February 8, 2018

SEC 2018 Examination Priorities

Each year, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) communicates its examination priorities for the upcoming year. The SEC has narrowed their focus on the following common themes:(1) Retail Investors (2) Compliance and risks in critical market infrastructure (3) Cybersecurity. Based on these themes, the SEC has pinpointed several key areas of concern that will be focus areas for 2018. Some of which are similar to years past, however, continue to be a priority for the SEC. We have provided an overview below of the key topics that RIAs need to be mindful of in 2018.

Disclosure of the Costs of Investing

The SEC will focus on the calculation of fees and expenses paid to the Advisor as well as any compensation that is paid to affiliates of the Advisor.

Focus areas include:

  • Consistency of the advisory fee calculations and the advisory fee methodology disclosures.
  • If charging an asset-based fee, the consistency of the valuation of client securities and the valuation methodology disclosures.
  • Advisors that receive financial incentives to recommend mutual fund share classes (ie. high sales loads or distribution fees).
  • Client accounts that are not re-assigned to a new IAR when an employee leaves the firm.
  • Advisors that transition from commission based accounts to fee based accounts.

Electronic Investment Advice

As in prior years, the SEC will continue to focus on advisors that offer investment advice through automated programs (ie. robo-advisors).

Focus areas include:

  • Oversight of the algorithms used to generate general investment advice.
  • Marketing materials.
  • Policies and procedures related to client data protection.

Wrap Fee Programs

For advisors that charge a wrap fee (ie. fee that includes both advisory fees and execution costs), they will need to demonstrate that the wrap fee is in the best interest of the client.

Focus areas include:

  • Any conflicts of interest are disclosed.
  • Review for best execution.
  • Disclosure of execution costs with broker-dealers.

Never Before Examined Investment Advisors

Due to the large volume of newly registered advisors and the limited resources of the SEC, the SEC will continue to prioritize advisors that have “elevated risk profiles”. This likely includes advisors that fall under the scenarios outlined by the 2018 exam priorities.

Senior Investors and Retirement Accounts and Products

Advisors that provide investment advisory services to seniors and/or retirement accounts will continue to be a focus for the SEC. Advisors will need to have internal controls in place to identify and mitigate financial exploitation of seniors.

Focus areas include:

  • Investment product recommendations.
  • Sales of variable insurance products.
  • Usage of target date funds.
  • Advisors that serve state and local government employees and non-profit employees (ie. 403(b) and 457 plans).

Mutual Funds and ETFs

As the primary investment products for retail clients, the SEC will focus on the types of mutual funds and ETFs recommended to clients.

Focus areas include:

  • Funds that experienced poor performance or liquidity.
  • Funds that are managed by advisors with little experience managing a fund.
  • Funds that hold securities that are difficult to value due to market stress (ie. securitized loans or mortgage backed securities).
  • Ensure that risk disclosures are provided to investors.

Cryptocurrency, Initial Coin Offerings (ICOs), Secondary Market Trading, and Blockchain

Cryptocurrency has wildly risen in popularity over the past year. The SEC will monitor this space as advisors engaged in this market continues to grow.

Focus areas include:

  • If advisors maintain controls and safeguards to protect assets from theft.
  • If advisors are providing adequate disclosures associated with the risks of these type of investments including: investment losses, trading liquidity, price volatility, and potential fraud.


Cybersecurity continues to be a priority for the SEC as we have witnessed large scale cyber attacks over the past year.

Focus areas include:

  • Governance and risk assessment.
  • Access rights and controls.
  • Data loss prevention.
  • Vendor management.
  • Training.
  • Incident response.

Please remember that OCIE and the SEC communicate these as PRIORITIES, and not an all-inclusive list of all focus areas. To read the full report, click here: "2018 National Exam Program Examination Priorities"


Brian Young
Conor Anderson

December 1, 2017

Three Actionable Tips to Become SEC Examination Ready

Over the summer, we heard rumblings that the SEC was conducting unannounced examinations on RIAs in the Boston area. While we have certainly seen a significant uptick in the examinations of never before examined advisors, none of which have been unannounced. Regardless if it is a routine exam or unannounced, it is best practice for advisors to stay examination ready regardless of location or if registered with the SEC or applicable State(s). As we preach to our clients, make sure you take proactive measures to become “examination ready”. Don’t wait until the SEC or a state level examiner comes knocking at your door!

Here are three (3) actionable tips to consider:

1. Customize your Compliance Program

We see far too many advisors that think they are “plain vanilla” and therefore think they can get by with a generic compliance manual (Wrong!). Most firms do not create their compliance manual from a blank page. They start with a model document to address the broad regulatory structure and industry requirements. Although, a model document is a good starting point, it does not amount to a finished product. RIAs need to know that a one-size-fits-all compliance manual does not exist and no consultant or legal resource knows the firm better than the people actually operating it on a daily basis. The creation of a firm specific compliance manual should include three broad steps:

  • Review the model document for content and applicability (ask questions).
  • Customize the model document to be firm specific, which means customize language specific to your business practice and make sure to remove language that is not relevant to your firm. Then operate your firm in a manner that is consistent with your compliance manual.
  • Regularly review, and update your compliance manual as the dynamics of the business evolve and the regulatory environment changes. A compliance manual should never be considered a final document but a current draft of a “living document”.

Always remember that SEC or State regulators expect there to be evidence to demonstrate that policies and procedures are being implemented. Simply put, if there is no evidence, it did not happen.

2. Complete an annual review of your Policies and Procedures

On an (at least) annual basis, you should complete a review of the adequacy and effectiveness of your compliance program. Ideally, the firm should conduct risk assessments of your compliance program throughout the year to test the risk controls and identify any weaknesses. If any issues are identified, make sure to take corrective action and document, document, document! If you don’t document the steps you have taken, (*in the regulator’s eyes) it never happened!

Keep in mind that an effective compliance program should identify potential risks and mitigation opportunities. If the established controls never identify a risk or a mitigation opportunity, the controls should be evaluated and potentially revised.

3. Organize your Books and Records

During the examination process, the regulators will want to complete a sampling of your books and records. You should make sure that your books and records are maintained in an organized fashion to ensure they can be readily delivered. The examination process typically starts with a document request letter including (but not limited to):

  • Financial Statements including income statements, balance sheets, and other key accounting records.
  • Client Records including a full list of current and past client accounts, supporting client agreements, profiles, investment policy statements and trade data.
  • Communications with existing or prospective clients including emails, advertisements, and social media accounts.
  • Regulatory filings and other compliance program documents including your ADV 2A/2B, compliance manual, compliance certifications, business continuity plan, code of ethics, and cyber-security policy.

This is by no means an exhaustive list, but should get you started on the right track. If you have any additional questions, please feel free to post a comment below or send an email to info@advisorassist.com.


Brian Young
Dan Rome

September 13, 2017

Addressing the Equifax Breach with your Clients

If it is not yet apparent, cybersecurity is the biggest risk facing independent RIAs. When the fraud protector becomes the weakest link, it is time to take notice.

From mid-May through July 2017, the personal information of approximately 143 million consumers was exposed during a long running data breach at Equifax (one of the nation’s three major credit reporting agencies).

The personal information that was accessed during the breach included:

  • Names
  • Social Security numbers
  • Birth dates
  • Addresses
  • Driver’s license numbers
  • Credit card numbers for about 209,000 people
  • Credit dispute documents for about 182,000 people

In response to the breach, Equifax published a press release late on Thursday (9/7) announcing the breach and the availability of resources on the Equifax website, www.equifaxsecurity2017.com to protect individuals from identity theft. The site will verify who has been affected by this breach. If an individual’s information was exposed, they can receive a year of free credit monitoring and other identity theft protection services. Once they enter their name, the site will give them a date when they can come back to enroll. Affected individuals must remember to write down the date and come back to the site and click “Enroll” on that date.The deadline to enroll is November 21, 2017.

Initially, by agreeing to the terms and conditions for Equifax's monitoring, individuals were waiving key consumer rights, such as agreeing to settle disputes through arbitration and waiving the right to participate in class-action lawsuits. After the waiver of rights was exposed by the news media (see the CNBC articles linked here and here), Equifax amended its terms and conditions and issued the following FAQ: “the free credit file monitoring and identity theft protection that we are offering as part of this cybersecurity incident does not waive any rights to take legal action. We removed that language from the Terms of Use on the website, www.equifaxsecurity2017.com.”

The fact that Equifax attempted to bury arbitration clauses and class action waivers into the terms of use of the free credit file monitoring and identity theft protection creates concerns about whether their actions are about fixing the issue or purely an attempt to limit their liability. However, the free credit file monitoring and identity theft protection may make sense as a measure to mitigate some of the negative effects of the breach.

To assist your clients in protecting themselves from identity theft due to this data breach, AdvisorAssist recommends that you, as the Advisor, consider the following best practices:

  • Read through the consumer notice and related documents found at: https://www.equifaxsecurity2017.com/consumer-notice/ to determine if it makes sense for your clients to enroll in the free credit file monitoring and identity theft protection offering.
  • Monitor the accounts and financial statements that you advise on for your clients. Report to the client any potentially unusual activity.
  • Recommend that your clients change their passwords on all financial accounts.
  • Have your clients request a free credit report from all three credit bureaus at www.annualcreditreport.com.
  • Assist your client with setting up fraud alerts with the three major credit bureaus.
  • Work with the client to address any accounts that were fraudulently opened in their name.
  • If appropriate, assist your client with installing a security freeze on their credit. Please note the credit bureaus typically charge for a credit freeze. However, some states require that the fee be waived if the consumer provides a police report to the credit bureau.

Brian Young
Brendan Furey

August 9, 2017

SEC Risk Alert: Cybersecurity

On August 7, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) released their observations of cybersecurity preparedness from the examinations of 75 SEC registered firms, including registered investment advisors (“RIAs”). Although the OCIE noted improvements since their last cybersecurity risk alert in 2014, there is still room for improvement.

The OCIE suggests that RIAs consider the following practices to enhance their cybersecurity policies and procedures.

What you need to know:

  • Include details on how safeguards will be implemented. OCIE recommends adding safeguards that are specific to your RIAs computers and systems to your procedures.
  • Penetration tests to review the effectiveness of the firm's cybersecurity policies and procedures.
  • Security monitoring and system auditing of the firm’s cybersecurity framework. To answer questions, such as, when systems are reviewed for software updates and patches and who is responsible for conducting the reviews.
  • Tracking list of vendors and what data is stored on the vendor’s system.
  • Tracking of access rights for all employees to the systems that store client data.
  • Access controls to firm data and systems including:
    • Acceptable use policies for using the firm’s network or equipment.
    • Restrictions and controls for using mobile devices when connected to the firm systems.
    • Require third party vendors to provide logs of their activity on the firm’s network.
  • Reporting of the loss of sensitive information including who should be contacted.
  • Providing mandatory staff training of cybersecurity policies and procedures.
  • Involvement from senior management to develop and approve the firm’s policies and procedures.

If you have any questions, please schedule time with your compliance consultant to discuss your cybersecurity risks.

For full details of the risk alert:


Brian Young
Brendan Furey

June 20, 2017

Guest Post: 3 Critical Steps to Improve Your RIA's Cybersecurity

Wes Stillman is the chief executive officer of RightSize Solutions, a provider of cybersecurity and technology management services for wealth management firms. We have asked Wes to share a few tips on cybersecurity for RIAs:

Cybersecurity is a growing concern, and recently has become a hot button issue amongst business publications and consumer national news. Regulatory boards that monitor the financial services industry are taking note to quickly shift accountability to financial advisors.

While these may seem daunting at first glance, the better you plan to address these issues the more prepared you will be for an audit, and equally important, how you’ll respond to an unforeseen incident.

To help you manage this critical aspect of your business's health, success and security, as well as clients personal too, here are 3 proactive steps you can immediately take:

“9 out of 10 organizations do not believe their cybersecurity fully meets their needs.” EY Global Information Security Survey

1. Survey your existing technology environment. You can find easy wins, and avoid pitfalls, by just recognizing your strengths and weaknesses.

The best place to start is by looking at what you already have. Take an inventory of what policies, software and hardware your firm utilizes. Where are your weak points? Consider the business partnerships and data exchanges your company executes on a daily basis. In today’s interconnected business environment, our data supply chains create many access points to your customers’ data. Make sure you are doing your part to protect these connections. Understand and document how your partners are protecting your clients’ data. Some partners, like your custodian, may offer tools and assistance for improving your security. As a last line of defense, check your Errors and Omissions Insurance, many policies now include or require cybersecurity. If yours does not, consider a standalone Cyber-insurance policy. Keep in mind, having insurance protection is important, but it does not negate the need for proper processes and procedures in place.

“62% of cyber-breach victims are small to mid-size businesses, which are at the greatest risk for an attack. Their level of preparation is low, and the costs of customer notification alone can be enough to do a small company irreparable financial harm.” PropertyCaualty360

2. Make sure the IT/cybersecurity section of your employee handbook is up-to-date and enforceable

Establish a clear contingency plan for dealing with cybersecurity incidents. Make sure your plan has both preventative and reactive action items. Do you have a clear contingency plan set in place and a process for responding to cyberattacks? Do your employees know what is expected of them? To ensure this, create actionable steps for dealing with employees, clients, partners, members of the press, and police & government. Think about all of the levels of security at your company. Clearly lay out who has access to what and control administrative privileges accordingly (both with internal staff and outsourced vendors). For example, by limiting the ability to install drivers and execute applications can help control what gets onto your systems and prevent attacks like ransomware.

Lastly, recognize the impact of social media and create a policy specific to it. Not only does it distract employees, social media is a direct portal to cyber incidents. RIAs are prime targets for advanced phishing campaigns because much of their personal and business information is available online. Social Media should be monitored for both public and employee comments. Policies should restrict what employees can and/ or should be saying on Social Media accounts. Be sure to include any company social media accounts in your archive process for auditing purposes.

“Elite RIAs are more focused on maximizing their investments in existing technology as well as their partnerships with technology vendors.” InvestmentNews Research and BlackRock Elite RIA Study

3. Empowering your entire company to participate in awareness and rewarding employees when they do, can drastically improve your security

Building a culture of cybersecurity is one of the most important things you can do. Lead by example; regularly discuss cybersecurity in staff meetings and with other internal communication. Employees need to be empowered with knowledge and a shared commitment that goes far beyond the annual ‘check the box’ that you have read and understand the company IT policies. If an incident does occur, let your employees know about it. Not only will it help deter the impact of the incident, it will help your employees develop a team approach to cybersecurity. When employees alert management to mistakes early in the process, they are giving management the opportunity to prevent huge losses of time, data, and money. Specific ways that you can educate employees are by conducting mock cybersecurity drills, scheduling periodic ‘test’ phishing emails or phone calls. Discussions regarding recent and specific documented cases should be had in staff meetings. Question employees directly on how they would individually handle such situations.

In conclusion, the biggest stumbling block for registered investment advisors when it comes to guarding against cybersecurity breaches is not technology-based, it’s a people problem. The right technology is critical, but RIA leaders can face a bigger challenge in fostering a cybersecurity-sensitive culture in a way that resonates throughout all levels of their firms.

Read our ‘Managing Your Company’s Security Policy’ whitepaper for all 10 tips to help improve your firm’s cybersecurity.

Guest Contributor:

Wes Stillman is the chief executive officer of RightSize Solutions, a provider of cybersecurity and technology management services for wealth management firms.

June 14, 2017

DOL Rule: Level Fee Fiduciary

Even if you are a fee only RIA, the DOL still applies to you!

Unless you have been living under a rock, you are already aware that June 9, 2017 marked the official compliance effective date of the DOL Rule. Although advisors have until January 1, 2018 to be in full compliance of the new rule, it is recommended that you get started today.

I have been asked multiple times about the applicability of the DOL rule to a fee only RIA. Just because you do not collect commissions via mutual fund or insurance sales does not mean that you are safe from the DOL rule. Yes, as a fee only RIA, you are in good shape because you are already held to a fiduciary standard under the Advisers Act. However, the DOL rule expands the definition of a “fiduciary” as it relates to retirement plans and accounts. The most common scenario is when an Advisor recommends a retirement account rollover. In a rollover situation, there are additional disclosures and documentation practices that Advisors will need to implement to comply with the DOL rule. As it relates to fee based RIAs, I will focus my conversation on the level fee fiduciary exemption.

So who is a level fee fiduciary? Per the DOL rule, it is an advisor that provides services based on an AUM or fixed fee that does not vary based on the recommended investments. I think most people would agree that a fee based account versus a commission based account better aligns the interests between the Advisor and client. However, the DOL rule seeks to cover the conflict of interest that potentially lies in the rollover of a retirement account. More specifically, the scenario where the Advisor is able to generate revenue that they would not receive if not for the account rollover. Here are a couple scenarios to consider:

Scenario 1:

Your client has an ERISA retirement plan account through their employer, XYZ Corp. They are making a career change and starting a new job with ABC Corp. They reached out to you to help decide what they should do with their XYZ Corp sponsored retirement account. You recommend that the client should rollover their retirement plan account into an IRA account.

Scenario 2:

Your client has an IRA account that is held in a commission based account. You recommend that they rollover this account into a fee based account.

In these scenarios, here are a few best practices to make sure that you adhere to the level fee fiduciary exemption. You will need to:

  • Acknowledge your fiduciary status through a written notice to your client.
  • Abide by the impartial conduct standards:
    • Act in the best interest of the client.
    • Charge reasonable compensation.
    • Do not make misleading statements.

In both account rollover scenarios, it is important that you also document how you are adhering to the impartial conduct standards. Here are few questions that you should answer and keep saved in your client files:

  • Why was the account rollover recommendation in the best interest of the client?
  • What other investment options are available to the client besides an account rollover?
  • What are the fees and expenses in the previous account versus the fee based account?
  • What are the level of services or investments made available under the previous account versus the fee based account?

If you have any additional questions, please feel free to post a comment below or send an email to info@advisorassist.com. We will be posting more content in regards to the DOL Rule, so please subscribe to our blog!

Brian Young