Investment Advisor Representative Continuing Education

  

Investment Advisor Representative Continuing Education 

Investment Advisor Representatives (IARs) have their hands full at year end with such items as required minimum distributions, end of year tax loss harvesting, client gifting, annual meetings, and the list goes on! A requirement, introduced in 2020, has added a yearly addition to certain IARs via the NASAA Model Rule on Investment Adviser Representative Continuing Education. Continuing education (CE) is required for every IAR registered in a jurisdiction that adopts the Model Rule. The program applies to all registered IARs of both state-registered and federal covered investment advisers in adopted jurisdictions.

IARs are free to select an approved course provider, along with applicable classes that interest them or align to their business model, so long as the IAR obtains 12 CE credits each year - 6 credits of Products and Practices and 6 credits of Ethics and Professional Responsibility. States which currently require IAR CE as of December 31, 2024:

• Arkansas (effective in 2023)
• California (effective in 2024)
• Colorado (effective in 2024)
• Florida (effective in 2024)
• Hawaii (effective in 2024)
• Kentucky (effective in 2023)
• Maryland (effective in 2022)
• Michigan (effective in 2023)
• Minnesota (effective 1/1/2025)
• Mississippi (effective in 2022)
• Nebraska (effective in 2025)
• Nevada (effective in 2024)
• New Jersey (effective in 2025)
• North Dakota (effective in 2024)
• Oklahoma (effective in 2023)
• Oregon (effective in 2023)
• Rhode Island (effective in 2025)
• South Carolina (effective in 2023)
• Tennessee (effective in 2024)
• Vermont (effective in 2022)
• Washington, D.C. (effective in 2023)
• Wisconsin (effective in 2023)
• U.S. Virgin Islands (effective in 2025)

IARs have an annual deadline to complete their CE requirement. Should they not complete their CE by December 31st the IAR will pay the registration renewal fee and become “CE Inactive”. This status will allow the IAR to continue doing business, but should the IAR not complete the CE requirement by end of year the IAR will be unable to renew his or her registration and become a status of “Fail to Renew”. If you are CE Inactive, courses completed in the current year will apply to the past year’s deficiency – so you will want to work with your provider and Firm to ensure you are covering prior/current year requirements. IARs should be aware of particular nuances to the Model Rule and CE requirements, which can be reviewed on both the NASAA FAQ and also the Program Handbook:

Newly Registered IARs: Newly registered IARs will be required to meet CE requirements by the end of their first full calendar year following the year in which they first become registered.

IAR Multi-State Registration: An IAR is responsible for the requirements of each state they are registered in during that year, whether it is a home state or additional state, whether they add the in-scope state registration halfway through the year, or whether they withdraw from an in-scope state during the year – requirements apply. For additional considerations regarding in-scope/out-of-scope states, we urge IARs to review the NASAA FAQ for scenario examples, or reach out to state regulators.

Professional Designations: Although there are no exemptions to CE requirements, it would be prudent to work with a provider who can assist IARs in taking classes that cover the requirements for their professional designations and count toward state CE requirements as well.

Dually Registered IARs: Currently, FINRA CE content meets NASAA eligibility to count toward the six credits of Products and Practices credit hours. Dually registered IARs should work with their BD Firm to determine if additional training, such as Annual Firm Element classes, are approved to count toward their completion requirements for IAR CE.

When an IAR completes courses, the vendor/provider reports course completion to FINRA, NASAA’s vendor for program tracking. The responsibility of tracking the vendor/provider’s submission falls on the IAR and regulators urge IARs to open a FinPro account for CE tracking purposes. Advisors can also pull CE reporting through FINRA Gateway to monitor IAR annual completions.

As additional states adopt the Model Rule, CCO’s and other compliance professionals can review the NASAA Investment Advisor Representative Continuing Education training webinar for additional information, or reach out to their AdvisorAssist consultant.

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SEC Marketing Rule Examination Sweep Deficiencies

 

SEC Marketing Rule Examination Sweep Deficiencies

September 9th, 2024 Update: Press Release

On September 9th, 2024 the U.S Securities and Exchange Commission (“SEC”) announced charges against nine Registered Investment Advisors (“RIAs”) for violations of the Marketing Rule as part of the SEC’s ongoing Marketing Rule Sweep Exam efforts. All nine firms agreed to settle, totaling over $1.2 million in combined damages. These actions demonstrate the SEC’s zero-tolerance policy for marketing violations. Additionally, the continuation of these sweep exams codifies the SEC’s dedication to promoting compliance and accountability, indicated Corey Schuster, Co-Chief of the SEC’s Division of Enforcement’s Asset Management Unit. 

The deficiencies identified by the SEC in this tranche of enforcement cases are as follows: 

• Disseminated content that claimed to provide “conflict-free advisory services”, which the firms were not able to substantiate.
• Disseminated content that could not be substantiated regarding awards provided to firm principals.
• Disseminated content that claimed to contain two testimonials, but neither came from current clients.
• Advertised endorsements not fully disclosing that an “endorser” was a paid, non-client in videos, on social media, and on physical objects such as bags and flags.
• Advertised third-party ratings, some of which were more than five years old, without disclosing the dates on which the ratings were given or the periods of time upon which the ratings were based.

As stated in the rule, firms are permitted to include testimonials, endorsements, and third-party ratings provided that each activity is conducted within the scope of the intentions of the Marketing Rule and adhere to the guidance provided within the Additional Resources below when drafting and reviewing marketing materials ahead of distribution. 

________________________________________________________________________________________

April 12, 2024 Update : Press Release

Five additional registered investment advisors have been added into the Marketing Rule examination sweep deficiency list, bringing the total enforcement actions to over $1 million in combined penalties.

Hypothetical performance continues to be a sore spot, as each of the Advisors advertised hypothetical performance to the general public on their website. Hypothetical performance can be enticing to both current and prospective clients, but unless the Advisor adopts and implements policies and procedures designed to ensure the performance is relevant to the financial profile and goals of the intended audience, the Advisor will be in clear violation of the Marketing Rule. This would suggest, that because an Advisor can not control the audience of public websites and social media, an Advisor should not be publishing hypothetical performance through these mediums or should only do so in a controlled environment, such as a portal to target specific investors.

Additional performance violations consisted of making false and misleading statements in advertisements, advertising misleading performance, and the inability to substantiate performance data. These violations inevitably led to record keeping violations for the Advisor. Furthermore, there was an additional violation for fail

________________________________________________________________________________________

September 11, 2023 Update: Press Release

On September 11, 2023, the SEC announced charges against nine Advisors for hypothetical performance advertising violations as part of the SEC’s initial sweep into Marketing Rule Violations. These charges related to promoting hypothetical performance on the Advisor’s websites to the general public without adopting and/or implementing policies and procedures as required by the rule. Additionally, two firms were found to have failed to retain appropriate copies of the advertisements within the Firm’s books and records. All nine firms agreed to settle, were censured, and must pay $850,000 in combined damages.

Gurbir Grewal, the SEC’s Director of the Division of Enforcement, emphasized the Commission’s view that hypothetical performance advertising poses an elevated risk to prospective investors, and the importance of firms adopting policies and procedures under the new rule to mitigate this risk. He also made it clear that until the Commission is satisfied that that is the case, they will continue their ongoing sweep to ensure investment advisor’s compliance with the Marketing Rule. AdvisorAssist reminds Advisors that the Marketing Rule is applicable to SEC-registered firms and certain State-registered firms who have adopted it. Under the rule, an Advisor is permitted to include hypothetical performance in an advertisement, provided that the Advisor:

• Adopts policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement
• Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating the hypothetical performance
• Provides sufficient information to enable the audience to understand the risks and limitations of using hypothetical performance to make investment decisions.
• Important Note: Hypothetical performance should only be distributed to clients and/or prospective clients who have access to the resources to independently analyze such information and who have the financial expertise to understand the risks and limitations of such types of presentations.
• Maintain the relevant data and documentation that supports the hypothetical performance figures presented.

This is the tenth hypothetical performance related violation the SEC has released in less than a month, the first which you can review in the AdvisorAssist blog post released in August 2023.

Marketing Rule violations were the most common deficiency in the AdvisorAssist 2023 SEC Exam Report, and considering the SEC’s stance on continuing targeted examinations, Advisors are urged to review AdvisorAssist's blog post regarding the need for a retrospective review of all marketing pieces, the AdvisorAssist SEC Sample Marketing Exam Request, and to take advantage of our Mock Examination Services should they have concerns or feel the need to enhance current procedures.

If you have any questions or concerns please contact your consultant to discuss!

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SEC Remains Vigilant on Share Class Selection as Deficiencies Rise

 

SEC Remains Vigilant on Share Class Selection as Deficiencies Rise 

                                                   

For over six years, mutual fund share classes have been a major risk consideration for Registered Investment Advisors (RIAs), and priority for the U.S Securities and Exchange Commission (SEC). Throughout this period, AdvisorAssist has consistently updated RIAs on the SECs’s share class selection risk priority, and subsequent disclosure Initiative. Given the SEC’s continued focus on mutual fund share class selection, we wanted to bring your attention to the increased number of RIAs receiving deficiencies for continuing to operate with lack of disclosure and/or inadequate policies and procedures regarding share class selection. As a fiduciary, an RIA can not place the Advisor’s financial interests ahead of their clients. Violations of an Advisor’s Duty of Loyalty is where regulators continue to maintain that, if the Advisor reaps financial benefit from clients, there will be regulatory action. In addition, even if the Advisor does not stand to financially benefit, under the Duty of Loyalty obligation, rendered advice needs to be in the client’s best interest. Failure to adhere to the Duty of Care and Duty of Loyalty standards, Advisors can be subject to the following disciplinary action items:

• Cease-and-Desist Order and Censure 
• Disgorgement and Prejudgment Interest 
• Civil Penalties
• Individual Liabilities 

Regardless of disciplinary actions, Advisors may be pressured by the SEC to refund clients based on perceived harm to clients, due to the Advisor not adhering to their fiduciary obligations. This can be a material financial impact on an Advisor depending on the severity of potential harm to clients, and you can review results of this financial impact from our prior Blog Posts or through the various releases of the SEC Share Class Initiative. At AdvisorAssist, we remind clients that as part of your fiduciary duty to clients, Advisors should endeavor to purchase the lowest-cost share class available when recommending a particular mutual fund. Further, Advisors must maintain policies and procedures that align with the Advisor’s actual business practice. AdvisorAssist encourages Advisors to perform forensic reviews of their share class selection policies and procedures, while periodically reviewing their mutual fund holdings. Regardless of whether a higher cost share class was purchased or transferred in, if a client is invested in a share class that is potentially not the lowest cost, there is a very important need to ensure the firm has proper documentation substantiating why the client is holding the position. If the Advisor determines and/or discovers that there is no substantive reasoning to support the holding of a higher cost share class, the Advisor should promptly begin to convert the mutual fund to its lowest cost share class. In certain instances, substantive reasoning regarding why a holding isn't converted to the lowest share class may include, but is not limited to:

• Tax implications
• Dollar-cost averaging
• It does not meet the minimum investment/the fund is closed to new investors
• Investment time horizon
• The availability of lower share classes at the custodian

By clicking here, you will find an example of a common deficiency letter related to Share Class Selection. Should you have any current questions or concerns regarding Share Class Selection, please reach out to your Consultant.

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Books and Records: Trade Affirmation, Allocations, and Confirmations

 

Books and Records: Trade Affirmation, Allocations, and Confirmations 

Contributed By - Thomas Yates

Managing Partner and Director

AdvisorAssist, LLC

                                                   

The U.S Securities and Exchange Commission’s (SEC) amendments to the record-keeping requirements, Rule 275.206(4)-2, for registered investment advisors, focuses on maintaining accurate and up-to-date records of allocations, confirmations, and affirmations related to securities transactions subject to Rule 15c6-2(a) as described in our initial AdvisorAssist Blog post. AdvisorAssist has been evaluating and monitoring industry guidance and best practices, regarding the amendment, since May 2023. During our evaluation, AdvisorAssist held discussions with each custodian and/or executing broker-dealer (herein “Custodian(s)”) to understand each Custodian’s process to assist RIAs in complying with this new rule, At this time, here is a summary of what RIAs are required to do: 

Books and Records Requirement 

Advisors are required to archive:

• Date and time stamp indicating when the trade allocation and trade affirmation occurred.
• Details, sent or received, about each:
• confirmation received,
• any allocation made, and
• each affirmation. 

The intention is to have accurate and current records for trades for securities transactions subject to Rule 15c6-2(a), as defined below. RIAs should validate and confirm that all email communications, platform instructions, or any other mode of communication related to client transactions is archived, and that RIAs are able to produce evidence of the communications and/or instructions upon request.

Transactions under Rule 15c6-2(a) are “All Securities”, with certain exemptions, as follows:

• Exempted Securities (e.g. Private Funds)
• Government Securities
• Municipal Securities
• Commercial Paper
• Bankers’ Acceptances
• Commercial Bills
• Security Based-Swaps

Settlement Cycle’s Impact on Process

The settlement cycle for transactions will now be reduced to one business day (T+1), which means all Custodians should be updating their process to adhere to the new settlement cycle requirement. Separately, a Custodian is mandated to maintain timestamped records of trade allocations, confirmations and affirmations, as described above. Due to this requirement placed on your Custodian, the information required for RIAs to archive should already be maintained on their respective platforms.

Furthermore, the SEC has provided commentary that RIAs may rely on third parties, e.g. Portfolio Management platforms, to maintain records on this. However, these third parties are not responsible for RIAs books and records, and while the data may exist, they can not assume responsibility on the RIA’s behalf for maintaining records. In addition, depending on the third party, data may only be readily available for a period of time that could impact the RIA’s ability to retrieve the requested data in a timely manner and may not allow for RIAs to comply with this rule.

How To Comply: Variations in Process Among Custodians

While AdvisorAssist remains in discussions with each Custodian, we also suggest that RIAs take the following steps to comply with this new rule:

• Reach out to their Custodians and ask them the following question: Can you provide instructions on how I can download a report, at least annually, date and time stamp of all trade allocations, confirmations and affirmations?
• Are bulk downloads available, and for what time period?
• Is batch reporting available?
• Is any level of automation available to our Firm for generating these items?
• Once these reports are received, save them into a dedicated folder where all books and records are kept, and ensure that this data is backed up!
• Use this opportunity to perform forensic testing for trade accuracy purposes, making sure trades were executed and/or allocated as intended.
• If any transaction activity is conducted via email, make sure that emails are archived and that email communications include any confirmations or additional transaction details sent by or received from custodians and/or broker-dealers. RIAs should separately log these communications so that they can ensure timely retrieval of these records upon request from a regulator.

As we continue discussions with Custodians, and have further guidance from the SEC, we will communicate this information out. Should you have any current questions or concerns, please reach out to your Consultant.

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SEC Adopts Important Rule Amendments to Regulation S-P

 

SEC Adopts Important Rule Amendments to Regulation S-P

Contributed By - Thomas Yates: Managing Partner and Director, AdvisorAssist, LLC

Philip Coniglio : President & CEO, AdvisorDefense, LLC

                          

                            

On May 15th, the U.S. Securities and Exchange Commission adopted amendments to Regulation S-P, which requires registered investment Advisors (RIAs) to adopt written policies and procedures to safeguard customer records and information (the “safeguards rule”). These amendments aim to enhance the policies and procedures of RIA’s regarding the protection of client sensitive information, especially policies on incident response, client notification, disposal of client sensitive information, and service provider due diligence.

“Over the last 24 years, the nature, scale, and impact of data breaches has transformed substantially,” said SEC Chair Gary Gensler. “These amendments to Regulation S-P will make critical updates to a rule first adopted in 2000 and help protect the privacy of customers’ financial data. The basic idea for covered firms is if you’ve got a breach, then you’ve got to notify. That’s good for investors.”

While AdvisorAssist, LLC and AdvisorDefense, LLC are closely monitoring how this rule will be further interpreted, we anticipate more clarity from the SEC. As feedback comes in, we will continue to analyze and formulate guidance to help ensure adherence to amendments to the Safeguards Rule. That said, here is our current synopsis:

Compliance Date 

Mandatory compliance, 60 days after posting on the federal registrar, Advisors have the following timeline to comply with the amendment:

• Advisors with at least $1.5 billion or more in assets under management (AUM): 18 Months
• Advisors with less than $1.5 billion in AUM: 24 Months

Enhancements to Regulation S-P

Incident Response Program - The amendment requires that Advisors adopt policies and procedures that are reasonably designed to detect, respond to, and recover from unauthorized access to, or use of, client data. Further, these policies must include the following:

• Assessment: Advisors will evaluate the nature and scope of the breach and/or incident;
• Containment: Implement remedial measures to prevent further incidents and/or unauthorized access; and
• Notification: Policies must be in place to notify affected clients as soon as possible, but no later than 30 days after detection of the incident and/or breach, and ensure proper information is disclosed to the client.

Service Provider Oversight - As a component of the Incident Response Program, RIAs must implement policies and procedures designed to oversee Service Providers, through due diligence on and ongoing monitoring. The amendment defines “Service Provider” as any person or entity that receives, maintains, processes, or otherwise is permitted access to customer information through its provision of services directly to a covered institution. RIAs must ensure that Service Providers have controls in place to protect against unauthorized access to, or use of, client information. Service Providers must provide notification to Advisors regarding unauthorized access to client information, as soon as possible, but no later than 72 hours after becoming aware of the breach. Customer Notification Requirement - RIAs must notify affected individuals promptly when sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization. Notices must include:

• Comprehensive details about the incident.
• Specifics on the type of data that was breached.
• Instructions for affected individuals on how to address the breach and protect themselves.

An exception to the customer notification requirements exists when an RIA can evidence that sensitive customer information has not been, and is not reasonably likely to be, used in a manner that would result in substantial harm or inconvenience.

Privacy Policy Delivery Requirements - RIAs are no longer required to deliver an annual privacy policy to clients, provided:

• The RIA does not share nonpublic personal information with non-affiliated third parties (other than as permitted under certain enumerated exceptions, e.g., to service providers who perform services on behalf of the RIA, or as necessary to administer a transaction requested or authorized by an individual).
• The RIA has not changed its privacy policies and practices from the policies and practices that were disclosed in the most recent privacy notice sent to individuals.

Books and Records - Maintenance of written records documenting compliance with the requirements of the Safeguards Rule and Disposal Rule.

• Safeguards Rule: Policies and procedures to safeguard client records and information
• Disposal Rule: Policies and procedures for the proper disposal of consumer report information in a manner that protects against unauthorized access to or use of such information

How AdvisorDefense, LLC Can Help! AdvisorDefense’s service is to provide Cybersecurity Consulting and managed security services, specifically for Registered Investment Advisors. AdvisorDefense’s CEO, Philip Coniglio, is an experienced in-house Chief Information Security Officer for multiple RIAs, and led security at one of the largest RIAs in the nation. Driven to provide cybersecurity guidance to RIAs of all sizes, AdvisorDefense can assist in the readiness for compliance with these amendments. We are currently working to further our guidance and communications on Regulation S-P and its impact on RIAs, which will include a full breakdown of requirements and guidance to adhere to the regulation, but should you have any questions, please reach out to your Consultant!

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Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

 

Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz

                           Senior Compliance Consultant

                             AdvisorAssist, LLC

On May 13, 2024 the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly proposed customer identification program (CIP) requirements for RIAs and ERAs on the tailwind of the February 2024 proposal to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA). If adopted, the rule will require RIAs and ERAs to implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable, and maintaining records of the information used to verify a customer’s identity. The below list is the proposed required minimum amount of client information that would be required to be collected per a CIP, however, verification methodologies may require additional documentation and data:

1. Name – referring to the client’s full legal name, but aliases or DBAs may be required to be obtained.
   
2. Date of birth for an individual or the date of formation for any person other than an Individual.
3. Residential or business address, unless other stipulations apply as proposed.
4. Identification number (SSN, TIN, legal identifiers) dependent upon whether the individual is domestic or foreign.

Clients will be informed of the Firm’s identity verification policies through a CIP customer notice, which may be presented on websites, in account applications, agreements, or through other written or verbal communications. The Firm must establish a reasonable belief in the true identity of its clients using either documentary or non-documentary verification methods, or a combination of both, as outlined in their risk-based procedures. Documentary methods include government-issued IDs for individuals and entity-proofing documents like certified articles of incorporation for businesses. Non-documentary methods involve checking financial statements, comparing client information against fraud databases, verifying information through third-party sources like credit reports, and checking references with other financial institutions. The Firm's verification policies must address situations where typical ID verification is challenged, such as when:

• An individual cannot present a valid government-issued photo ID.
• The investment advisor is unfamiliar with the presented documents.
• The advisor does not obtain documents for verification.
• There is no face-to-face meeting with a customer.
• Circumstances suggest an increased risk of identity verification failure.

In such cases, the Firm's CIP (Customer Identification Program) must include procedures for handling these situations, potentially escalating to filing a Suspicious Activity Report (SAR) if a reasonable belief in the customer’s identity cannot be established. Under this proposed provision, an investment advisor would be required to retain the information obtained about a customer while the account remains open and for five years after the date the account is closed. Although there are provisions for reliance on another financial institution for all, or some, of its requirements under the regulation, the investment advisor would remain responsible for ensuring compliance and an agreement would need to be in place stating as such. FinCEN and SEC anticipate that the effective date of the proposed rule will be 60 days after adoption, and is currently in its comment period. Specifically, under this proposed rule, an investment advisor would be required to develop and implement a CIP that complies with the requirements of this section on or before six months from the effective date of the regulation, but no sooner than the compliance date of the AML/CFT Program and SAR Proposed Rule, if adopted. AdvisorAssist will continue to monitor both proposals, with the expectation that another joint effort between the SEC and FinCEN is on the way. Should you have any questions or concerns, please reach out to your Consultant.

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Risk Alert: Initial Observations Regarding Marketing Rule Compliance

  

Risk Alert: Initial Observations Regarding Marketing Rule Compliance

Contributed By: Samuel Guy, Compliance Consultant

Thomas Yates, Managing Director & Partner

                            AdvisorAssist, LLC

On April 17, 2024 the Division of Exams (“EXAMS” or “the staff”) released a Risk Alert: Initial Observations Regarding Advisers Act Marketing Rule Compliance. This Risk Alert highlights areas of focus for Advisors to stay in compliance with the Rule 206(4)-1 (the “Marketing Rule”) as discovered through the staff’s preliminary assessments and findings concerning the updated rule.

Observations Regarding the Compliance Rule, Books and Records Rule, and Form ADV

The staff's review of whether Advisors adopted and implemented written policies and procedures reasonably designed to prevent violations produced the following findings, including deficiencies:

Policies and Procedures The staff generally observed that compliance policies and procedures were updated to comply with the Marketing Rule. It was also observed that further steps were often taken; Advisors typically held training on the Marketing Rule’s requirements, Advisors implemented policies and procedures for reviewing marketing materials, and Advisors required pre-approval of marketing materials before dissemination. However, the staff also observed some common deficiencies concerning policies and procedures and the Marketing Rule, which are as follows:

• Policies and Procedures were general, informal, or not fully updated to cover all applicable marketing topics, or not properly implemented in the Advisor’s marketing materials.
• Policies and Procedures cover the General Prohibitions of the Marketing Rule, but do not cover the specific types of marketing materials utilized by the Advisor, such as testimonials or third-party ratings.

Books and Records The staff observed that Advisors updated their practices to reflect the Marketing Rule’s books and records maintenance and preservation requirements, however, some common deficiencies were also observed:

• Questionnaires or surveys used in preparation for a third-party rating were not archived.
• Social Media posts were not archived.
• Documentation to support performance claims were not maintained.

Form ADV The staff observed that Advisors updated their ADV documents in response to the Marketing Rule. However, the Staff did observe misreporting in ADV1 Item 5.L, where the Advisor utilized a certain type of marketing (i.e. Performance results, Third-party rating) that was not disclosed. Further, some Advisors had inaccuracies in ADV2 Item 14 as they were not properly disclosing their referral arrangements.

Observations Regarding Compliance with the Marketing Rule’s General Prohibitions

The staff’s review of the Marketing Rule assessed whether the Advisor’s marketing materials violated any of the General Prohibitions. Common deficiencies of these are organized by the prohibition, and are as follows:

Untrue statements of material fact and unsubstantiated statements of material fact.

The following are some instances of untrue statements in advertising materials observed by the staff during their preliminary assessment:

• Advertisements stated the Advisor was free of all conflicts of interest when conflicts did exist.
• Advertisements that misrepresent the Advisors’ business, such as misreporting the individuals performing advisory services, the qualifications of individuals employed by the Advisor, or awards granted to the Advisor.
• Advertisements that misrepresent facts about the Advisors’ investment processes, such as claiming these processes were validated by professional institutions or followed certain mandates, such as ESG, when this could not be substantiated by the Advisor.
• Advertisements in which Advisors could not substantiate investment practices, such as stating the client’s risk tolerance were considered, referencing security screening processes that did not exist, or referencing a list of approved securities that did not exist.

Omission of material facts or misleading inference.

The following are the primary instances of omission of material facts or misleading inference in advertising materials observed by the staff:

• Advisors attempted to differentiate themselves by stating they “acted in the best interest of clients” without disclosing that all Advisors have a fiduciary duty to act in the client's best interest.
• Advisors recommended certain investments in advertising materials without disclosing the compensation received by the Advisor for the recommendation.
• Advisors misrepresented the requirements of being SEC-registered. For example, Advisors implied that SEC registration represented a particular level of skill, or that the SEC had approved the firm's business practices, sometimes by including the SEC logo on their website or marketing materials.
• Advertisements containing third-party rankings did not disclose that other Advisors received the award and implied they were the sole recipient, or did not include the necessary disclosures explaining the methodology behind the ranking.
• Advertisements containing testimonials did not include context around what the testimonial was endorsing. In one instance, the Advisor included testimonials for a third-party product but represented the testimonial as being about the Advisors’ services.

Omission of material facts or misleading inference related to performance.

The following are the primary instances of omission of material facts or misleading inference related to performance advertisements observed by the staff:

• Facts included in performance marketing materials included outdated market data information or investment products and fees that are no longer available to clients.
• Marketing materials that omitted necessary context around performance results. For instance, omitting context around fees and expenses when calculating returns, or omitting context around general market performance.
• Misrepresenting performance track record, such as stating securities were bought in client accounts when they were not, or not disclosing that the Advisor did not have clients in the model of the performance report.
• The Advisor used a benchmark index but did not properly define the index or include enough context.
• Advertisements did not disclose the time period or whether the returns were calculated from the time period defined in the material.
• Some performance results were included or excluded in an unfair or unbalanced manner. For example, an Advisor only included the performance of realized investment information in total net return and excluded unrealized investments.

Other Deficiencies

The staff observed several deficiencies related to the fair and balanced presentation of marketing materials by advisors. Notably, many advertisements failed to disclose the material risks and limitations associated with the services offered. Additionally, references to specific investment advice often lacked balance, particularly with omissions in disclosures concerning the exclusion of certain investments. The staff also noted that advisors lacked adequate policies and procedures to ensure that such information was presented fairly. Furthermore, some advertisements contained materially misleading disclosures, including some that were unreadable, compromising the clarity and integrity of the information presented to clients.

In light of these deficiencies, advisors are urged to review and enhance their compliance practices. This should include updating and strictly implementing policies and procedures, ensuring comprehensive and accurate maintenance of books and records, maintaining accurate and reflective policies to the advisor’s marketing practices and reviewing marketing materials to eliminate misleading information. By taking these steps, advisors can seek to ensure transparency, accuracy, and adherence to Marketing Rule.

AdvisorAssist has published multiple resources for Advisors as they strive to enhance their policies and procedures surrounding the Marketing Rule. Targeted Mock Examinations through AdvisorAssist are available to those who wish to test the effectiveness of their current process. We urge you to review any of the following resources, or reach out to your Compliance Consultant for further assistance:

SEC Marketing Rule Examination Sweep

SEC 2023 Priorities and the Marketing Rule – How Important is a Retrospective Review?

SEC Sample Marketing Exam Request

 

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Adopted Amendment: 203A-2(e) & Internet Only Investment Advisers

 

Adopted Amendment: 203A-2(e) & Internet Only Investment Advisers

The SEC recently delivered a communication regarding their revisions to the registration of internet-only investment advisers (“IO RIAs”) under rule 203A-2(e) of the Investment Advisers Act of 1940. Here are some important points:

Audience: This rule ONLY applies to SEC Registrants that rely on the Internet Only exemption.

Timing Details for IO RIAs: The amendments will become effective on July 8, 2024. An adviser relying on the internet adviser exemption must comply with the rule by March 31, 2025.

Withdrawal: IO RIAs no longer eligible under the amended exemption must deregister with the SEC and, if applicable, register with state authorities by June 29, 2025.

Key Points

• Operational Interactive Website: IO RIAs using the internet adviser exemption must now offer services on an ongoing basis to more than one client exclusively through a website or mobile application ("operational interactive website”). This means the website must be actively functioning and capable of providing advisory services without interruption, except during minimal, unavoidable outages.
• Elimination of the De Minimis Exception: The updated rule removes the allowance for IO RIAs to have up to 15 non-internet clients within a 12-month period. Going forward, all client advisement must occur via the operational interactive website without exception.
• Form ADV Part 1 Update: IO RIAs must affirm on Schedule D of Form ADV that they maintain an operational interactive website as part of their compliance with the internet adviser exemption.

 For Advisers who rely on this exemption, further updates will be communicated moving forward regarding policy updates and best practices, but please reach out to your Consultant should you have any additional comments or concerns.

 

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Adopted Amendment - DOL Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

 

Adopted Amendment: Department of Labor's Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

The Department of Labor (DOL) recently announced significant amendments to Prohibited Transaction Exemption (PTE) 2020-02, which affects Registered Investment Advisors (“RIA”). As we continue through our research on these amendments we are learning that nothing has changed from our guidance since the DOL released its initial communication on PTE-2020-02, and that our guidance still aligns with the amendments, as all RIA’s are subject to a fiduciary standard. That said, here’s what you need to know about the amendment to PTE-2020-02: Effective Date - The amended rule takes effect on September 23, 2024. The DOL is granting this practical buffer through a designated phase-in period, to give RIAs the appropriate amount of time to make adjustments in order to adhere to the amended rule. There are two (2) material changes we wanted to highlight as it relates to this amendment: Inclusion of the Fiduciary Standard: The amendment to PTE 2020-02 allows investment advice fiduciaries to receive compensation that would otherwise be prohibited under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. The amendment provides a further definition of what is constituted as “Fiduciary Advice” based on the following five-part test:

• they provide investment advice for a fee,
• on a regular basis,
• pursuant to a mutual understanding,
• that the advice will serve as a primary basis for investment decisions, and
• that the advice is individualized.

Based on the above, this applies to the majority of RIA’s, registered with the SEC and/or various state regulators, who provide ongoing investment advice to clients. The following are key features to meet the Fiduciary Standard:

• Fiduciary Acknowledgment: RIAs must formally acknowledge their fiduciary status in writing to retirement investors. This declaration is crucial as it reaffirms the advisor’s role and the associated responsibilities.
• Conflict Disclosure: Advisors must fully disclose the services provided and any material conflicts of interest to their clients. Transparency is key to maintaining trust and adherence to fiduciary duties.
• Impartial Conduct Standards:
1. Care Obligation - Advisors must provide advice that reflects the care, skill, prudence, and diligence under prevailing circumstances that a prudent person would exercise.
2. Loyalty Obligation: The interests of the retirement investor must always be placed ahead of the advisor’s or the firm’s interests.
3. Reasonable Compensation: The compensation for advice must not exceed what is considered reasonable within the industry.
4. No Misleading Statements: Advisors must avoid making statements that could mislead retirement investors about investment transactions and other relevant matters.

Clarity Related to Retirement Investors The amendments now clarifies that this exemption applies to investment recommendations to “Retirement Investors”, which is inclusive of plans, plan participants, beneficiaries, IRAs, IRA owners and beneficiaries, and plan fiduciaries with discretionary authority. Although implied, this was not clear in the earlier release of the exemption. Now this answers a lot of questions on whether or not IRAs are subject to the rule. AdvisorAssist is closely monitoring industry best practices, interpretations, and any additional guidance the DOL may provide. We anticipate more clarity from the DOL as feedback comes in, and have begun the process to fully analyze and formulate guidance to help ensure adherence to amendments to PTE 2020-02. Please contact your Consultant for further questions regarding this amendment.  

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Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements

 

Adopted Rule: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz

                           Senior Compliance Consultant

                             AdvisorAssist, LLC

Effective September 4, 2024, the Financial Crimes Enforcement Network’s (FinCEN) has officially adopted and published its new rules on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) programs strictly for investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”), and does not apply to investment advisors registered with state regulatory agencies.

The Compliance Deadline is January 1, 2026 

AdvisorAssist has begun to review  the rule's release and will continue to provide guidance, as applicable, on the key aspects necessary for compliance with this regulation over the course of the “Compliance Period” that ends in January 2026.

Important Items to Note:

• Implement a risk-based and reasonably designed AML/CFT program. This includes, but is not limited to:
• establishing policies and procedures designed to prevent firms from being used for money laundering, terrorist financing, or other illicit finance activities;
• appointing an AML Officer;
• performing independent compliance testing;
• developing and implement a training program; and
• performing ongoing client due diligence to develop client risk profiles and identify/report suspicious transactions.
• File certain reports, such as Suspicious Activity Reports (SARs), with FinCEN.
• Keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule)

Important Information for State Registered Investment Advisors!

Given that FinCEN currently exempts state registered investment advisors, compliance to similar AML regulations may be required in the future. AdvisorAssist will continue to monitor each state’s rule making and will continue to keep respective firms apprised.

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Initial Proposal - March 2024

On varying occasions, the Financial Crimes Enforcement Network (FinCEN) has submitted rule proposals regarding the need for Registered Investment Advisors (RIAs) and Exempt Reporting Advisors (ERAs) to be subject to comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures. FinCEN’s recent synopsis is driven by the 2024 Investment Adviser Risk Assessment, which identified several illicit finance and national security risks such as sanctioned individuals, corrupt officials, tax evaders, and other criminal actors using RIAs to gain access to US Markets. Furthermore, the risk assessment identified cases of foreign adversaries, including China and Russia, investing in early-stage companies through RIAs to access sensitive information and emerging technology. The proposal would include RIAs and ERAs in the definition of “financial institution” under The Bank Secrecy Act (BSA). Under the BSA, RIAs and ERAs would be required to:

• implement an AML/CFT program;
• file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
• keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
• fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

Furthermore, the proposal would grant information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions to RIAs, along with subjecting RIAs to the “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act. Nuances to this proposal to highlight are the following:

• The proposal will not include the requirement to have a customer identification program that aligns with BSA requirements, nor beneficial ownership requirements for legal entity customers via the Customer Due Diligence rule. It is expected both these requirements will come with joint SEC rule proposals down the line.
• The proposal will not require RIAs to apply AML/CFT program or SAR filing requirements to mutual funds they advise, as mutual funds are already defined as “financial institutions” under the BSA.
• Finally, FinCEN will be delegating examination authority to the SEC for compliance with the BSA and FinCEN’s implementing regulations.

At this time, no action is required for RIAs or ERAs. The proposal will remain in a comment period through April 15, 2024. Should the rule become effective, compliance will be required on or before 12 months from the final rule’s effective date.

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