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Over the past month, new guidance, and resources on the topics of custody, investment adviser compensation, and Form ADV disclosures have been issued. Below we highlight each topic and cite the source for easy reference. We welcome questions from our clients relative to these important matters.

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.  

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).

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)

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.

issued April 16, 2019

On April 16, 2019 the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert related to Privacy Notice and safeguard policy compliance issues. This regulatory communication is applicable to investment advisers and broker-dealers (“registrants”) alike.  OCIE cited issues identified in deficiency letters from broker-dealer and adviser exams completed by the Staff during the past two years. It should be noted by SEC registrants that the Commission has issued deficiency notices and pursued enforcement actions on the basis of registrant non-compliance with Risk Alerts, including on the basis of guidance in the absence of a rule.

Introduction

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) just delivered a holiday and new year greeting to registered investment advisers … just in case the volatile markets were not enough to keep you on your toes!  On December 14^th, OCIE issued a Risk Alert related to electronic messaging and on December 20^th released its 2019 examination priorities. It may be the busiest time of the year, but when OCIE talks, it is worth listening!