On November 15, 2022, the U.S. Securities and Exchange Commission (SEC) announced the results of its latest round of enforcement actions against investment advisors. Compared to FY 2021:
- Enforcement actions increased by 6.5%;
- cases brought against investment advisers and investment companies increased by 9%;
- penalties and disgorgements increased by 64%; and
- NASAA’s total fines surpassed $145 million, with a 313% year-over-year increase.
In December of 2022, the SEC fined RIAs over $2 billion for breaking texting laws and using prohibited external communications. Overall, the SEC had a record-breaking enforcement year. Here are the top 10 compliance problem areas of 2022:
- Form CRS (ADV 3)
- digital communications
- marketing & advertising rule
- advisor misconduct
- best execution – share classes
- policies & procedures
- Regulation Best Interest (Reg BI)
- Municipal Advisor Registration Rule
- code of ethics
- DOL Employment Rule Threatens Future Of Independent Advisors
- Why Financial Advisors Should Act Now To Remove False Disclosures From Their Public Records
- AdvisorLaw Helps Veteran Advisor Transition to Ideal Firm
- The Importance Of Form ADV Amendments & What RIAs Need To Know
- 70% Of Financial Advisory Firms Considered An Acquisition In 2022
- AdvisorLaw Partners with Financial Professionals Coalition
- SEC Sweep Letters: What You Should Know
Preparing For 2023
For the past five years, RIAs and firms have been buckling down and paying more for their compliance services, with spending increasing by more than 25%. If you’re looking to prepare for what may come in the new year, here are a few of the compliance areas on which to focus:
Regulation Best Interest & Form CRS
In the coming year, be prepared for increased Reg BI and Form CRS enforcement from the SEC and FINRA. Reg BI’s enforcement began with the SEC’s initial enforcement action, and FINRA filed its first Reg BI case this past October.
These contain insights about how businesses should detect and manage conflicts of interest, disclose to retail clients all relevant information about such conflicts, design and enforce proper written supervisory procedures, and file, deliver, and track a precise Form CRS.
The SEC issued more than $1.1 billion in penalties for failing to keep track of digital communications sent from personal devices. The Commodity Futures Trading Commission ordered more than $710 million for related violations for using prohibited apps, like WhatsApp or Signal. Since 2015, reps and firms have been routinely caught text messaging on their personal devices to communicate with each other about business matters.
If you’re not sure what constitutes a prohibited communication device or which applications can be used at your firm, consulting with a specialist who is well-versed in SEC regulations is recommended. In addition to our skilled compliance specialists, AdvisorLaw offers a solution for capturing, reviewing, and archiving SMS messages with our tech package, Nexus.
Some of the biggest hazards that many clients and businesses face today are cybersecurity threats. Attacks are happening more frequently and are becoming more sophisticated and varied. The impact of cyber-enabled fraud activity, including that involving investors in the crypto-asset market, has led to an increase in the SEC’s enforcement. And with a new cybersecurity rule likely coming this year, RIAs need to begin updating their technology and security systems. To facilitate that process, AdvisorLaw offers CyberProtection software that monitors your systems and helps keep your data secure.
Marketing & Advertising Rule
Since November 4, 2022, RIAs have been required to fully comply with the SEC’s new marketing and advertising rule, and they’re now seeking full compliance at every opportunity. The rule, among other things, adopts new standards for reporting the performance of prior investments and permits the use of investment projections in marketing. It also establishes a new definition of what constitutes an advertisement by financial advisors and permits the use of client testimonials. Due to the small nuances and complexities of this 400-page rule, it’s in RIAs’ best interests to seek outside counsel to make sure their business is fully compliant.
How To Prepare For This Year’s Compliance Hurdles
It’s wise for advisors to review their internal processes on a regular basis so they can quickly identify any issues before they become too big of a problem. Consider employing a team of compliance consultants or simply outsourcing your chief compliance officer altogether. This will help you stay ahead of regulatory changes while still providing quality advice to your clients.
AdvisorLaw can provide guidance on everything from developing comprehensive compliance programs to conducting internal reviews and responding to inquiries from regulators. Our goal is to ensure that our clients remain compliant while still running successful businesses. We have years of experience helping RIAs and firms navigate the complexities of regulatory requirements of the SEC, NASAA, each state’s Securities Division, and the DOL. AdvisorLaw’s team of enforcement defense attorneys and legal transition experts can help you protect your livelihood and cover all of your bases.
When it comes to staying on top of supervision and being compliant with regulations, financial advisors should never go it alone — having an experienced partner like AdvisorLaw can make all the difference in protecting your reputation and career.