What: The Division of Examinations issued a Risk Alert with preliminary observations about Marketing Rule items contained in Form ADV as well as related discussions concerning the Compliance Rule (206(4)-7), the Books and Records Rule (204-2), and the Marketing Rule’s General Prohibitions.

Who: SEC-Registered Investment Advisers (The Marketing Rule applies to investment advisers registered or required to be registered with the SEC under Section 203 of the Advisers Act.)

When: Risk Alert issued April 17, 2024.

Why: Marketing practice assessments were designated as a particular focus area in the Division of Examination’s FY 2024 examination priorities.

How: The Risk Alert provides examples of gaps in marketing policies and procedures and in the preservation and maintenance requirements under the Marketing Rule. In addition, with respect to the Marketing Rule’s General Prohibitions, the Risk Alert provides observations of deficiencies related to the following: (1) untrue statements of material fact and unsubstantiated statements of material fact; (2) omission of material facts or misleading inference, (3) fair and balanced treatment of material risks or limitations, (4) references to specific investment advice that were not presented in a fair and balanced manner, and (5) inclusion or exclusion of performance results or time period in matters that were not fair and balanced.

Why it matters: As a 2024 priority, investment advisers should expect Marketing Rule compliance to continue to be under the microscope in examinations this year. It is imperative that firms have appropriately tailored compliance procedures designed to prevent violations of the Marketing Rule and, just as importantly, that the procedures are fully implemented – including the maintenance of required books and records. Investment advisers are encouraged to review the focus areas laid out in the examination priorities letter and the initial examination observations included in the new Risk Alert relative to their specific programs and marketing practices.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: SEC Marketing Rule Risk Alert appeared first on Compliance Risk Concepts.

Last week the SEC announced that it had settled charges against five more registered investment advisers for Marketing Rule violations, resulting in $200,000 in combined penalties (with one firm making up half the total on its own). This latest round of cases resulted from an ongoing targeted sweep concerning the Marketing Rule, and it follows another group of cases from September 2023 against nine other advisory firms.

In the present actions, the SEC’s orders found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, as required by the Marketing Rule. Four of the five firms received reduced penalties because of the corrective steps they undertook in advance of being contacted by the SEC staff.

According to the SEC’s order, the fifth firm also violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements. In addition, the SEC also found that the firm committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the SEC.

Compliance Risk Concepts believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of actions by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam.

For more information, please contact:

Mitch Avnet | p. (646) 346-2468 | mavnet@compliance-risk.com

The post SEC Charges Five More Investment Advisers for Marketing Rule Violations appeared first on Compliance Risk Concepts.

What: The SEC announced that it settled charges against two investment advisers for making false and misleading statements about their purported use of artificial intelligence (AI). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.

Who: Delphia (USA) Inc. and Global Predictions Inc.

When: March 18, 2024

Why: The SEC’s concerns stem from firms selling AI solutions that they cannot deliver on or where the use or benefits of AI are overstated as part of an investment advisory service. Gary Gensler notes “[w]e’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

How: In the case of Delphia, the SEC found that the firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process. The SEC determined that the statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed. Similarly, the SEC found that Global Predictions made false and misleading claims in 2023 on its website and on social media about its purported use of AI. The charges against both firms included violations of the SEC’s Marketing Rule.

Why it matters: At CRC, we have seen an influx of AI-driven investment advisory business. This uptick has been seen across both internet-based advisers and traditionally registered advisers incorporating AI and technology into their recommendation generation and delivery. While these settlements were IA-specific, the regulatory signaling is widely applicable. There is a continued focus on ethical marketing, and heightened scrutiny on the use of AI is going to leach into other areas of regulatory focus.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: SEC Charges Investment Advisers with Advisers Act Violations for AI Statements appeared first on Compliance Risk Concepts.

What: The proposed rule would require some investment advisers to apply certain anti-money-laundering and countering the financing of terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA).

Who: SEC-registered investment advisers and investment advisers that report to the SEC as exempt reporting advisers (ERAs) would be included in the definition of “financial institution” under the BSA.

When: Proposed rule announced on February 13, 2024 (Federal Register publish date expected February 15, 2024). The comment period for the proposed rule is open until April 15, 2024.

Why: A risk assessment conducted by the Department of the Treasury identified that criminal actors have used investment advisers as a point of entry to invest in U.S. securities, real estate, and other assets and found that the lack of comprehensive AML/CFT requirements across the investment adviser sector contributed to its vulnerability to illicit finance activity.

How: The proposed rule would require SEC-registered investment advisers and ERAs 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.

The proposed rule would also apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions, along with Section 311 special measures.

The proposed rule does not include a customer identification program (CIP) requirement or a requirement to collect beneficial ownership information (BOI) for legal entities. However, FinCEN plans to address these separately in future rulemaking. The proposed rule would also not require the covered investment advisers to apply AML/CFT and SAR reporting requirements to mutual funds they advise.

Why it matters: Although some investment advisers have adopted voluntary AML/CFT measures, this proposal represents a significant set of potential new mandatory obligations for covered investment advisers. With plans for subsequent rulemaking regarding CIP and BOI requirements, this proposal appears to be simply an opening salvo in what is an extended regulatory push for more consistency between broker-dealers and investment advisers as access points to the US financial system.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: FinCEN Notice of Proposed Rulemaking for Registered Investment Advisers and Exempt Reporting Advisers appeared first on Compliance Risk Concepts.

The Differences Between Broker-Dealers and Investment Advisers Over the past few years, we have discovered that many of our clients and prospects have taken a genuine interest and are often seeking information, trying to ascertain the benefits / issues that exist within the Broker-Dealer and Investment Adviser models. This includes, but is not limited to, regulatory requirements, commission / fee structures, infrastructure requirements, operational issues, fiduciary versus suitability standards, etc. Whether you operate within a Broker-Dealer or Investment Adviser – the basic operating premise must be the needs of the customer outweigh the needs of the firm / investment professional. Having said that, both models offer viable solutions and approaches to customers. However, as we all know – you can’t be all things to all people. There are certain activities an organization can only undertake within a broker-dealer entity (i.e., IPO’s, Secondary Offerings, M&A Advisory, Private Placements, etc.). Conversely, in order to receive a fee for providing advice to customers, an organization must be registered as an Investment Adviser. We hope you find this side-by-side analysis helpful and educational. As always, feel free to reach out with any questions, comments, etc. Happy Reading! Fill out the form below to download your complimentary Compliance Bulletin titled:

A TALE OF TWO VERTICALS: The Differences Between Broker-Dealers and Investment Advisers

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INVESTMENT ADVISER BULLETIN

With the recent SEC enforcement actions taking place, greater emphasis is being put on compliance rules. Valerie Pierrat examines the regulatory landscape and identifies three compliance mandates for advisers to recognize within four recent SEC enforcement actions including: best execution practices and disclosures, valuation of securities, and oversight of sub-advisers.

Fill out the form below to download your complimentary Investment Adviser Compliance Bulletin.

The Compliance Bulletin Service

The monthly Compliance Bulletin Service provides the information your organization needs- at the speed it can handle it. Let the trusted Compliance professionals at CRC do the hunting, gathering and data-mining for you.

Thank you again for your interest in Compliance Risk Concepts.  We strive to continually evidence our overall credibility as a “go to” resource – and create long term value for our clients.

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