customer while the account remains open and for five years after the date the account is closed. Although there are provisions for reliance on another financial institution for all, or some, of its requirements under the regulation, the investment advisor would remain responsible for ensuring compliance and an agreement would need to be in place stating as such. FinCEN and SEC anticipate that the effective date of the proposed rule will be 60 days after adoption, and is currently in its comment period. Specifically, under this proposed rule, an investment advisor would be required to develop and implement a CIP that complies with the requirements of this section on or before six months from the effective date of the regulation, but no sooner than the compliance date of the AML/CFT Program and SAR Proposed Rule, if adopted. AdvisorAssist will continue to monitor both proposals, with the expectation that another joint effort between the SEC and FinCEN is on the way. Should you have any questions or concerns, please reach out to your Consultant.

Risk Alert: Initial Observations Regarding Marketing Rule Compliance

2024-04-30T15:15:00.002-04:00

Risk Alert: Initial Observations Regarding Marketing Rule Compliance

Contributed By: Samuel Guy, Compliance Consultant

Thomas Yates, Managing Director & Partner

AdvisorAssist, LLC

On April 17, 2024 the Division of Exams (“EXAMS” or “the staff”) released a Risk Alert: Initial Observations Regarding Advisers Act Marketing Rule Compliance. This Risk Alert highlights areas of focus for Advisors to stay in compliance with the Rule 206(4)-1 (the “Marketing Rule”) as discovered through the staff’s preliminary assessments and findings concerning the updated rule.

Observations Regarding the Compliance Rule, Books and Records Rule, and Form ADV

The staff's review of whether Advisors adopted and implemented written policies and procedures reasonably designed to prevent violations produced the following findings, including deficiencies:

Policies and Procedures The staff generally observed that compliance policies and procedures were updated to comply with the Marketing Rule. It was also observed that further steps were often taken; Advisors typically held training on the Marketing Rule’s requirements, Advisors implemented policies and procedures for reviewing marketing materials, and Advisors required pre-approval of marketing materials before dissemination. However, the staff also observed some common deficiencies concerning policies and procedures and the Marketing Rule, which are as follows:

Policies and Procedures were general, informal, or not fully updated to cover all applicable marketing topics, or not properly implemented in the Advisor’s marketing materials.
Policies and Procedures cover the General Prohibitions of the Marketing Rule, but do not cover the specific types of marketing materials utilized by the Advisor, such as testimonials or third-party ratings.

Books and Records The staff observed that Advisors updated their practices to reflect the Marketing Rule’s books and records maintenance and preservation requirements, however, some common deficiencies were also observed:

Questionnaires or surveys used in preparation for a third-party rating were not archived.
Social Media posts were not archived.
Documentation to support performance claims were not maintained.

Form ADV The staff observed that Advisors updated their ADV documents in response to the Marketing Rule. However, the Staff did observe misreporting in ADV1 Item 5.L, where the Advisor utilized a certain type of marketing (i.e. Performance results, Third-party rating) that was not disclosed. Further, some Advisors had inaccuracies in ADV2 Item 14 as they were not properly disclosing their referral arrangements.

Observations Regarding Compliance with the Marketing Rule’s General Prohibitions

The staff’s review of the Marketing Rule assessed whether the Advisor’s marketing materials violated any of the General Prohibitions. Common deficiencies of these are organized by the prohibition, and are as follows:

Untrue statements of material fact and unsubstantiated statements of material fact.

The following are some instances of untrue statements in advertising materials observed by the staff during their preliminary assessment:

Advertisements stated the Advisor was free of all conflicts of interest when conflicts did exist.
Advertisements that misrepresent the Advisors’ business, such as misreporting the individuals performing advisory services, the qualifications of individuals employed by the Advisor, or awards granted to the Advisor.
Advertisements that misrepresent facts about the Advisors’ investment processes, such as claiming these processes were validated by professional institutions or followed certain mandates, such as ESG, when this could not be substantiated by the Advisor.
Advertisements in which Advisors could not substantiate investment practices, such as stating the client’s risk tolerance were considered, referencing security screening processes that did not exist, or referencing a list of approved securities that did not exist.

Omission of material facts or misleading inference.

The following are the primary instances of omission of material facts or misleading inference in advertising materials observed by the staff:

Advisors attempted to differentiate themselves by stating they “acted in the best interest of clients” without disclosing that all Advisors have a fiduciary duty to act in the client's best interest.
Advisors recommended certain investments in advertising materials without disclosing the compensation received by the Advisor for the recommendation.
Advisors misrepresented the requirements of being SEC-registered. For example, Advisors implied that SEC registration represented a particular level of skill, or that the SEC had approved the firm's business practices, sometimes by including the SEC logo on their website or marketing materials.
Advertisements containing third-party rankings did not disclose that other Advisors received the award and implied they were the sole recipient, or did not include the necessary disclosures explaining the methodology behind the ranking.
Advertisements containing testimonials did not include context around what the testimonial was endorsing. In one instance, the Advisor included testimonials for a third-party product but represented the testimonial as being about the Advisors’ services.

Omission of material facts or misleading inference related to performance.

The following are the primary instances of omission of material facts or misleading inference related to performance advertisements observed by the staff:

Facts included in performance marketing materials included outdated market data information or investment products and fees that are no longer available to clients.
Marketing materials that omitted necessary context around performance results. For instance, omitting context around fees and expenses when calculating returns, or omitting context around general market performance.
Misrepresenting performance track record, such as stating securities were bought in client accounts when they were not, or not disclosing that the Advisor did not have clients in the model of the performance report.
The Advisor used a benchmark index but did not properly define the index or include enough context.
Advertisements did not disclose the time period or whether the returns were calculated from the time period defined in the material.
Some performance results were included or excluded in an unfair or unbalanced manner. For example, an Advisor only included the performance of realized investment information in total net return and excluded unrealized investments.

Other Deficiencies

The staff observed several deficiencies related to the fair and balanced presentation of marketing materials by advisors. Notably, many advertisements failed to disclose the material risks and limitations associated with the services offered. Additionally, references to specific investment advice often lacked balance, particularly with omissions in disclosures concerning the exclusion of certain investments. The staff also noted that advisors lacked adequate policies and procedures to ensure that such information was presented fairly. Furthermore, some advertisements contained materially misleading disclosures, including some that were unreadable, compromising the clarity and integrity of the information presented to clients.

In light of these deficiencies, advisors are urged to review and enhance their compliance practices. This should include updating and strictly implementing policies and procedures, ensuring comprehensive and accurate maintenance of books and records, maintaining accurate and reflective policies to the advisor’s marketing practices and reviewing marketing materials to eliminate misleading information. By taking these steps, advisors can seek to ensure transparency, accuracy, and adherence to Marketing Rule.

AdvisorAssist has published multiple resources for Advisors as they strive to enhance their policies and procedures surrounding the Marketing Rule. Targeted Mock Examinations through AdvisorAssist are available to those who wish to test the effectiveness of their current process. We urge you to review any of the following resources, or reach out to your Compliance Consultant for further assistance:

SEC Marketing Rule Examination Sweep

SEC 2023 Priorities and the Marketing Rule – How Important is a Retrospective Review?

SEC Sample Marketing Exam Request

Adopted Amendment: 203A-2(e) & Internet Only Investment Advisers

2024-04-29T11:34:00.007-04:00

Adopted Amendment: 203A-2(e) & Internet Only Investment Advisers

The SEC recently delivered a communication regarding their revisions to the registration of internet-only investment advisers (“IO RIAs”) under rule 203A-2(e) of the Investment Advisers Act of 1940. Here are some important points:

Audience: This rule ONLY applies to SEC Registrants that rely on the Internet Only exemption.

Timing Details for IO RIAs: The amendments will become effective on July 8, 2024. An adviser relying on the internet adviser exemption must comply with the rule by March 31, 2025.

Withdrawal: IO RIAs no longer eligible under the amended exemption must deregister with the SEC and, if applicable, register with state authorities by June 29, 2025.

Key Points

Operational Interactive Website: IO RIAs using the internet adviser exemption must now offer services on an ongoing basis to more than one client exclusively through a website or mobile application ("operational interactive website”). This means the website must be actively functioning and capable of providing advisory services without interruption, except during minimal, unavoidable outages.
Elimination of the De Minimis Exception: The updated rule removes the allowance for IO RIAs to have up to 15 non-internet clients within a 12-month period. Going forward, all client advisement must occur via the operational interactive website without exception.
Form ADV Part 1 Update: IO RIAs must affirm on Schedule D of Form ADV that they maintain an operational interactive website as part of their compliance with the internet adviser exemption.

For Advisers who rely on this exemption, further updates will be communicated moving forward regarding policy updates and best practices, but please reach out to your Consultant should you have any additional comments or concerns.

Adopted Amendment - DOL Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

2024-04-29T11:24:00.001-04:00

Adopted Amendment: Department of Labor's Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

The Department of Labor (DOL) recently announced significant amendments to Prohibited Transaction Exemption (PTE) 2020-02, which affects Registered Investment Advisors (“RIA”). As we continue through our research on these amendments we are learning that nothing has changed from our guidance since the DOL released its initial communication on PTE-2020-02, and that our guidance still aligns with the amendments, as all RIA’s are subject to a fiduciary standard. That said, here’s what you need to know about the amendment to PTE-2020-02: Effective Date - The amended rule takes effect on September 23, 2024. The DOL is granting this practical buffer through a designated phase-in period, to give RIAs the appropriate amount of time to make adjustments in order to adhere to the amended rule. There are two (2) material changes we wanted to highlight as it relates to this amendment: Inclusion of the Fiduciary Standard: The amendment to PTE 2020-02 allows investment advice fiduciaries to receive compensation that would otherwise be prohibited under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. The amendment provides a further definition of what is constituted as “Fiduciary Advice” based on the following five-part test:

they provide investment advice for a fee,
on a regular basis,
pursuant to a mutual understanding,
that the advice will serve as a primary basis for investment decisions, and
that the advice is individualized.

Based on the above, this applies to the majority of RIA’s, registered with the SEC and/or various state regulators, who provide ongoing investment advice to clients. The following are key features to meet the Fiduciary Standard:

Fiduciary Acknowledgment: RIAs must formally acknowledge their fiduciary status in writing to retirement investors. This declaration is crucial as it reaffirms the advisor’s role and the associated responsibilities.
Conflict Disclosure: Advisors must fully disclose the services provided and any material conflicts of interest to their clients. Transparency is key to maintaining trust and adherence to fiduciary duties.
Impartial Conduct Standards:

Care Obligation - Advisors must provide advice that reflects the care, skill, prudence, and diligence under prevailing circumstances that a prudent person would exercise.
Loyalty Obligation: The interests of the retirement investor must always be placed ahead of the advisor’s or the firm’s interests.
Reasonable Compensation: The compensation for advice must not exceed what is considered reasonable within the industry.
No Misleading Statements: Advisors must avoid making statements that could mislead retirement investors about investment transactions and other relevant matters.

Clarity Related to Retirement Investors The amendments now clarifies that this exemption applies to investment recommendations to “Retirement Investors”, which is inclusive of plans, plan participants, beneficiaries, IRAs, IRA owners and beneficiaries, and plan fiduciaries with discretionary authority. Although implied, this was not clear in the earlier release of the exemption. Now this answers a lot of questions on whether or not IRAs are subject to the rule. AdvisorAssist is closely monitoring industry best practices, interpretations, and any additional guidance the DOL may provide. We anticipate more clarity from the DOL as feedback comes in, and have begun the process to fully analyze and formulate guidance to help ensure adherence to amendments to PTE 2020-02. Please contact your Consultant for further questions regarding this amendment.

Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements

2024-03-15T15:13:00.002-04:00

Adopted Rule: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz

Senior Compliance Consultant

AdvisorAssist, LLC

Effective September 4, 2024, the Financial Crimes Enforcement Network’s (FinCEN) has officially adopted and published its new rules on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) programs strictly for investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”), and does not apply to investment advisors registered with state regulatory agencies.

The Compliance Deadline is January 1, 2026

AdvisorAssist has begun to review the rule's release and will continue to provide guidance, as applicable, on the key aspects necessary for compliance with this regulation over the course of the “Compliance Period” that ends in January 2026.

Important Items to Note:

Implement a risk-based and reasonably designed AML/CFT program. This includes, but is not limited to:
establishing policies and procedures designed to prevent firms from being used for money laundering, terrorist financing, or other illicit finance activities;
appointing an AML Officer;
performing independent compliance testing;
developing and implement a training program; and
performing ongoing client due diligence to develop client risk profiles and identify/report suspicious transactions.
File certain reports, such as Suspicious Activity Reports (SARs), with FinCEN.
Keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule)

Important Information for State Registered Investment Advisors!

Given that FinCEN currently exempts state registered investment advisors, compliance to similar AML regulations may be required in the future. AdvisorAssist will continue to monitor each state’s rule making and will continue to keep respective firms apprised.

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Initial Proposal - March 2024

On varying occasions, the Financial Crimes Enforcement Network (FinCEN) has submitted rule proposals regarding the need for Registered Investment Advisors (RIAs) and Exempt Reporting Advisors (ERAs) to be subject to comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures. FinCEN’s recent synopsis is driven by the 2024 Investment Adviser Risk Assessment, which identified several illicit finance and national security risks such as sanctioned individuals, corrupt officials, tax evaders, and other criminal actors using RIAs to gain access to US Markets. Furthermore, the risk assessment identified cases of foreign adversaries, including China and Russia, investing in early-stage companies through RIAs to access sensitive information and emerging technology. The proposal would include RIAs and ERAs in the definition of “financial institution” under The Bank Secrecy Act (BSA). Under the BSA, RIAs and ERAs would be required to:

implement an AML/CFT program;
file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

Furthermore, the proposal would grant information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions to RIAs, along with subjecting RIAs to the “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act. Nuances to this proposal to highlight are the following:

The proposal will not include the requirement to have a customer identification program that aligns with BSA requirements, nor beneficial ownership requirements for legal entity customers via the Customer Due Diligence rule. It is expected both these requirements will come with joint SEC rule proposals down the line.
The proposal will not require RIAs to apply AML/CFT program or SAR filing requirements to mutual funds they advise, as mutual funds are already defined as “financial institutions” under the BSA.
Finally, FinCEN will be delegating examination authority to the SEC for compliance with the BSA and FinCEN’s implementing regulations.

At this time, no action is required for RIAs or ERAs. The proposal will remain in a comment period through April 15, 2024. Should the rule become effective, compliance will be required on or before 12 months from the final rule’s effective date.

Navigating the New Independent Contractor Rule: Insights for Registered Investment Advisors

2024-02-07T10:24:00.004-05:00

Contributed By: Thomas Yates

Managing Director & Partner

AdvisorAssist, LLC

Over the recent weeks, we have received inquiries regarding the U.S Department of Labor final rule on defining “independent contractor” under the Fair Labor Standards Act (FLSA) and what that means for registered investment advisors (“RIA”). Although we are not specialists in employment law, nor are we attorneys, we have consulted with legal experts to help break down the rule in regard to W-2 employees and 1099 Independent Contractors (collectively “Supervised Person(s)”) at an RIA. We note that Supervised Persons can be either Investment Adviser Representatives (“IAR”) or client administrative support persons, or other persons that are subject to the Advisor’s Compliance Program. Our goal is to provide Advisors with a basic understanding of rule language to help guide RIAs to compliance with federal wage-and-hour laws, as applicable.

The Essence of the New Rule

The rule's emphasis on the "economic reality" of the employment relationship underlines the importance of determining whether a worker is genuinely operating an independent business or is economically dependent on the employer.

The rule focuses on six key factors, including the worker’s opportunity for profit or loss and the nature of control over the work, among others. This holistic approach encourages a deeper analysis beyond mere contractual terms to the actual practices and dynamics of the working relationship between the RIA and the Supervised Person.

To simplify, here is how AdvisorAssist views the six conditions, and helps Advisors assess whether or not their Supervised Persons can be deemed Independent Contractors:

Opportunity for Profit or Loss: If a Supervised Person can earn more by the more work they put in, clients obtained, and/or the result of their investment management, which could result in additional income earned, they can be perceived as operating as an independent contractor.

Investments by the Worker and Employer: If the Supervised Person spends their own money to purchase tools, technology, or any other resources, at their discretion, to provide their services, this would suggest that they are likely acting as an Independent Contractor.

Degree of Permanence of the Relationship: If the Supervised Person is an IAR and can leave at their own discretion, and take their clients to another RIA, this suggests that they are likely acting as an Independent Contractor.

Nature and Degree of Control: If an RIA’s degree of control over the Supervised Person is only exercised due to the necessity to comply with regulatory requirements, and nothing more, this suggests that they are likely acting as an Independent Contractor.

Extent to Which the Work is Integral to the Potential Employer’s Business: If the Supervised Person does not participate in the day to day operations of the RIA or does not influence management-level decisions, where they solely work with their own clients, suggests that they are likely acting as an Independent Contractor.

Worker’s Skill and Initiative: Generally, Supervised Persons are considered “specialized” in their type of work, as they are trained to operate in this industry and if the Supervised Person is an IAR, are required to obtain a certification to provide investment advice. However, being specialized does not automatically mean a Supervised Person is working in the capacity of an Independent Contractor. Rather, the RIA should assess whether or not the Supervised Person’s skill/application is “in connection with business-like initiative”. This is a broad statement but should go into the overall analysis when determining a Supervised Person's contribution to a firm's growth vs. their intent to specifically service their own clients.

Ultimately, if Supervised Persons are compensated through fees for the services provided to clients, demonstrating minimal economic dependence on the firm, aligns well with the Independent Contractor status. Conversely, a Supervised Person on a salary or hourly wage, especially those without a direct link between compensation and client services rendered or who rely heavily on the firm for their economic sustenance, may not fit the Independent Contractor definition.

Conclusion When completing the Form U4 for a Supervised Person who is an IAR, it is essential to accurately disclose their employment status in Section 1 of the form. This section specifically inquires whether the IAR maintains an independent contractor relationship with the firm. Proper classification is crucial because it is a regulatory filing, and the way an IAR is classified must be properly reflected.

It is important to note, that this rule does not change an RIA’s responsibility to supervise its Supervised Persons, nor does it change the RIA’s obligations to act as a fiduciary. However, RIAs should consider how this rule would impact them from an employment law perspective. It is necessary for RIAs to ensure they maintain a robust employment policy to ensure adherence to the Department of Labor’s rules on the classification of its employees and ensure that wage-and-hour laws are in fact adhered to, helping mitigate the internal legal risk posed to the RIA.

While AdvisorAssist is not an employment law firm, we feel it is prudent that RIAs have a basic understanding of these conditions to help determine whether or not a Supervised Person can be classified as an Independent Contractor. We want to emphasize however, that all six factors, ranging from the worker’s opportunity for profit or loss, the relative investments by both parties, the permanence of the relationship, the degree of control, the integral nature of the work to the employer’s business, to the worker’s skill and initiative, must be considered in holistically. There is no single category that would determine a Supervised Person’s status, as all six categories as a whole should be assessed to an RIA determine a Supervised Person’s employment status with the RIA. With all this in mind, if RIAs ever do question the appropriate classification of a Supervised Person, do not hesitate to reach out to an employment attorney, as RIAs should want to ensure that they have the appropriate legal backing in these classification decisions.

Modernization of Beneficial Ownership Reporting in 2024

2023-12-20T13:48:00.015-05:00

Modernization of Beneficial Ownership Reporting in 2024

After 50 years the SEC has decided to adopt amendments to long-standing reporting requirements for beneficial ownership under Sections 13(d) and 13(g) of the Securities and Exchange Act of 1934. Starting in Q4 2024, the amendments will require Form D/G Filers to provide more timely information regarding their beneficial ownership in the following manner:

13D Filers

The deadline for the initial 13D filing has been shortened from 10 days to 5 business days
Amendments to 13D filings are required to be reported within 2 business days

13G Filers

Qualified Institutional Investors and Exempt Investors: Initial filing deadline shortened from 45 days after year end, to 45 days after the end of the calendar quarter.
Passive Investors: Amendments of ownership changing 5% or more shorten the filing deadline from 10 days to 5 business days.
All amendments generally required to be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.

Require Schedule 13D and 13G filings be made using a structured, machine-readable data language, XML, via the SEC Edgar System.

The amendment also provides guidance with respect to “formation of a group”, and it is of the Commission’s view that the determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding, or disposing of securities of an issuer are sufficient to constitute the formation of a group.

Compliance with the revised Schedule 13G filing deadlines will be required beginning on Sept. 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on Dec. 18, 2024. Compliance with the other rule amendments will be required upon their effectiveness. The final rule, and fact sheet can be found within the SEC’s press release.

AdvisorAssist is in the process of reviewing rule requirements for enhancements to applicable manual language, and compliance tasks. We will be releasing further communication regarding this rule update as needed, but should you have any questions, please contact your Compliance Consultant.

Update - March 2024: On the tailwind of this adopted amendment, the SEC announced that they settled charges against a New York-based Investment Advisor (IA) for its failure to make timely ownership disclosures. This failure led to an agreed upon $950,000 civil penalty to settle the SEC’s charges.

Although the Advisor disclosed its ownership of more than 5% of the common stock in question in December 2021, the Advisor did not properly file its change in control status and increased ownership in the position as required by federal securities laws. Please review the full press release here.

AdvisorAssist wants to remind Advisors, especially with the upcoming adopted amendments, that if the Advisor has exceeded the 5% threshold, the Advisor is required to file an initial Section 13D or G promptly and then an annual filing thereafter. In accordance with Rule 13d‐1(h), a firm may file Schedule 13G (shorter form) as long as the shares are not held with control intent – and the pitfall with our NY based IA in this scenario.

Having appropriate controls in place is imperative for supervising security thresholds for accurate and timely reporting, which includes a process for aggregating trades across various custodians. Advisors should also contact their custodians to determine if they monitor if the firm needs to file Form 13D or G.

Investment Advice Fiduciary and Prohibited Transaction Exemptions Proposal

2023-11-20T11:34:00.001-05:00

Department of Labor Proposal: Investment Advice Fiduciary and Prohibited Transaction Exemptions

As expected, the Department of Labor (DOL) released the Retirement Security Rule: Definition of an Investment Advice Fiduciary proposal for its 60-day comment period to the Register, along with amendments to the various Prohibited Transaction Exemption (PTE) regulations. The intent is to expand the definition of whom qualifies as an “Investment Advice Fiduciary” under ERISA, and clarify the standards set forth in PTE regulation. Per the rule proposal’s definition, a Provider is someone whom:

Provides investment advice or makes an investment recommendation to a “retirement investor” (i.e., a plan, plan fiduciary, plan participant or beneficiary, individual retirement account (IRA), IRA owner or beneficiary, or IRA fiduciary);
Receives a “fee or other compensation, direct or indirect” for the advice or recommendation; and
Makes the recommendation in one of the following contexts of a professional relationship where the individual investor would reasonably expect to receive sound investment recommendations that are in their best interest:The provider has discretion over the retirement investor’s investment decisions;

The provider makes investment recommendations to investors on a regular basis as part of his, her, or its business, and the recommendation is provided under circumstances that would indicate that the recommendation is based on the retirement investor’s particular needs or circumstances, and
the advice may be relied upon by the retirement investor as a basis for making investment decisions that are in the retirement investor’s best interest; or

When making the investment recommendation, the provider acknowledges or represents that they are acting as a fiduciary.

The reason for expansion? The rule doesn’t cover IRAs. The current five-part test to determine if you are an Investment Advice Fiduciary is a Provider whom:

Renders advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
On a regular basis;
Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that;
The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that;
The advice will be individualized based on the particular needs of the plan or IRA.

With the expansion of the “on a regular basis” item, to cover a Provider’s day-to-day business would effectively capture one-time advice recommendations; i.e whether a retirement investor should roll over their employer-sponsored 401(k) into an IRA, an annuity, or keep his or her assets in the plan. In conjunction with these changes, the DOL will be maintaining core components of the PTE 2020-02. However, this amendment will require additional disclosures to investors, which if adopted may require amendments to Advisor’s client disclosures and policies and procedures. In addition, the proposal includes enhanced language regarding the exemption’s conditions, such as the fiduciary acknowledgment requirement and a new requirement to provide a written statement of the best interest standard of care owed by the investment professional to the investor. PTE 2020-02 would furthermore be expanded to cover certain transactions involving pooled employer plans (PEP) and transactions involving “pure” robo-advice providers. AdvisorAssist will continue to monitor this proposal through its comment period in January and will communicate out further action steps as necessary. No action is needed at this time. Please contact us with any questions regarding this proposal, or your current PTE 2020-02 processes.

Division of Examinations: 2024 Examination Priorities

2023-10-25T15:42:00.001-04:00

Division of Examinations: 2024 Examination Priorities

Each year, the Division of Examinations (“the Division”) of the U.S. Securities and Exchange Commission (“SEC”) publishes its Examination Priorities for the upcoming year. This is the first year the Division has published their priorities to align with the beginning of the fiscal year, with the intent to inform new and current registrants of key risks, trends, and examination topics. Below are the key elements that we believe are of the utmost importance for registered investment advisors. Compliance Programs

The Division remains focused on Advisors maintaining effective and compliant programs that align with the Advisor’s business model, the corresponding annual reviews that address the effectiveness of the compliance program, and any applicable conflicts related to the Advisor. A typical exam will include a review of program and disclosure documents focusing on such topics as:

Custody
Valuation
Portfolio Management
Brokerage and Execution
Conflicts of Interest
Compliance Issues
Supervision and Oversight
Compensation

Currently, the Division has stated the following topics are deemed priority review items during an exam:

Communications and Marketing: It is critically important for Advisors to ensure that they have adopted and implemented written policies and procedures reasonably designed to prevent violations of the Marketing Rule, and have amended their Form ADV to appropriately disclose marketing related information. Advisors should review their current and prospective marketing material to ensure that they can substantiate statements made within their content, and that testimonials/endorsements, third party ratings, and performance advertising align with rule requirements.

Compensation: The SEC will continue their focus on Advisor’s compensation structures. Examiners will review Advisor’s conflicts of interest and their related client disclosures, as seen in such regulatory initiatives as the Mutual Fund Share Class Sweep and Money Market Fund/Sweep Vehicles Initiative. The concern is whether an Advisor is adhering to their fiduciary obligations when attempting to maximize their revenue through forms of additional compensation via their advice, implementation of investment products, or how fee breakpoints are calculated and processed.

Valuation: Advisors must ensure that there are compliant policies and procedures for the valuation of illiquid investments, such as commercial real-estate or private placements. When securities are not properly valued it will affect the billing of client assets, and affect performance considerations which can be detrimental and misleading to investors.

Safeguarding Client Information: Due to larger market events, geopolitical concerns, and the proliferation of cybersecurity attacks the Division will focus on Advisor’s policies and procedures (especially Regulations S-P and S-ID), governance practices, and cyber incident responses. Their reviews of policies and procedures will attempt to determine if controls are reasonably designed to safeguard customer records and information, whether the controls are implemented via a third party vendor or the Advisor itself.

Accurate and Timely Regulatory Filings: Regulatory filings, including the Form CRS, must be accurate, complete, and timely. Client’s must be fully aware of the services, fees, disciplinary history, and conflicts of interest of an Advisor. If not accurate, this would be deemed misleading.

Lastly, examiners will also be mindful in understanding the Advisors approach to initial and ongoing due diligence for third party vendors, branch oversight, electronic communications, and implementation procedures for material changes of Advisor’s agreements with clients.

Private Fund Advisors

The SEC will continue their focus on Advisors to Private Funds and their policies and procedures, contractual requirements, calculation and allocation of fees and expenses, and custody. The Division will focus on Fund’s portfolio management techniques, especially when risks are present to the fund, for example inflation or withdrawal rate. Examiners will look for adequate controls, policies, and procedures regarding timely Form PF and Form ADV updates, especially in regard to Private Fund audits by an independent qualified auditor and distribution of Private Fund audited financial statements.

Standards of Conduct

The SEC continues to focus on fundamental principles of fiduciary responsibility and duty to clients. Examiners will evaluate the quality of investment advice provided, particularly in relation to various products and strategies. They will also review the Advisors robustness of their investment processes such as suitability assessments, cost and risk evaluations, and conflict of interest management.

Evaluation of Investment Advice: Examiners will focus on the evaluation of investment advice provided to clients. Specifically the concern around various products, investment strategies, and account types that are considered complex in nature. Complex products like derivatives and leveraged ETFs, high-cost and illiquid options such as variable annuities and non-traded REITs, and unconventional strategies targeting rising interest rates are a sample of mentioned items. There is an expectation that appropriate due diligence is performed before the investment advice is rendered. This allows the Advisor to substantiate the appropriateness of their investment recommendations, especially when considering certain client types such as seniors.

Client’s Best Interest: To ensure appropriateness of investment advice, the Advisor must have a process in place for making initial and ongoing suitability determinations, which should consider best execution, cost and risk evaluation, investment restrictions, and conflict of interest management. Further, the Advisor should adopt policies to evaluate reasonably available alternative products. Determining Client’s best interest should also include how an Advisor handles conflicts of interest by either mitigating or eliminating them.

Compensation Arrangements: Advisors have a fiduciary obligation to be transparent regarding their compensation arrangements with clients and affiliates. Disclosures are required for Advisor’s compensation for services provided to clients, including valuation methods, and alternative compensation arrangements such as cash sweep programs/mutual fund share classes.

Additionally, exams will include reviews of any economic incentives that an Advisor has to recommend products, services, or account types and how that affects investment advice, such as share class selection or proprietary products. This enhances last year’s priority where exams included conflict of interest disclosures and whether the disclosures are sufficient in scope that a client can provide informed consent to the conflict, whether express or implied. The inquiry will focus on whether the firm has tailored and established policies and procedures to identify and periodically review conflicts of interest, in alignment with the Firm’s business model, compensation structure, and product lineup

Crypto Assets and Emerging Financial Technologies

The Division will continue its focus and exams on certain types of investments such as crypto/crypto related products and services, along with emerging financial technology such as mobile apps, robo-advisors, and additional online solutions. Due to recent events in the crypto asset market the Division will continue to monitor and select applicable registrants for examination which will focus on the offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets. Furthermore, the Division will assess the following:

The registrants’ requirements under the standards of care in crypto or crypto relates assets
Whether the registrant reviews and updates their compliance and risk practices, and disclosures accordingly
New or never examined registrants offering crypto or crypto-related assets

In particular, the Division will focus on the tools and methods offered via digital engagements through RIAs:

Recommendations being provided via electronic channels such as social media or social trading platforms.
Whether representations align with Marketing Rule requirements
Are applicable disclosures and controls in place
Are recommendations being made in the client’s Best Interest
Risks that may be associated with this method of business practice

Please remember that the Division communicates these as PRIORITIES, and should not be relied upon as an all-inclusive list of all focus areas. To read the full report, click here: Division of Examinations 2024 Examination Priorities.

When Revenue Becomes a Conflict: Mutual Fund Share Classes & Cash Sweep Programs

2023-10-05T17:00:00.000-04:00

When Revenue Becomes a Conflict

Mutual fund share class selection and cash sweep programs are two of the most common forms of revenue sharing, turned into undisclosed conflict of interest, facing the industry over the past few years. After multiple Division self-reporting initiatives, exam sweeps, and enforcement cases, press releases like the AssetMark Inc. case are still hitting the wire…but why?

The most recent SEC order found that AssetMark Inc. agreed to pay over $18 million, of which $8.5 million is to be distributed to harmed investors, because the firm failed to provide full and fair disclosure for several items:

AssetMark received economic benefits from assets held in certain no-transaction-fee mutual funds, but it failed to disclose to clients that lower-fee share classes were available, but these share-classes had no payout for AssetMark.
AssetMark assisted the affiliate custodian in setting the fee received for operating the cash sweep program, which reduced interest payments to clients.

“Investment advisers have a fundamental duty to disclose conflicts between their own financial interests and those of their clients. Here, AssetMark failed to disclose multiple financial conflicts of interest where AssetMark and its affiliated custodian reaped significant financial benefit from decisions it made.” - Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit

Furthermore, over the past few years the SEC has peppered in several money market sweep vehicle and fund cases where Advisors have failed to disclose revenue sharing related to clients' funds held in cash sweep vehicles, a few examples of which are below:

Trust Advisory Group
Cowen Prime Advisors LLC
Cantella & Co., Inc
St. Germain Securities, Inc.

The SEC’s Share Class Initiative has cumulatively returned well over $125 million to retail clients from Advisors who directly or indirectly received 12b-1 fees for client investments without adequate disclosure, including disclosures that were inconsistent with policies and procedures. At AdvisorAssist, we remind clients that as part of an Advisor's fiduciary duty to clients, Advisors should endeavor to purchase the lowest-cost share class available to clients when recommending a particular mutual fund and maintain policies and procedures which align to the Advisor’s true business practices. AdvisorAssist encourages Advisors to review their mutual fund holdings, whether purchased or transferred in, and if a client is invested in a share class that is potentially not the lowest cost, Advisors need to ensure the firm has proper documentation substantiating why the client is holding the position. Examples of why the holding isn't converted to the lowest share class may include, but are not limited to:

Tax implications
Dollar-cost averaging
It does not meet the minimum investment
Investment time horizon
The availability of lower share classes at the custodian

When it comes to money market funds or sweep vehicles, similar conflicts exist in regard to revenue sharing and cost to client. Enforcement actions boil down to Advisors choosing money market or cash sweep vehicles when lower or no-cost options were available to clients and where Advisors would not have received any revenue sharing. Also, Advisors breached their fiduciary duty by failing to provide full and fair disclosure of its money market fund selection practices, failing to consider additional funds/vehicles available, and related conflicts of interest to its advisory clients. To that end these Advisors willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.

An Advisor can not place the Firm’s financial interests ahead of their clients, and regulator’s continue to maintain that if the industry reaps financial benefit from clients – there will be regulatory action. If you have any questions or concerns please contact your consultant to discuss!

SEC Amends Record-Keeping Requirements for Investment Advisors

2023-09-06T17:23:00.003-04:00

SEC Amends Record-Keeping Requirements for Investment Advisors

The SEC has made amendments to record-keeping requirements, Rule 275.206(4)-2, for Registered Investment Advisors. The amendments focus on maintaining accurate and up-to-date records of allocations, confirmations, and affirmations (as defined below) related to securities transactions subject to Rule 15c6-2(a). These changes apply universally to registered investment advisors and include provisions for maintaining records electronically. The rule was finalized on May 5, 2023 with the Federal Registrar and has a compliance date of May 28, 2024.

Let's start with the definable terms within the rule language:

Allocation - Refers to how Advisors divide a trade among different client accounts or distribute securities trades made simultaneously.
Confirmation and Affirmation - Refers to message exchanges between the Advisor and Broker-Dealer/Custodian to verify trade details, for accurate settlement of trades executed on behalf of clients/investors. This also includes confirmation of the execution of the trade.

With these changes, Advisors are now required to archive the following:

The date and time stamp indicating when the trade allocation and trade affirmation occurred.
Details, sent or received, about each confirmation received, any allocation made, and each affirmation.

Securities transactions subject to Rule 15c6-2(a) refers to “All Securities”, with certain exemptions, as follows:

Exempted Securities (e.g. Private Funds)
Government Securities
Municipal Securities
Commercial Paper
Bankers’ Acceptances
Commercial Bills
Security Based-Swaps

Be on the lookout for communications regarding enhanced policies and procedures, along with industry best practices as we continue to review rule requirements. Please do not hesitate to reach out to your Compliance Consultant should you have any questions.

SEC Charges Five Advisory Firms for Custody Rule Violations

2023-09-06T13:19:00.002-04:00

SEC Charges Five Advisory Firms for Custody Rule Violations

On September 5, 2023, the SEC announced Custody Rule related charges against five investment advisers, with fines totalling more than $500,000. These charges come on the tailwind of the 2022 charges of nine investment advisers, with fines totalling more than $1 million. According to the order, the firm’s failed to do one or more of the following:

Have audits performed
Deliver audited financials to investors in a timely manner
Ensure a qualified custodian maintains client assets
Failure to disclose custody, and amend ADV information accordingly

“The Custody Rule and the associated Form ADV reporting obligations are core to investor protection,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “We will continue to ensure that private fund advisers meet their obligations to secure client assets.”

AdvisorAssist reminds their clients of their obligations concerning custody. An Advisor may be deemed to have custody when:

A Supervised Person of an Advisor is appointed as executor, conservator, or trustee for an estate, conservatorship, or personal trust or have power of attorney for a client unless, the appointment of these roles is through familial obligation or through a personal relationship, and not as a result of employment with an advisor.
An Investment Advisor Representative or Supervised Persons maintains client personal login credentials.
An Advisor has check writing or discretionary money movement authority to third parties. However, and Advisor may not be subject to the independent, surprise examination requirement of the custody rule, for standing letters of authorization to third parties, provided the standing instructions meet the seven conditions test, per the February 17, 2017 No-Action Letter .
If you are an Advisor to a private fund, you are deemed to have custody of the fund's assets. As such, the fund[s] must be audited annually by an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB), where audited financials must be delivered to investors within 120 days of the fiscal year end (180 days for fund of funds).

Generally, a registered investment advisor who is deemed to have custody of retail client assets will be required to maintain these assets as a "qualified custodian." Further, they must ensure that the Qualified Custodian is delivering statements to the client on an at least quarterly basis.

Should a firm touch upon any of the stated items related to custody, it is imperative that they reach out to their AdvisorAssist consultant for further assistance.

Securities and Exchange Commission Adopts Final Rules for Private Funds

2023-08-30T15:32:00.001-04:00

Securities and Exchange Commission Adopts Final Rules for Private Funds

The U.S. Securities and Exchange Commission (SEC) has implemented significant reforms aimed at enhancing the regulation of private fund advisors to safeguard the interests of investors and maintain the integrity of financial markets. These new rules address certain practices that could pose risks and harm to investors and private funds, ensuring greater transparency and protection for those who invest directly or indirectly in private funds.

Key Requirements:

Quarterly Statements: Private fund advisors, registered with the SEC, will be required to provide investors with quarterly statements. These statements will detail information about private fund performance, fees, expenses, and compensation paid to the advisor.
Private Fund Audits: Registered private fund advisors must arrange for annual financial statement audits for the funds they advise. This measure aims to ensure accurate valuation of private fund assets and prevent misappropriation.
Advisor-Led Secondaries: When offering existing fund investors options to sell or convert their interests, advisors must obtain a fairness or valuation opinion. Additionally, advisors must disclose any significant business relationships related to these transactions.
Restricted Activities: Restrictions are in place for private fund advisors from engaging in activities that conflict with investor interests, including charging certain fees without disclosure and consent from investors, allocating regulatory expenses to the fund, and reducing clawback amounts.
Preferential Treatment: Advisors are prohibited from offering preferential terms to certain investors regarding redemptions or portfolio information. Exemptions may apply, where preferential treatment must be disclosed to all investors.
Compliance Documentation: Private fund advisors must document their annual compliance reviews in writing. This will help assess adherence to rules and identify potential compliance weaknesses

Although the rule has been finalized, advisors have some time before they are required to adhere to these new rules. Below is the implementation timeline:

Private Fund Audit Rule and Quarterly Statement Rule: Compliance is required in ~18 months
Advisor-Led Secondaries Rule, Preferential Treatment Rule, and Restricted Activities Rule for advisors with more than $1.5 billion AUM: Compliance is required in ~12 months
Advisor-Led Secondaries Rule, Preferential Treatment Rule, and Restricted Activities Rule for advisors with less than $1.5 billion AUM: Compliance required ~18 months

AdvisorAssist is closely monitoring industry best practices, interpretations, and any additional guidance the SEC may provide. We anticipate more clarity from the SEC as feedback comes in, and have begun the process to fully analyze and formulate guidance to help ensure adherence to the new private fund rule if they apply to your firm. Please reach out anytime if you need assistance or have questions in the meantime.

Misrepresentations in Hypothetical Performance Leads to SEC’s First Marketing Rule Enforcement Case

2023-08-22T11:14:00.001-04:00

Misrepresentations in Hypothetical Performance Leads to SEC’s First Marketing Rule Enforcement Case

FAQs, Risk Alerts, and press releases can provide valuable insight into the SEC’s thought process on rule language, maybe even more so than the rule itself. On August 21, 2023, the SEC announced its first violation of 206(4)-1 The Marketing Rule, in a case that also touches other hot button industry items. The SEC found that Titan Global Capital Management USA LLC (Titan), used misleading hypothetical performance metrics in advertisements, and had several other compliance failures, leading to fines totaling $192,454 in disgorgement and an $850,000 civil penalty for affected clients. From August 2021 to October 2022, Titan made misleading statements on their website regarding the Advisor’s hypothetical performance. These statements included annualized performance yielding a high mark of 2,700% for their crypto strategy. These results did not disclose material information, such as the fact that the annualized projections assumed performance based on the first three weeks of the strategies performance data, nor taking into light economic/market conditions, or other applicable risk factors. AdvisorAssist has engaged with Sean P. Gilligan CFA, CPA, CIPM, Managing Partner of Longs Peak Advisory Services, as an industry expert and provider of guidance with GIPS compliance and investment performance measurement, analysis, and reporting to comment on some key data points of this case:

“Periods less than a year should never be annualized. This has always been a requirement under the GIPS standards, but even without being a GIPS compliant Advisor, I think most SEC examiners would have considered this to be misleading - even prior to the new Marketing Rule. Then you add in such a volatile and risky asset like crypto, where repeating a return earned over 3 week period for an entire year, would not be a likely scenario.”

Furthermore, Titan failed to adopt and implement the required policies and procedures regarding the Marketing Rule:

“Having policies and procedures to determine who can receive hypothetical performance is one of the key updates made clear in the new marketing rule.” said Gilligan, “When working with firms that want to use hypothetical performance, we always emphasize the importance of having these policies and to limit the distribution to only those that can reasonably be expected to understand what they are presenting.”

AdvisorAssist has guided on the importance of a retrospective review of Advisor’s active client communications in our recent blog post, and stressed how regulatory examinations are focused on components of the Marketing Rule by providing sample request letters to clients.

In conjunction with adopting applicable policies and procedures, as Mr. Gilligan stated above, it is imperative that the discloses for all client communications all relevant criteria used and assumptions made in calculating the hypothetical performance, and discloses sufficient information to allow the intended audience to understand the risks and limitations associated with hypothetical performance.

AdvisorAssist can support you with questions you may have regarding your current performance advertising and/or Marketing Rule policies and procedures. Please contact us today!

SEC Rule Proposal: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers

2023-07-27T15:33:00.000-04:00

SEC Rule Proposal: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers

The financial sector has been speculating at guidance regarding the use of AI technology, and on July 26, 2023 the SEC stepped forward with their rule proposal on the use of predicative data analytics and these technological advancements. Although these systems can be optimized for investor interests, if not properly supervised, these technologies can effectively cause conflicts to arise and harm the end investor. The proposal defines these technologies as a “covered technology”, used in a firm’s engagement or communication with an investor/prospect:

“Any analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor. “

Per the proposal, if an Advisor uses, or may foreseeably use, a covered technology during client interactions the Advisor must:

Evaluate and identify any conflict of interest associated with the use of covered technology in investor interactions, and determine whether any conflict of interests exists that place the firm’s or its associated person’s interest ahead of investors’ interests.
Eliminate or neutralize the effect of conflicts of interest if discovered.
Have written policies and procedures reasonably designed to prevent violations of the rule.
Adhere to record-keeping requirements of the rule.

AdvisorAssist will continue to monitor this proposal as it goes through its comment period. Should you have any questions, please contact your AdvisorAssist Consultant for further information.

SEC 2023 Priorities and the Marketing Rule – How Important is a Retrospective Review?

2023-07-10T12:09:00.001-04:00

SEC 2023 Priorities and the Marketing Rule – How Important is a Retrospective Review?

With the release of the SEC Division of Examinations 2023 Examination Priorities, newly registered advisers and other SEC registered investment advisers, undergoing an examination, have begun to receive exam requests from the newest addition to the Division’s core examination review - the Advisers Act Rule 206(4)-1 (Marketing Rule).It is critically important for Advisors to ensure that they have adopted and implemented written policies and procedures reasonably designed to prevent violations of the Marketing Rule. New and existing Advisors, must be prepared to have the Division request these policies and procedures, and request samples of active/currently used client communications pieces along with their corresponding reviews and approvals. On June 8, 2023 the SEC released the Risk Alert: Examinations Focused on Additional Areas of the Adviser Marketing Rule reiterating it’s primary areas of focus during exams:

Policies and Procedures
Substantiation Requirement
Performance client communications Requirements
Books and Records

“The Division encourages advisers to review their websites and other marketing materials for compliance with the Marketing Rule, including ensuring that they have a reasonable basis for believing they will be able to substantiate material statements of fact and that their performance client communications, including extracted performance and hypothetical performance, complies with the requirements of the Marketing Rule.”

The Staff is also conducting focused examinations, as well as broad reviews, on such topics as Testimonials and Endorsements and Third Party Rankings, Rating, and Awards. Please click here for examples of questions AdvisorAssist has seen during examinations regarding the Marketing Rule. As a reminder, an Advisor should treat any form of communication to Clients that is designed to solicit or maintain advisory service (“Client Communications”) as covered by regulations under Securities Laws. This includes written communications on a one-to-one basis to existing, or prospective, advisory Clients designed to offer advisory services, or maintain the existing Client, are subject to the general prohibitions under the Marketing Rule. It is imperative that client communications that were approved PRIOR to the rule’s compliance date (or Advisor’s implementation date), do not receive any level of grandfather clause regarding compliance with the Marketing Rule or the Advisor’s newly published policies and procedures.

As a reminder, an Advisor should treat any form of communication to Clients that is designed to solicit or maintain advisory service (“Client Communications”) as covered by regulations under Securities Laws. This includes written communications on a one-to-one basis to existing, or prospective, advisory Clients designed to offer advisory services, or maintain the existing Client, are subject to the general prohibitions under the Marketing Rule. It is imperative that client communications that were approved PRIOR to the rule’s compliance date (or Advisor’s implementation date), do not receive any level of grandfather clause regarding compliance with the Marketing Rule or the Advisor’s newly published policies and procedures.

ACTION ITEMS:

Compile a list of active/current client communications and re-review content against the standards now set forth within the Marketing Rule,
Being sure to evidence this review through the Firm’s client communications/marketing review procedures stated within their compliance manuals, and record keep the review accordingly.
Place an emphasis on enhanced requirements of the rule, such as reviewing their current marketing material to ensure that they can substantiate material statements of fact for such items as testimonials/endorsements, third party ratings, and performance client communications.
If Advisors can not substantiate the data within their client communications, they should either obtain evidence for substantiation immediately or deactivate that client communication.
Keep in mind that active and current client communications can mean your website, social media pages, brochures, stationary, performance marketing, article copies, newsletters, etc.
Review the advertisement violates any of the general prohibitions, taking into consideration the facts and circumstances of the advertisement, the nature of the audience to which the advertisement is directed, the form and content of the advertisement, and whether the Advisor can substantiate any and all claims within the piece. We urge you to review our Marketing Rule 206(4)-1 General Provisions fact sheet regarding these General Prohibitions.
Pull all performance marketing, client communications that contain specific investment advice, and any pieces which contain third-party ratings, rankings, and awards as they each have additional review components outside of the general prohibitions.
Evidence their retrospective review based on their policies and procedures for marketing reviews, being mindful to adequately notate these new rule components into their review and how it aligns with the Advisors implemented policies and procedures.

Please note, this process will assist the Advisor in adequately answering the ADV questions under 5L. We have included AdvisorAssist’s Marketing Fact Sheets to assist you in this endeavor:

AdvisorAssist would like to remind Advisors that it is prudent to ensure the Firm’s process of record keeping is consistent with the requirements of the Advisers Act. The record keeping obligation does not differentiate between various media, including paper and electronic communications, such as emails, instant messages, and other Internet communications that relate to the adviser’s recommendations or advice. As the Division starts its first year of exams with the new Marketing Rule components, and Advisors continue to navigate the Rule and take advantage of its newer components (such as utilizing testimonials and endorsements) AdvisorAssist urges Advisors to keep an eye on the Marketing Rule FAQ for updates. Should you have any questions, please contact your AdvisorAssist Consultant for further information.