Regulatory Compliance 2022 and beyond: Full speed ahead

Many registered investment advisors (RIAs) and other financial professionals in the United States may wince when it comes to the myriad of regulatory and compliance matters they are required to address. It can be especially daunting for RIAs required to register with the U.S. Securities and Exchange Commission (SEC), or state securities regulators.

Well, hold on to your hats; because, if anything, the regulatory environment is poised to become even more intense. The good news is, there is plenty of expert help available from those who specialize in serving the compliance needs of RIAs and other financial advisory professionals.

Leila Shaver 450“Regulation is not going to slow down, in fact, it’s only going to speed up,” Leila Shaver, founder of My RIA Lawyer told Advisors Magazine in a recent interview. The securities attorney and self-described “compliance nerd,” explained that a lot of advisors who are in the brokerage space continue to make a break into the RIA space because of how much more freedom it can provide.

“But it's that very movement from the brokerage arena to the advisory space that’s also drawing all of the regulatory attention,” she added. “So, regulators are seeing this trend and they want to put more structure in place with the whole idea being that they want to protect the investor.”

That’s a good thing she acknowledges, but Shaver also points out that many regulators have never worked in a financial services company. “They're long-time regulators; they don't really get the day-to-day burden. They're all about theory and they don't understand the practice, or what regulations might mean for a firm.”

Leila quote
What’s more, it won’t matter which political party is in power. “We've seen [financial-related] regulation under Republican administrations, and we've seen it under Democratic administrations,” Shaver said.

The growth in cryptocurrency platforms, trading and as a fast-emerging vehicle for investment is a good example of why regulators are definitely not asleep at the switch. In fact, Bitcoin, Ethereum, NFTs, the private funds that are investing in crypto are all areas of wide-eyed interest for regulators.

“What a lot of advisors fail to recognize is the SEC has developed a whole department that looks at crypto and digital assets,” Shaver said. “When the SEC does that, it’s going to be an ongoing area of concern. If it was a one-off thing, they wouldn't create a whole department and team that looks at those things.”

She says advisors should take note of crypto emerging as an area of scrutiny.

“A lot of everyday investors are interested in it,” Shaver explained. “And the SEC is looking at it and looking at how financial advisors are representing these digital assets to clients and if they are doing so in the best interest of clients.”

Hottest Compliance Issues

While digital asset regulation and compliance is a key subject to monitor going forward, it placed fourth in the Investment Advisor Association’s (IAA) 2021 compliance poll. Advisors were asked for their three hottest compliance topics for 2021, and advertising/marketing, cybersecurity and ESG/sustainability were the ones leading the list.

Advertising and marketing was the leading compliance concern based on responses to the IAA poll, and for good reason: The SEC’s update of the rules governing the advertising and cash solicitation practices of investment advisors registered or required to be registered with the SEC became effective May 4, 2021. More commonly known as the “Marketing Rule,” advisors have until November 4, 2022, to come into compliance—an 18-month transition period.

Dating back more than 80 years, a new Marketing Rule was certainly overdue.

“The Marketing Rule modernizes and combines two rules under the Investment Advisers Act of 1940 (Advisers Act),” wrote Amy S. Matsuo, regulatory and ESG Insights Leader at KPMG US in a special alert last May.

SECThe rules that were combined are specifically referred to as the Advertising Rule (Rule 206(4)-1) and the Cash Solicitation Rule (Rule 206(4)-3). “These two rules were originally adopted in 1961 and 1979, respectively, and the SEC indicates they have not been substantively updated since adoption,” Matsuo explained. “The amended framework under the Marketing Rule is designed to recognize the increasing and evolving use of electronic media and mobile communications.”

For sure, the world has come a long way since 1940, 1961 and 1979. Computers, cell phones, the Internet, social media, websites and software programs are just some of the tools which speed the creation and delivery of marketing and advertising materials.

Since last May, law firms and compliance experts have been helping financial-advisor clients get ready for the Marketing Rule’s November 4 compliance deadline.

“To prepare our clients for the Marketing Rule, we’ve been developing customized policies and procedures tailored to their specific marketing strategies and operational capabilities,” Cary Kvitka, partner at RIA Lawyers told Advisors Magazine in an email. RIA Lawyers was founded earlier this year by Kvitka and partners Max Schatzow and Ryan Walter.

RIA Lawyers“Ryan, Max, and I have been engaging with the SEC examiners about advertising for years, so we’ve developed a sense of intuition on the issue,” Kvitka added. “It also helps to work with attorneys who have carefully studied the adopting release, and who can all lean on each other when it comes making difficult judgment calls as we venture into uncharted territory.”

“Few compliance officers have time to work their way through the 430-page final release of the rule,” wrote Courtney Raymond, director of RIA Services at AdvisorLaw, a Colorado-based firm that does not provide legal services, but does have the expertise to guide financial professionals.

“And while the rule only affects SEC-registered advisers for now, states will likely begin to adopt their own advertising rules that mirror the new SEC rule over the next few years,” Raymond added in a website post. “To complicate things further, the SEC will likely continue to provide guidance and opinions, clarifying and interpreting aspects of the rule.”

Some rule changes are helpful

No matter the industry, those subject to oft-changing rules and regulations tend to automatically look upon complying with them as onerous. Experts who are willing to dig a little deeper, however, can often help discover some advantages.

Shaver’s take on the Marketing Rule, for instance, is largely positive and she recognizes its benefits to RIAs.

“The Marketing Rule—and it doesn’t happen very often—is a regulation that actually benefits the advisor and their firms,” she said.

Shaver explained that her firm finds its clients fall into two categories: those who are afraid of marketing, and those who embrace it. For those hesitant about marketing, the Marketing Rule is likely to have no impact because they weren’t doing anything to begin with and they will probably continue to do nothing. “And then there's a second bucket of clients that are super-excited and they're gearing up for as much marketing as they can do for their firm.”

For My RIA Lawyer’s compliance clients, Shaver says her firm started working on the Marketing Rule when it went into effect last May. But her practice provides a range of other services from SEC registration and ongoing compliance, to servicing outsourced C-Suite roles such as CFO, COO and Chief Compliance Officer and General Counsel. The firm also takes on regulatory defense enforcement, and arbitration matters.

She added: “Now that the SEC's kind of come into the 21st century, it will allow the marketing-savvy firms to use testimonials and endorsements and has even gives them the ability to compensate clients for referring their friends and family.”

VedderPrice, a Chicago-based law firm with offices in six other major U.S. cities and Singapore, wrote that permitting the use of testimonials and endorsements was “perhaps the most stunning reversal of the prior advertising regime.” Advisors, however, must comply with certain disclosure, oversight and disqualification provisions.

“We can only imagine the number of possible celebrity endorsements in the future,” VedderPrice quipped in an article posted on its website’s Vedder Thinking section.

Arnold & Porter, a huge law firm with offices in the U.S., Europe and Asia and nearly 1,000 lawyers globally, also published on its website a recent article related to the Marketing Rule. “Before providing any benefit to a person that provides or will be providing a testimonial or endorsement,” Arnold & Porter urged, “consider whether that benefit may constitute compensation for the testimonial or endorsement, whether compensation may be provided to that person and whether a written agreement is required with respect to the benefit so provided.”

As far compensating clients for referrals, Shaver explained what’s different and how it can help RIAs. Under the old rule, anyone compensated for referring a client to a firm was deemed to be a solicitor, and there was no dollar amount attached.

“Compensating someone, theoretically, even a dollar would have implicated them as a solicitor,” Shaver said, which could mean more red tape. She noted that in many states solicitors need to get registered and licensed, or treated as an investment advisor representative engaged in solicitation activities.

“What the recent rule change has done is create a de minimis, whereby in a 12-month period, you can compensate someone up to a thousand dollars for referring clients to your firm,” she said.

In short, if a longtime client refers a friend, the financial advisor now has the opportunity to compensate or provide something of value (a gift card, for example) in exchange for that referral – without making that person a solicitor, according to Shaver.

VedderPrice also pointed out that the new rule allows the use of third-party ratings in an advertisement, subject to certain disclosure and other criteria related to the preparation of the rating.

The new Marketing Rule defines the term third-party rating as “a rating or ranking of an investment adviser provided by a person who is not a related person… and such person provides such ratings or rankings in the ordinary course of its business.” This would ostensibly apply to the ratings and rankings often seen in the industry from media and others, which list the ‘top’ or ‘best’ advisors.

In terms of overall preparation, Arnold & Porter said advisors must update any investor communications that would be considered advertisements. These would include offering materials such as private placement memoranda (to the extent they include marketing information), pitchbooks and other marketing materials. “And be prepared to substantiate any statements of material fact included in such materials,” they emphasized.

Marketing and advertising, while foremost in the minds of most financial advisors, is joined by several other compliance concerns. Shaver said some of these are related to the Boomer generation and the number of people nearing or already in retirement.

“Qualified rollovers, documenting rollovers—these can be a big headache and burden for advisors right now,” Shaver said.

“Regulators, in particular, are showing much interest in private funds and private fund managers, and they're seeking to bring more transparency to that part of the industry,” she added. “So, you’re seeing more reporting requirements around capitalization and greater scrutiny of any adverse financial issues with a fund.”

In general, Shavers sees a well-intentioned push for more transparency under the Biden administration. “And while that is coming from a good place, it creates a lot of administrative compliance and regulatory headaches for advisors and their firms.”

Such headaches, however, need not turn into debilitating migraines. And standing by to help investment advisors are a sizable number of legal and compliance specialists.


Follow Us

Subscribe to Our Newsletter

What's Next, Updates & Editorial Picks In Your Inbox

Related Articles

© 2017-2021 Advisors Magazine. All Rights Reserved.Design & Development by The Web Empire