May 31, 2023

Breach of Fiduciary Duty


Breach of Fiduciary Duty

Advisors have a fiduciary duty to conduct reasonable due diligence for any investment that the advisor buys, sells, or holds in a client's portfolio. Due diligence is paramount in helping advisors find the appropriate investment opportunity by carefully examining all aspects of an investment before recommending it to a client. An effective due diligence process is not centered around performance; instead, it requires a comprehensive and holistic approach and must (at a minimum) entail consideration of the following: human capital, driving principles, process, conflicts of interest, competitive landscape, and performance. Certain products or opportunities may present additional complexities and require a heavier hand and a more detailed investigation, review, or audit of the investment opportunity. Additionally, as a fiduciary, advisors must manage clients' portfolios in accordance with their investment strategy/mandate and, as necessary, provide an explanation for material deviations from the agreed-upon directive. So not only does an Advisor need to understand the products it is recommending, but it also needs to understand what products will be most suitable for a specific client. Recently the SEC announced that it charged an advisory firm and its part-owner and investment advisor representative (IAR) for breach of fiduciary duty in connection with the use of leveraged exchange traded funds (ETFs). The Advisor and IAR invested client assets in leveraged ETFs for extended periods of time, significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks, were designed to be held for no more than a single trading day, and required frequent monitoring. Because the Advisor and IAR did not understand the product itself, they did not meet their fiduciary duty in conducting reasonable due diligence on the investment opportunity. According to the SEC’s announcement, the Advisor and IAR additionally did not conduct ongoing due diligence and portfolio monitoring to ensure these products continued to meet the clients’ best interests. The full SEC announcement can be read here.
Should you have questions, please don’t hesitate to reach out today. 

April 21, 2023

Annual Retrospective Review – What does it Mean for Advisors?


Annual Retrospective Review - What Does it Mean for Advisors?

The DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improving Investment Advice for Worker’s & Retirees) gives registered investment Advisors and their representatives the ability to receive compensation when providing investment advice to ERISA retirement plans, participants, and IRA owners. AdvisorAssist has previously provided guidance on the requirements of PTE 2020-02 in the corresponding blog post, but this post elaborates on the regulatory requirement for Investment Advisors regarding the Annual Retrospective Review. As a reminder, Advisors must conduct an Annual Retrospective Review and record their findings in a written report within six (6) months after the end of the year, or by June 30th.

The DOL has published FAQs, which provide additional guidance regarding an Advisor’s requirement to perform an Annual Retrospective Review of their covered recommendations in Question 19. Defined, the Annual Retrospective Review is a review that must be reasonably designed to assist the Investment Advisor in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the Advisor’s policies and procedures. Whichever methodology the Advisor chooses for their review, and its applicable results, must be reduced to a written report. This written report can either be provided to a Senior Executive Officer of the firm, or as circumstances require, created by the Senior Executive Officer in cases of smaller sized firms.. The officer required to certify the report will be attesting that they have reviewed the report in its entirety, inclusive of any violations, and that the Advisor has policies and procedures in place prudently design to achieve compliance with the exemption. Investment Advisors are required to retain the report, certification, and applicable supporting data for a period of six years along with the ability to produce these documents to the DOL within ten business days if requested.

When Investment Advisors are reviewing, assessing, and documenting the Firm’s overall control environment in regards to PTE 2020-02 and the Impartial Conduct Standards, they should review their current control framework by asking such questions as:
  • Does the Advisor have a prudent process to modify current policies and procedures as business, regulatory and legislative changes and events dictate?
  • Does the Advisor have the ability to test the effectiveness of the policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with the conditions of this exemption?
  • When reviewing Advisor’s current internal work flows, do they align with what is currently published in written manuals?
  • Does the Advisor have policies and procedures which ensure compliance with the Impartial Conduct Standards including:
    • How an Advisor investigates and evaluates investments, provides advice, and the requirement to act prudently in their recommendations?
    • That an Advisor acts with loyalty when making recommendations and never places their own interest ahead of the client?
    • That an Advisor charges no more than reasonable compensation and complies with federal best execution laws?
    • That an Advisor can not make misleading statements about investment transactions, or related data points, to entice clients into transactions?
  • Has the Advisor mitigated any conflicts of interest that may affect them, and adequately documented how those conflicts are mitigated?
  • Does the Advisor provide applicable written acknowledgments of the firm's ERISA fiduciary status?
  • Does the Advisor have a process in place to identify all covered transactions during the review timeframe, and furthermore delineate those results into solicited transactions versus client-initiated transactions?
  • For any client-directed rollovers, does the firm provide clients with a separate and distinct acknowledgment form where the client attested that the firm did not solicit the rollover?
  • How is the Advisor tracking document and disclosure delivery, and can the Advisor prove all applicable documents and disclosures were delivered when required?
  • Does each solicited transaction document the specific reasons for recommendations made to retirement clients, applicable due diligence conducted, costs associated, and whether the recommendation was in the client’s best interest?
PTE 2020-02 does contain the ability for Investment Advisors to correct certain violations within 90 days after the Investment Advisor learns, or reasonably should have learned, of the violation. Assuming the violation did not cause investment losses to the retirement client, and/or the Investment Advisor has made the client whole, the firm needs to notify the Department within 30 days, and the violation and correction must be specifically set forth in the written report of the retrospective review. Although not an exhaustive list, certain examples of violations could be:
  • A transaction that inherently violates the Impartial Conduct Standards, and does not align to the fiduciary standards placed on representatives.
  • Not having adequate policies and procedures to comply with all components of PTE 2020-02 or an update mechanism to enhance for any corresponding internal or external change required such as new business lines, enhanced regulations, etc.
  • Not disclosing material conflicts and/or not providing required documentation and disclosures to the client during the transaction process which could have a material impact on their decision making such as:
    • Not providing a comparable review of the costs associated with the current plan versus the proposed investment solution such as internal expense ratios, advisory fees, custodial fees, commissions, etc.
    • Not providing a comparable review of the account characteristics of the current plan versus the proposed investment solution i.e legal protections, surrender timeframes, loan applicability, and/or tax ramifications.
    • Not providing a comparable review of the characteristics of the current plan’s investment options versus the proposed investment solution such as product type availability or, share class availability.
With the results of the Retrospective Review in hand, Investment Advisors can find more effective ways to ensure their representatives are providing investment advice that aligns to the Impartial Conduct Standards, and strengthen the firm’s policies and procedures. AdvisorAssist Consultants are here and ready to assist Adviser’s in any compliance capacity needed. Should you have questions, please don’t hesitate to reach out today.

March 28, 2023

SEC Risk Alert: Observations from Examinations of Newly-Registered Advisers


SEC Risk Alert: Observations from Examinations of Newly-Registered Advisers

On March 27, 2023 the Securities and Exchange Commission’s Division of Examinations (the Division) released a Risk Alert regarding its observations from newly-registered adviser’s introductory examinations. Since 2013, the Division has prioritized exams for newly-registered advisers within a reasonable period of time (generally within the first two years) after SEC registration. These exams give the Division an opportunity for early engagement to provide advisers with the following:
  • Provide the Adviser information regarding the Division’s examination program.
  • Conduct preliminary risk assessments in order to understand the Adviser’s operations and risk characteristics.
  • Determine whether conflicts of interest have been adequately identified, addressed, and disclosed in a full and fair capacity for client consent.
  • Promote compliance with applicable regulation, such as the Advisers Act, and through effective compliance programs.
The examination itself generally involves documentation requests for a defined time period and interviews with Adviser staff to determine the tone of compliance culture. Requests generally consist of the following items:

General Information – Organizational charts, eligibility for SEC registration documentation, ownership/control documentation, information regarding current and former personnel, financial statements, and any past, present, or potential litigation or arbitration cases. 
Demographics and Data – Adviser’s offered services, types of clients serviced and whether the Adviser maintains discretionary or non-discretionary authority, a current client list with their applicable holdings/transactions, what personnel services and oversees accounts, AUM data, third-party service providers, and investment strategies. Part of this request may require documents such as contracts, agreements, statements, etc.
Compliance Program and Risk Management – Compliance program documents such as the Adviser’s compliance policies and procedures, internal controls, code of ethics, and business continuity plan.
Communications –Advertising or marketing pieces used to inform or solicit new and existing clients such as brochures, social media, websites, blogs, or mailings.
Throughout the Division’s examination process, they have observed some consistent deficiencies brought forward through the alert:

Compliance Policies and Procedures – Programs were missing applicable risk areas, policies existed without controls or procedures to achieve them, lack of enforcement of policies and procedures, annual testing that did not prove effectiveness of implementation, purchased policies and procedures that were not further tailored to the Adviser’s operations and business , insufficient resources dedicated to compliance, outsourced services not properly understood or supervised, undisclosed and therefore unmitigated conflicts of interest, and inadequate business continuity plans, including succession plans.
Disclosure Documents and Filings – Disclosure documents contained omissions or inaccuracies relating to fees and compensation, business and operations, services, disciplinary information, conflicts of interest, and web/social media presence. Required updates such as material changes, or annual filings, were also noted as either being untimely or not completed.
Marketing – Advisers could not substantiate claims in their marketing material, or material appeared to contain false and misleading information, especially concerning advisory personnel’s professional experience, third party rankings/awards, and performance.
The Division will continue to make initial exams a priority for newly-registered advisers, and urges Firms to review the applicable resource attachment offered within the Risk Alert. This resource page links to rules, regulatory actions, enforcement actions, guidance, FAQs, etc. released by the SEC in an effort to provide guidance. AdvisorAssist Consultants are here and ready to assist Adviser’s in any compliance capacity needed. Should you have questions, please don’t hesitate to reach out today.

March 21, 2023

Preparing for the Future Regulatory Landscape: Navigating SEC Regulations and Enforcement under Gary Gensler's Leadership


Preparing for the Future Regulatory Landscape
Navigating SEC Regulations and Enforcement under Gary Gensler's Leadership

AdvisorAssist, LLC, the leader in driving registered investment advisor (RIA) independence by providing comprehensive consulting services, anticipates a significant number of firms will begin to feel the impact of the flurry of proposed SEC regulations. As these rules are finalized and adopted, risk profiles will be significantly impacted from a regulatory, compliance, and operational perspective. The current rule proposals in the pipeline address the following:
  • Cybersecurity Risk Management
  • Privacy of Consumer Financial Information and Safeguarding Customer Information
  • Safeguarding Advisory Client Assets
  • Outsourcing by Investment Advisers
  • Environmental, Social, and Governance Disclosures
  • Private Fund Advisers; Documentation of Compliance Review
Further, under the leadership of SEC Chairman Gary Gensler, AdvisorAssist is observing an upward trend in more rigorous and lengthy examinations, ultimately being evidenced by a heightened enforcement environment. RIAs and their Chief Compliance Officers need to stay informed of ongoing developments of these rule proposals and remain proactive to ensure firms are prepared to address the SEC and the future of the regulatory landscape.

March 8, 2023

Series Exam Changes Effective June 12, 2023


Series Exam Changes Effective June 12, 2023

Today, the North American Securities Administrators Association (NASAA) announced the corresponding results to their job analysis study of the Series 65 and 66 examinations. These changes will affect both content specifications of the exams, and an adjustment to the passing score for the Series 65. Currently, the passing score of the Series 65 requires at least 94 of 130 questions to be answered correctly, with a passing score of 72%. The adjustment will now require the candidate to answer 92 of 130 questions correctly, or a passing score of 70%. There will be no adjustment in scoring for the Series 66 examination. Content updates will include enhancements to each exam to align questions with the Secure Act 2.0. Additional topics have been added, while other topic areas have been modified or deemphasized. All June updates to test specifications can be reviewed below at the test’s respective link: Candidates are urged to review their examination windows, and adjust test scheduling accordingly based on the announcement. Should you have any questions, please contact your AdvisorAssist Consultant. 

February 27, 2023

Industry Resistance to the SEC’s Proposed Outsourcing Rule


Industry Resistance to the SEC’s Proposed Outsourcing Rule

Back in October, the SEC proposed a new rule that would amend the Investment Advisers Act of 1940 to create due diligence and monitoring provisions for advisors that hire a third party that would provider a “covered function” to its clients. In developing the proposal the SEC has stated that purpose of the rule is to protect against potential investor harm if advisors don’t properly vet and monitor their service providers. The SEC has defined these covered functions as those that are essential to providing financial advice in compliance with federal security laws and that could materially harm clients if they were performed negligently or not at all. Over the years AdvisorAssist has communicated the importance of a prudent due diligence process when selecting service providers, while also delivering compliance testing and risk assessments to assist with your at least annual review of such vendors.

As one would imagine, the proposed rule resulted in industry push back. The public comment period for the proposed rule has since passed as of December 27th, but not after the SEC received approximately 90 letters. Industry groups such as the Investment Advisors Association, the Securities Industry and Financial Markets Association, the Institute for the Fiduciary Standard and the Money Management Institute pointed out that the proposal is unnecessary due to an advisor’s fiduciary duty to its clients, and that if approved the rule would do little to actually provide additional protection to investors. Many of the other comments spoke to the cost of complying with the rule if approved, especially in the case of smaller firms, as they would be duplicative to existing rules and regulations.

There were certain positive comments submitted as well. Investor advocates like the Public Investors Advocate Bar Association and the North American Securities Administrators Association, which represents state security regulators, feel the rule could go further, questioning the exemption for certain outsourced functions.

Time will tell whether the proposed rule will be approved as is, modified, or not pass at all. Rest assured AdvisorAssist will continue to monitor the situation and if ultimately approved, we will be working with you on the impact it will have on your firm and compliance program.

For additional information regarding the proposed rule and fact sheet please see the links below:

Proposed rule: Outsourcing by Investment Advisers

Fact Sheet: Outsourcing by Investment Advisers

Please contact your AdvisorAssist Consultant should you have any questions.