August 29, 2021

SEC Issues Risk Alert on Principal and Agency Cross Trading

 


SEC Issues Risk Alert on Principal and Agency Cross Trading

The Securities and Exchange Commission (SEC) recently published an alert detailing the most common compliance failures advisors commit in regards to principal trades and agency cross trades. Principal and agency transactions are two cases in which the advisory firm has an interest in the circumstances or outcome of the client trades. This incentive then becomes a conflict of interest in the discretion or recommendation of that transaction.

Principal Trade:
A “principal trade” occurs when an investment adviser, acting as a principal for its own account, purposefully (i) sells any security to a client or (ii) purchases any security from a client. Section 206(3) prohibits advisers from making principal trades unless the adviser discloses all material information about the proposed trade to and obtains the consent of the client before the completion of the transaction. Notably, disclosure and consent are required for each transaction.

Agency Cross Transaction:
An “agency cross transaction” occurs when an investment adviser, acting as a broker for a person other than the advisory client (themselves included), knowingly makes a sale or purchase of any security for the account of that client. Section 206(3) prohibits investment advisers from making agency cross trades unless the investment adviser discloses material information about the trade to the client prior to the execution of the trade and obtains the consent of the client to the transaction. Under Rule 206(3)-2, it may not be required to effect transaction-by-transaction disclosure and consent for certain agency cross transactions if the advisor takes additional precautions.

In short, advisors must disclose both principal and agency trades in Form ADV Parts 1 and 2A and maintain appropriate documentation to support these transactions. The SEC advised that Section 206(3), Sections 206(1), and (2) be considered together so that the advisor further discloses any potential conflicts of interest revolving around a trade.

Common Deficiencies: 
  • Failure to recognize the nature of trade 
  • Improper disclosure 
  • Non-adherence to policies and procedures
There are many ways for advisers to ensure that they follow the principal and agency cross trading requirements described above, included, but not limited to, the following:
  • Maintaining an updated list of principal accounts and requiring pre-approval by the advisor’s Chief Compliance Officer of any proposed trades between an advisory client and an account on that list;
  • Utilizing trading or compliance software to flag any trades with principal accounts prior to trade execution;
  • Maintaining a comprehensive checklist to be used when executing transactions that raise conflicts of interest (including principal and agency cross trades) to raise awareness of compliance concerns;
  • Establishing independent representatives to approve principal and agency cross trades on behalf of private fund and managed account clients to satisfy disclosure and consent requirements; and
  • Maintaining books and records of all steps taken to approve transactions that present conflicts of interest (including the disclosure and consent requirements of principal and cross trades);
  • Engaging in continuous education regarding principal trades, cross trading, and all other potential conflicts of interest. 
This SEC alert is consistent with the Commission’s focus on conflicts of interest and fiduciary duty in practice. Advisors have a duty to their clients to ensure they follow all regulator rules as well as their own policies and procedures.

August 5, 2021

SEC Issues Risk Alert on Wrap Fee Programs


SEC Issues Risk Alert on Wrap Fee Programs

On July 21, 2021, the SEC published a risk alert concerning various findings and subsequent deficiencies as it relates to advisors that participate in wrap fee programs, either as a sponsor or as a portfolio manager. The release was a clear signal from the SEC that it will continue to scrutinize wrap fee programs as part of the exam process moving forward.

The alert highlighted the most common deficiencies that the SEC staff identified over the course of their examinations, serving as a surrogate warning for SEC-registered advisors to be mindful of what their current practices are and to address any potential issues within their compliance programs related to their findings. The SEC identified three specific areas where advisors were short of meeting their fiduciary duty or their compliance programs were inadequate. 

A common deficiency the SEC noted pertains to suitability. The SEC cited numerous firms failing to conduct requisite ongoing due diligence of their wrap fee programs, specifically for failing to ensure ongoing client suitability. Such instances include advisors failing to monitor trading activity in client accounts. Limited trading in client accounts presents a conflict of interest between the client in a wrap fee program and the advisor, as the advisor stands to earn more compensation in that scenario if trading activity and the costs associated with trading are substantially less than what the client pays for services. This may present a breach of an advisor’s fiduciary duty of care for not reviewing and determining the ongoing suitability of clients in a wrap fee program by not having a reasonable basis to believe that the wrap fee programs were in the client’s best interests.

The SEC also noted misleading or omitted disclosures as another common deficiency. Specifically, the SEC found that advisors' disclosure documents were, in many cases, inconsistent with one another. Examples such as advisory agreements stating that clients will pay brokerage commissions while the wrap fee program brochure expressly stated that they would not pay these fees were noted as common deficiencies. Additionally, instances where fees that were not included as covered in the wrap fee programs but were to be paid by clients were not disclosed adequately or at all.

The link between the above examples of deficiency is tied directly to the last common deficiency that was noted, the advisor’s compliance program. The SEC noted the weak and ineffective compliance policies and procedures in these cases as a key finding. In some cases, advisors omitted policies and procedures entirely for key business risks associated with recommending a wrap fee program. In other cases, advisors had written policies and procedures in place to address these risks, however, adherence to these policies was on a case-by-case basis, willfully ignored, or never reviewed.

While offering a wrap fee program to clients presents an efficient means of billing and allows for a degree of client certainty, the business risk that an advisor opens itself up to is significant. As fiduciaries, advisors are required to, at all times, act in the best interest of the client. In order to meet that expectation, it is imperative that advisors that wish to implement a wrap fee program not only understand the mechanics of doing so, but understand the degree of due diligence required to fulfill their duty as a fiduciary. Regular reviews of the wrap program offering itself, ongoing client best interest reviews, and clear, thorough disclosures related to the various conflicts of interest that present themselves in these cases are critical components of maintaining a compliant wrap fee program.

July 12, 2021

Amendments to "Qualified Client" Dollar Thresholds

Amendments to "Qualified Client" Dollar Thresholds

Every five years, as provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 205(e) of the Investment Advisers Act of 1940 (“Advisers Act”), the U.S. Securities and Exchange Commissions (“SEC”) adjusts the dollar amount thresholds for a Qualified Client to account for inflation, to the nearest multiple of $100,000. This five-year redefinition will increase the standards for a qualified client as of August 16, 2021. 

Rule 205-3 of the Advisers Act permits investment advisers to receive performance-based compensation only when the client is a qualified client. As of August 16, 2021, a qualified client will be a client that:


  1. Has at least $1.1 million in assets under management with the investment adviser immediately after entering into the advisory contract; or


  1. Has a net worth (together, in the case of a client that is a natural person, with assets held jointly with a spouse) that the investment adviser reasonably believes to be in excess of $2.2 million immediately prior to entering into the advisory contract”


A qualified client also includes a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (“Company Act”), as amended, and an investment adviser’s “knowledgeable employees.”


The increased thresholds will affect individually managed accounts and private funds that rely on the exception to the definition of an investment company provided in section 3(c)(1) of the Company Act, which is required to “look through” to each investor of such a fund to determine such investor’s qualified client status. 


Clients that enter into advisory elements in reliance on the net worth test prior to the effective date will be grandfathered in under the prior net worth threshold. However, private fund advisers to 3(c)(1) funds should update their current offering documents to conform to the new qualified client threshold. The updated net worth threshold should be reflected in prospective investor net worth representations in subscription agreements for any section 3(c)(1) funds with closings on or after the effective date and representations in any documents used in effectuating secondary transfers of ownership interests in existing section 3(c)(1) funds following the effective date.


Click here for additional information regarding the order approving adjustment for inflation of the dollar amount tests in Rule 205-3 under the Advisers Act.

July 2, 2021

Rollover Recommendations: Improving Investment Advice for Workers and Retirees

  

Rollover Recommendations
Improving Investment Advice for Workers and Retirees

On December 18, 2020, The Department of Labor (“DOL”) adopted Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”). PTE 2020-02, called Improving Investment Advice for Workers and Retirees, expands the definition of advice covered under ERISA law to include recommendations about retirement plan rollovers and Individual Retirement Accounts (“IRAs”). PTE 2020-02 went into effect on February 16, 2021, and included a non-enforcement policy until December 20, 2021.

The result of expanding the DOL definition of investment advice to include recommendations to rollover a client's assets from an ERISA sponsored retirement plan to an IRA is significant, as ERISA fiduciaries are prohibited from engaging in transactions where they receive increased compensation as a result of the advice provided, otherwise categorized as “conflicting advice”. There is a myriad of disclosures and policies and procedures that require implementation in order to receive compensation for rollover recommendations.

The DOL has established a Five-Part Test in order to assist advisors in determining whether a recommendation to roll over retirement plan assets into an IRA falls under ERISA. The regulation states that a person provides “investment advice” if he or she: (1) renders advice to a plan or participant as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (2) on a regular basis; (3) pursuant to a mutual agreement or understanding; (4) that such advice will be a primary basis for investment decisions; and that (5) the advice will be individualized to the plan or participant.

How does this impact Registered Investment Advisors? Many that once did not offer retirement plan advisory services will now find themselves subject to the ERISA fiduciary standard when providing recommendations to roll over a participant’s retirement plan assets into an IRA. Certain of these requirements and standards were already required under the Investment Advisers Act of 1940 (“Advisers Act”), so the DOL requirements below shouldn’t come as a major surprise. Under the DOL there are requirements to adhere to the following:
  1. acknowledgment from the advisor of their fiduciary status under Title I of ERISA and the Internal Revenue Code;
  2. due diligence and written documentation of the specific reasons that any recommendation to roll over assets (whether from an ERISA plan to an IRA, from one IRA to another IRA, or from one type of account to another (e.g. commission-based account to fee-based account) is in the best interest of the client.
  3. written disclosure to clients that include (i) the scope of the relationship, (ii) all material conflicts of interest, and (iii) the reasons the rollover recommendation is in their best interest;
  4. compliance with the Impartial Conduct Standards which includes (i) provide prudent investment advice, (ii) charge only reasonable compensation, and (iii) avoid misleading statements; and
  5. an annual compliance review with the results in a written report to a Senior Executive Officer of the advisor.
ACKNOWLEDGEMENT OF FIDUCIARY STATUS
The written fiduciary acknowledgment is designed to ensure that the fiduciary nature of the relationship under Title I of ERISA and/or the Code is clear to the advisor, as well as the client, at the time of the recommended investment transaction. This requirement reflects the DOL’s view that parties wishing to take advantage of the broad prohibited transaction relief in the new exemption should make a conscious up-front determination that they are acting as fiduciaries; tell their client’s that they are rendering advice as fiduciaries; and, based on their decision to act as fiduciaries, implement and follow the exemption’s conditions.

DUE DILIGENCE AND DOCUMENTATION
There are a number of specific considerations to be reviewed and compared before executing any action. Considerations include the following:
  • The range of investment options between the existing plan and proposed rollover account, and which is in the client's best interest.
  • A comparison of the fees and expenses associated with the existing plan and the proposed rollover account.
  • What, if any, tax implications exist for the individual client should they choose to accept rolling over their ERISA plan assets into an IRA?
  • Are there services that the client would receive from the existing plan that would benefit them that they would not receive in a new account?
  • Is the client's age a factor? Are they planning to retire early or do they plan to work past the age where Required Minimum Distributions (RMD’s) will come into play?
  • ERISA plans typically have unlimited protection from creditors, whereas IRA assets are only protected in bankruptcy proceedings. Is this a concern for the client?
Advisors are expected to make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interest in it. The focus should not be solely based on the client’s current holdings, but instead should consider the overall options available in the plan. Consideration of factors like the long-term impact of any increased costs, why the rollover is appropriate (notwithstanding any additional costs), and the impact of any economic investment features that exist are critical components in determining suitability with each individual client. In the event that a client won’t provide the information, even after an explanation of its significance, and the information is not otherwise readily available, the institution and professional should make a reasonable estimation of expenses, asset values, risk, and returns based on publicly available information. Documentation should be maintained whenever assumptions are being used and their limitations.

WRITTEN DISCLOSURES
Prior to engaging in a transaction under the exemption, the Advisor must provide its clients a written description of the Advisor’s material conflicts of interest arising out of the services it provides and any recommended investment transaction. These conflicts must include those associated with proprietary products, payment from third parties, and compensation arrangements for both the advisor and its investment advisor representatives. Disclosures with material omissions will be considered inaccurate and will not satisfy the exemption. It should be further noted that the disclosure cannot be a “check-the-box” activity. As it pertains to the written disclosure of the recommendation, advisors should consider, discuss, and document the alternatives to executing a rollover. Those alternatives include leaving the money in the existing plan, rolling the money into a new employer-sponsored plan, or withdrawing money from the ERISA plan completely.

Disclosures with material omissions will be considered inaccurate and will not satisfy the exemption. It should be further noted that the disclosure cannot be a “check-the-box” activity. As it pertains to the written disclosure of the recommendation, advisors should consider, discuss, and document the alternatives to executing a rollover. Those alternatives include leaving the money in the existing plan, rolling the money into a new employer-sponsored plan, or withdrawing money from the ERISA plan completely.

IMPARTIAL CONDUCT STANDARDS
The cornerstone of the exemption is the requirement that advisors adopt and adhere to the Impartial Conduct Standards. The essence of these standards should come as no surprise, as they speak directly to the duty of care and loyalty that should be paid to all clients and transactions at all times as an advisor. Those standards are outlined below:
  • Investment advice must be in the best interest of the client and must not place any other interests ahead of that interest.
  • Compensation paid for such advice must be reasonable.
  • Statements made with respect to the transaction must not be materially misleading.
ANNUAL REVIEW
The Advisor’s annual review should be designed to assist the firm in detecting and preventing violations of, and archiving compliance with, the impartial conduct standards and their policies and procedures. The results of the review must be reduced to a written report that is submitted to one of the institution's senior executive officers. The officer must make certain certifications related to their review of the report. The report, certification, and supporting data must be retained for six years and provided to the DOL within 10 business days of a request.


How will the DOL Oversee Compliance with PTE 2020-02?

To the extent that advisors experience violations of the exemption, PTE 2020-02 contains a self-correction procedure for violations of the conditions under the exemption. To self-correct, an advisor must:
  1. Determine that the violation did not result in investment loss, or it must make the client whole for any such loss;
  2. Correct the violation and notify the DOL within thirty (30) days of correction;
  3. Complete the correction no later than ninety days after the advisor learned of (or reasonably should have learned of) the violation; and
  4. Notify the person(s) responsible for conducting the retrospective review during the applicable review cycle so the correction can be included in the report.

NEXT STEPS: We are currently building various tools embedded within AdvisorCloud360® to assist with these requirements. In the meantime, we strongly encourage advisors to adopt policies and procedures to help with their due diligence and documentation efforts, as well as ongoing disclosure requirements.

If you’d like to receive more information on the new DOL rule, please reach out to AdvisorAssist at info@advisorassist.com.



RESOURCES:

May 27, 2021

SEC Marketing Rule Adoption

 

 SEC Marketing Rule Adoption

May 4, 2021, marks a historic day in the investment advisory space as the modernized “Marketing Rule” went into effect. Many advisors are finding themselves very eager to take advantage of the modernized marketing opportunities with what seems to be a more permissive and flexible rule than the original “Advertising Rule,” which has not been amended or updated since its adoption in 1961. However, the new rule doesn’t come without its many intricacies that are still being digested by advisors and industry experts alike to ensure full compliance with the new guidelines. As a result of the many complexities with this rule change, the SEC is providing an eighteen-month compliance period where during the interim, firms can choose to utilize the new Marketing rule or the old Advertising Rule, but not a combination of both.

We urge advisors to have patience and allow the regulatory landscape to fully break down and analyze the implications of this new rule. Similar to rule updates in the past, we expect to see the SEC update its FAQ page routinely in the next couple of months concerning the updated marketing guidance, which will further clarify their expectations on various disclosure and oversight obligations. In the meantime, AdvisorAssist is keeping a close eye on these updates and thoroughly working on developing and ensuring adequate policies and procedures are designed that will allow advisors to meet their continuing regulatory and compliance obligations under this new rule.

As it relates to state-registered investment advisors, we are actively monitoring each respective state to understand whether they will follow suit with federal regulations. At this time, we strongly urge state registrants to continue to comply with their current regulations. Many states rely on the SEC’s Advertising Rule, so we can expect to see updates in the near future.

Below are the highlights of the new Marketing Rule:

Definition of Advertisement
The amended definition of “advertisement” now contains two prongs. The first prong captures traditionally covered communications covered by the rule, while the second captures testimonials and/or endorsements for which an investment advisor provides direct or indirect compensation. The latter of which was formerly covered by the cash solicitation rule, which has been completely abolished and replaced by these changes.

There are 7 general violations advisors should avoid as it pertains to advertisements. These prohibited practices should come as no surprise to the advisor community, as the central tenet of them is focused on false or misleading statements, omission of material facts, and maintaining fair and balanced communication in all situations.
  1. Include any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
  2. Include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
  3. Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
  4. Discuss any potential benefits to clients or investors connected with or resulting from the investment adviser's services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
  5. Include a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced;
  6. Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or
  7. Otherwise be materially misleading.
Testimonials and Endorsements
Arguably, the most significant reversal from the prior advertising rule is that advisors are now permitted to use testimonials and endorsements in an advertisement, so long as the advisor is able to satisfy certain disclosure, oversight, and disqualification provisions.

Although the SEC has broadly referred to the term testimonial for decades, the term has never been defined until now. The final definition of what constitutes a testimonial includes any statement by a current client or private fund investor about the clients’ or private fund investors’ experience with an investment advisor or its supervised persons. The definition of endorsement includes any statement by a person other than a current client or private fund investor that indicates approval, support or recommendation of the investment advisor or its supervised persons or describes that person’s experience with the investment advisor or its supervised persons.

As one might imagine, there are a number of obligations that must be met in order to meet regulatory requirements and maintain compliance in order to incorporate testimonials and endorsements into your practice. The scope of those requirements is quite broad, particularly in light of the SEC incorporating many of the elements of the solicitation rule into the revamped marketing rule.

Third-Party Ratings
As far as third-party ratings are concerned, the Marketing Rule prohibits the inclusion of third-party ratings in an advertisement unless advisors comply with the overalls rules general prohibitions, and other specific conditions.

Performance
The inclusion of performance in advertisements is allowable, given numerous requirements of the rule are met and adhered to. The main focus of including performance is on gross performance (must include net, equally as prominent), specific time periods (1, 5, 10, and/or since inception), related performance, carve-outs, and hypothetical performance. 

Recordkeeping
Lastly, the SEC has amended the Recordkeeping Rule (Rule 204-2) and will now require more robust recordkeeping by investment advisors as it relates to advertisements. Of note, whereas previously advisors were required to retain advertisements sent to ten or more people, the new rule requires that advisors maintain advertisements sent to more than one person.

Click here to read the entire marketing rule.

March 6, 2021

SEC 2021 Examination Priorities

 SEC 2021 Examination Priorities

Each year, the Division of Examinations (the “Division” - formerly known as the Office of Compliance Inspections and Examinations) of the U.S. Securities and Exchange Commission (“SEC”), publishes its examination priorities for the upcoming year. While there was a slight delay in the release of the report, on March 2, 2021, the Division released its 2021 examination priorities which aligned with our expectations based on recent examination deficiencies and enforcement cases. 


These priorities are designed to enhance the transparency of the Division’s examination program and to provide insight into their risk-based approach. Below are some of the key topics that we believe are of utmost importance for registered investment advisors (“RIAs”).


FIDUCIARY DUTY

In June of 2019, the SEC released an interpretation regarding the standard of conduct (“Fiduciary Duty”) owed by RIAs. The Division will focus on assessing, among other things, whether RIAs provide advice, including whether account or program types continue to be, in the best interests of their clients, based on their clients’ objectives. Additionally, the Division will assess whether RIA’s are either eliminating or making full and fair disclosure of all conflicts of interest so clients can provide informed consent. 


FORM CRS

Effective June 2020, the Client Relationship Summary (“Form CRS”) was a newly required disclosure document required of all SEC registered RIAs. Therefore, the Division will prioritize examinations of RIAs to assess compliance with Form CRS disclosure, filing and delivery requirements.


CONFLICTS OF INTEREST

Conflicts of interest, particularly those with the prospect of financial gain or economic benefit, can improperly influence a firm’s fundamental obligation to act in a client’s best interest. The Division’s examinations will review firms’ disclosures regarding their conflicts of interest, including those related to fees and expenses. Fee and compensation-based conflicts of interest may take many forms, including revenue sharing arrangements between a registered firm and issuers, service providers, amongst others, and direct or indirect compensation to personnel for executing client transactions. 


One particular area the Division will prioritize is the examination of RIAs operating and utilizing turnkey asset management platforms (“TAMPs”). TAMPs provide RIAs with technology, investment research, portfolio management and other outsourcing services, and the Division’s examinations will seek to assess whether such fees and revenue sharing arrangements are adequately disclosed.


ADVISORY FEE BILLING

Concerns may arise when an RIA does not aggregate certain accounts for purposes of calculating fee discounts in accordance with its disclosures. In reviewing fees and expenses, the Division will review for:


  • advisory fee calculation errors, including, but not limited to, failure to exclude certain holdings from management fee calculations;

  • inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts; and

  • failures to refund prepaid fees for terminated accounts.


APPROPRIATENESS OF INVESTMENT ADVICE

The Division will concentrate on recommendations regarding account type, conversions, and rollovers, as well as the sales practices used by firms for various product types, such as structured products, exchange-traded products, real estate investment trusts, private placements, annuities, digital assets, municipal and other fixed income securities, and microcap securities. 


The Division will also continue to prioritize the examination of incentives provided to financial services firms and professionals that may influence the selection of particular higher cost mutual fund share classes when lower cost classes are available.


SUSTAINABLE INVESTING

Due to increasing demand, RIAs are increasingly offering investment strategies that focus on sustainability (sustainable, socially responsible, impact, and ESG conscious investing). The Division will focus on products in these areas that are widely available to investors such as open-end funds and ETFs, as well as those offered to accredited investors such as qualified opportunity funds. The Division will review the consistency and adequacy of the disclosures RIAs and fund complexes provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.


COVID-19 IMPACT ON CYBERSECURITY AND BUSINESS CONTINUITY

As RIAs have spent the last twelve (12) months testing their cybersecurity policies and business continuity plans, the Division will now take this opportunity to review and assess whether RIAs have taken appropriate measures with respect to COVID-19 and whether appropriate measures were put in place to:


  • safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access;

  • oversee vendors and service providers;

  • address malicious email activities, such as phishing or account Intrusions;

  • respond to incidents, including those related to ransomware attacks; and

  • manage operational risk as a result of dispersed employees in a work-from-home environment.


AUTOMATED COMPLIANCE SOFTWARE

The use of technology to facilitate compliance with regulatory requirements (“RegTech”) has experienced immense growth in recent years. RegTech, when implemented appropriately, may increase the efficiency of compliance staff, reduce manual processes, and exponentially increase transaction review capabilities. However, misused or improperly configured RegTech may lead to compliance program deficiencies. Examinations will focus on the implementation and integration of RegTech in firms’ compliance programs.


DIGITAL ASSETS

The digital asset market continues to evolve, and so too does the adoption of distributed ledger technology in financial services and market infrastructure. Examinations of market participants engaged with digital assets will continue to assess the following:


  • whether investments are in the best interests of investors;

  • portfolio management and trading practices; 

  • safety of client funds and assets;

  • pricing and valuation;

  • effectiveness of compliance programs and controls; and

  • supervision of representatives’ outside business activities.


Additionally, on February 26, 2021, the SEC's Division of Examinations released a long-awaited risk alert outlining observations made during examinations of investment advisory firms who utilize digital assets in client portfolios. The alert applies to firms who utilize these assets either directly (cryptocurrency) or indirectly (through private funds, publicly traded funds etc.). 


Click here to read the full alert.


COMPLIANCE PROGRAMS

The Division will continue to review RIA compliance programs, including whether the compliance programs and their policies and procedures are reasonably designed, implemented, and maintained. Specifically, the Division will pay particular attention to the following:


  • appropriateness of account selection;

  • portfolio management practices;

  • custody and safekeeping of client assets;

  • best execution;

  • fees and expenses;

  • business continuity plans;

  • compliance resources;

  • sustainable investing; 

  • broker-dealer affiliations (including RIAs with supervised persons who serve as registered representatives of a broker-dealer);

  • conflicts of interest;

  • outside business activities; and

  • valuation of client assets for consistency and appropriateness of methodology.


PRIVATE FUND ADVISERS

The Division noted that over 36% of RIAs manage private funds. This number is likely to continue to grow as RIAs look for different ways to distinguish themselves. As expected, the Division will continue to monitor and focus examination priorities on RIAs that manage private funds, specifically those that also provide services to retail investors. The Division will assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest


Finally, the Division will focus on how firms are complying with the recent changes to the definition of accredited investor when recommending and selling certain private offerings (click here to review the SEC’s modernized Accredited Investor definition).


Please remember that OCIE communicates these as PRIORITIES, and should not be relied upon as an all-inclusive list of all focus areas. To read the full report, click here: 2021 National Exam Program Examination Priorities.