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The Office of Compliance Inspections and Examinations (OCIE) of the SEC recently released its SEC 2020 Examination Priorities; this guide is intended to provide insight to its risk-based approach to identifying present and emerging risks to investors and the securities markets.
If you are either an RIA that is either newly formed or has not been examined in several years, take particular note as these groups are expected to have an increased likelihood of selection.
A few key take-aways:
- The OCIE will continue to focus on the protection of retail investors, particularly seniors and retirement savers. Disclosures of fees, expenses and conflicts of interest will be examined closely.
- Cybersecurity will remain high on the list of priorities again this year, and we expect scrutiny to continue to increase in this area for years to come. We encourage you to invest in the proper resources and third-party relationships needed for protection of your clients’ personal financial information. The OCIE will have a particular focus on (1) governance and risk management; (2) access controls; (3) data loss preven¬tion; (4) vendor management; (5) training; and (6) incident response and resiliency.
- The adoption of Regulation Best Interest in June 2019 will impact 2020 exams, including the addition of Form CRS Relationship Summary. As a reminder, investment advisers who are already registered or have an application for registration pending with the SEC before June 30, 2020, must electronically file the Form CRS beginning on May 1, 2020, and by no later than June 30, 2020, either as: (1) an other than-annual amendment or (2) part of the initial application or annual updating amendment.
- It should also be noted that if your fiscal yearend was December 31, you have until the end of March to file forms ADV Part 1, ADV Part 2A and ADV Part 2A Appendix 1 (if applicable). In addition, a December 31 fiscal yearend firm is required to deliver a copy of Part 2A (and Part 2A Appendix 1 if applicable) along with a copy of the firm’s privacy policy statement to all advisory clients by the end of April.
Advertising and Solicitation Rule Proposal
As anticipated, in November, the SEC introduced an amendment intended to modernize the Investment Advisers Act, including:
1) The “Advertising Rule” (Rule 206(4)-1), an effort long overdue since it has not been modified since its inception in 1961, and
2) The “Cash Solicitation Rule” (Rule 206(4)-3), last modified in 1979
Overall, statements that are untrue, misleading or cannot be substantiated are all still strictly prohibited. However, among the changes, some of the most significant would include:
The permitted use of testimonials and endorsements— The proposed rule would permit advisers to use testimonials and endorsements only if they clearly and prominently disclose, or reasonably believe that the testimonial or endorsement clearly and prominently discloses: (i) that the statement was given by an investor (if a testimonial) or a non-investor (if an endorsement); and (ii) that cash or non-cash compensation has been provided by or on behalf of the adviser in connection with the testimonial or endorsement, if applicable.
Performance reporting—the proposal also seeks to provide more clarity on prohibited performance marketing. Here are a few examples; 1) the use of gross performance results is prohibited unless the advertisement provides (or offers to provide promptly) a schedule of fees and expenses deducted to calculate net performance; 2) the use of any material which states that the calculation or presentation of performance results has been approved or reviewed by the SEC. Also, the Commission has tried to provide a little more granular information regarding the oft confused guidelines surrounding the use of hypothetical performance. Though the Commission continues to prohibit the use of hypothetical performance in general, it has now given advisors a few pointed requirements which would allow for the use of model data. The proposed summary of these requirements can be seen below:
a. Adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the financial situation and investment objectives of the person to whom the advertisement is disseminated;
b. Provides sufficient information to enable the recipient to understand the criteria used and assumptions made in calculating such hypothetical performance; and
c. Provides (or, when the recipient is a Non-Retail Person (as defined herein), offers to provide promptly) sufficient information to enable the recipient to understand the risks and limitations of using hypothetical performance in making investment decisions.
Additionally, the proposal provides additional clarity on compliance record-keeping practices for advertisements, which should be reviewed and approved in writing by a member of your compliance team prior to use.
The updates to the Cash Solicitation Rule would include increased disclosure of conflicts of interest, including all forms of compensation both cash and non-cash, such as awards and prizes, free or discounted services and directed brokerage. It also includes a larger list of disciplinary events that would exclude advisors from acting as solicitors.
For questions or additional compliance resources, contact your wholesaler to discuss how we can be of help!
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