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Form CRS: Risk Alert and New FAQs

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Please note that this newsletter addresses only investment adviser requirements. See the last page of this newsletter for helpful Form CRS resources available to advisers and broker-dealers.

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Despite the industry’s hopes for a delay in the implementation of Form CRS (Form ADV Part 3 Customer Relationship Summary) requirements, the SEC is moving forward with its original timeframe. 

In fact, the IARD system is ready to accept investment advisers’ Form CRS today.

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Coronavirus Considerations: Risk Management and Business Continuity

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“Before anything else, preparation is the key to success.”

Alexander Graham Bell

Now is an opportune time to review, update, and test your business continuity plan (“BCP”).  Here are three good reasons to do so …

  1. Regulatory: Recently, the SEC Division of Investment Management recommended that investment advisers and funds plan and prepare for potential sustained business disruptions due to the evolving risk presented by the coronavirus (“COVID-19”) outbreak. Specifically, the Commission stated: “The Division encourages investment advisers and funds to contact the Division staff with any concerns they have related to the staff letter or to current or potential effects of COVID-19 on their operations, including any need for relief or guidance.[1] The SEC goes on to encourage registrants to evaluate their business continuity plans and valuation procedures, among other relevant policies, procedures, and systems. This guidance is consistent with the Commission’s ongoing directive to advisers to develop “risk-based” policy. The COVID-19 risk set presents unusual challenges to adviser BCP execution; a risk-based response would therefore entail testing and follow-on amendment and possible implementation. 
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SEC Office of Compliance Inspections and Examinations Publishes Observations on Cybersecurity and Resiliency Practices

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“An ounce of prevention is worth a pound of cure.”

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued new guidance on January 27, 2020 which further addresses the cybersecurity risk set confronting regulated financial entities. The report provides visibility into OCIE observations pertaining to effective mitigation of primary cybersecurity risk sets, including:

  • Governance
  • Access rights
  • Data loss prevention,
  • Mobile security
  • Vendor management
  • Incident response
  • Employee training. 
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SEC Publishes 2020 Exam Priorities

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The U.S. Securities and Exchange Commission (“SEC”) continues to make progress with its self-imposed mandate of expanding its investment adviser examination reach. Leveraging increased staff and proprietary risk analytics, the Commission maintained its examination coverage of registered advisers in 2019 versus 2018 despite an increase of nearly 4 percent in registered firms and a month-long suspension of examination activity due to the 2019 government shut down.  Examinations of registered advisers in fiscal year 2019 remained robust covering 15 percent of the registered adviser population.

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SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers

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The U.S. Securities and Exchange Commission (“SEC”) announced on November 4, 2019 that it has voted to propose amendments to modernize the rules under the Investment Advisers Act of 1940, as amended (“Advisers Act”) addressing investment adviser advertisements and payments to solicitors. The proposed amendments (all 507 pages) are intended to update these rules to reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.

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Proxy Voting, Principal/Agency Cross Trading, and Form CRS

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Over the past month, the SEC has issued guidance on the topics of proxy voting, principal and agency cross trading, and Form CRS. Below we highlight each regulatory update and present an action plan for investment advisers to address the SEC’s guidance.

SEC Releases Guidance to Clarify Investment Advisers’

Proxy Voting Responsibilities

August 2019

Regulatory scrutiny of investment adviser reliance upon proxy advisory firms (“PAFs”) has again become evident with the release of new Commission guidance. This ongoing reliance on PAFs in conjunction with SEC concerns pertaining to adviser adherence to the fiduciary standard of care when voting client proxies underscores the essence of the SEC’s concerns.  At an open meeting held on August 21, 2019, SEC Commissioners issued guidance (hereafter referred to as “Guidance”), by a 3-2 vote, to assist investment advisers when conducting proxy votes on behalf of clients. Indeed, many in the investment adviser industry argue that this guidance is intended to significantly reverse adviser reliance on PAF services.  

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Risk Alert – Observations from Examinations of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest

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On July 23, 2019, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert to share its findings related to a series of examinations conducted to assess the oversight practices of registered investment advisers that previously employed, or currently employ, any individual with a history of disciplinary events.  These examinations, collectively referred to as the “Supervision Initiative” entailed examinations of over 50 registrants over the course of 2017.  Registrants collectively managed approximately $50 billion in assets for nearly 220,000 clients, the vast majority of whom were retail investors.  Advisers were identified for examination through a review of information about disciplinary events and other legal actions involving supervised persons, including legal actions that are not required to be reported on Form ADV (e.g., private civil actions).

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Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in their Relationships with Financial Professionals

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SEC rules package published June 5, 2019
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This past June, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) adopted two rules and issued two interpretations, each of which pertain to standard of conduct requirements for broker-dealers and investment advisers. The rules package addresses the following aspects of broker/dealer and investment adviser client disclosures and registrant comportment to the fiduciary standard of care:

Regulation Best Interest (Regulation BI), a new rule imposing a “best interest” standard of conduct on broker-dealers making recommendations to retail clients (compliance date: June 30, 2020)

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SEC Risk Alert: Safeguarding Customer Records and Information in Network Storage – Use of Third-Party Security Features

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issued May 23, 2019

The U.S. Securities and Exchange Commission (“SEC” or the “Commission”) has again commenced a series of cybersecurity examinations of registered investment advisers. The SEC distributed numerous request letters in May to gather registrant information pertaining to vendor diligence and oversight of cloud providers. The Commission is scrutinizing adviser policies and procedures which relate to the identification and monitoring of risks attendant to client information stored on third party vendor platforms. In general, advisers have a fiduciary duty and regulatory obligation pursuant to privacy regulations and cybersecurity guidance to ensure that non-public client information residing on third-party platforms remains secure and protected from misappropriation.

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