Even When SEC Rulemaking Slows, Your Compliance Manual Shouldn’t Stagnate

Even When SEC Rulemaking Slows, Your Compliance Manual Shouldn’t Stagnate

Maintaining tailored policies and procedures is a critical component of an adviser’s internal controls. Time and time again, we’ve heard regulators admonish the industry that off-the-shelf compliance manuals just don’t cut it.

In today’s ever-shifting regulatory environment, does your compliance manual need a reboot? Although there has not been any significant rule making over the past year, the SEC has been busy providing guidance on a wide range of compliance topics as reflected in their risk alerts, enforcement actions, and speeches. In the absence of new rules, you might believe that your policies and procedures don’t need much in the way of updating. However, the panel covering this topic at the Ascendant Compliance Solutions Strategies Spring 2019 Conference in Miami cautioned attendees about the danger of of being lulled into a false sense of security in this regard, as the SEC has been shifting its attention to some relatively new areas of compliance that should be addressed in your policies and procedures.

This panel – consisting of Investment Adviser Association Associate General Counsel Sanjay Lamba, Greensfelder, Hemker & Gale, P.C. Officer Andrew Hartnett, and CSS Director of Retail Wealth Manager Services Korrine Kohm – engaged in a lively, hands-on and informative discussion of a wide variety of timely compliance topics, as summarized here.

Senior and Retail Clients

With the SEC and state regulators sharpening their focus on protecting retail clients, advisers need to re-evaluate their policies periodically to determine their effectiveness in the ever-changing regulatory landscape.

The panel pointed out that SEC continues to prioritize its commitment to protect retail investors, including seniors and those saving for retirement. The panel noted that the SEC is especially looking closely at products and services offered to retail investors, as well as the disclosures they receive about those investments.

To a large extent, the SEC’s focus on senior investors was summed up in remarks made by SEC Chairman Jay Clayton in June 2018 in his Opening Remarks to the Elder Justice Coordinating Council:

“At the SEC, we are very concerned about financial exploitation of our seniors. Every day, bad actors target the elder community, and we – all of us at the SEC – despise this behavior. Americans work hard and save their entire lives with the hope of living better as a result of their retirement savings. We need to do all we can to protect them while ensuring they have quality investment opportunities.”

Share Class Selection Disclosure Self-Reporting Initiative

In the share class arena, the panel discussed recent SEC examinations where the SEC asked what the adviser’s rationale was to support transactions in sampled mutual fund transactions. The panel also touched on the need for adequate disclosure in Form ADV 2A of the receipt of 12b-1 funds/revenue sharing and discussed the SEC’s enforcement actions involving settled charges against 79 investment advisers who must return more than $125 million to clients, with a substantial majority of the funds going to retail investors. These actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers. The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The SEC’s action addressed advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

As discussed in the SEC’s press release, the “SEC found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.  According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.”

Privacy Issues

The panel also covered developments relating to privacy laws, including the SEC’s Regulation S-P, GDPR, and the California Consumer Privacy Act (CCPA).

GDPR is the EU’s data protection regulation that became effective on May 25, 2018, and grants consumers the right to see (and delete) data that you maintain and contains breach notification requirements.

Under the new California law, residents of California will be able to:

  • Know what personal information is being collected about them
  • Access that information
  • Know if their personal information is disclosed, and with whom
  • Know if their personal information is sold and the right to opt out of the sale
  • Receive equal service and price whether or not they exercise their privacy rights

In response to these privacy laws, the panel advised attendees to review policies and procedures and create an inventory of your consumer data – what do you keep, where is it kept, and how do you use it.


The panel also covered advertising practices and reminded attendees that advertising deficiencies are among the most common SEC examination findings, including:

  • Misleading performance
  • Cherry picking investment selections
  • Misleading use of third-party rankings

To address compliance concerns, reviewing your policies and procedures with an eye towards addressing the SEC’s no-action letter guidance is critical to help ensure that your marketing materials adhere to SEC guidance and capture all of the required disclosures.

Final Takeaway

Monitoring regulatory developments as they relate to your firm’s business model is critical. Keep close tabs on SEC risk alerts, examination priorities and enforcement actions to identify issues that need to be addressed or updated in your compliance manual.