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Compliance is a unique and somewhat paradoxical professional responsibility – one that must simultaneously co-exist in a silo of independence and as a fly on the wall of each department within investment advisory and broker-dealer firms. While some employees may believe that compliance personnel are constantly after them with an onslaught of regulatory requirements, acknowledgement forms, and mandatory training, it may be surprising that compliance personnel generally do not seem to view their own roles as supervisory in nature.

The anniversary filing of the revamped Form ADV Part 1A, which included material changes to the Part 2A brochure, is thankfully behind us. The “Annual Updating Amendment” was filed by April 1st this year (2013), for the majority of registered SEC1 advisers, Exempt Reporting Advisers, and new private fund advisers. The industry wrestled with the initial interpretation of Form ADV fi ling back in 2011 — and then wrestled with interpretations for the anniversary of the compliance filing date, following the SEC’s revamping of ADV disclosures to include private funds. And now, a year later, what have we all learned from those early days, from the SEC’s very helpful Q&A’s, and from each other?

There still remain some complicated questions – questions the SEC didn’t envision when drafting the revised Form ADV, just as the SEC Rules adopted in 19402 didn’t contemplate private equity firms, exempt reporting advisers, or relying advisers. How the world has changed.

Utilizing Change Management to Evidence Monitoring

As the SEC arrives to the technology party in a very public manner, investment advisers and broker dealers, who have already been operating in a needs-driven and best practice environment, must now open their programs for scrutiny. Current SEC and FINRA exams are already extending the interview and examination process into the technology arena, starting with the Chief Compliance Officer’s methods for touching base with and monitoring tech processes with regulatory ramifications. There are very few tech processes without direct ramifications for the compliance function. Consider Rule 204-2 and the maintenance and archiving of firm records on systems, file servers, and in the cloud; Regulation S-P and the protection of client information through secure networks, VPN’s, and the utilization of encryption; FINRA Notice to Members 11-39 (August 2011) in conjunction with Rule 17a-4 regarding the retention of business communications extending to personal devices like phones and tablets. The list goes on indefinitely as all of our business models have become intertwined with enabling technology. The registered adviser’s fiduciary responsibility to clients has been inextricably snared in the ability to manage, maintain, and deliver services through systems, networks, outsourced applications, and third parties.

Perhaps equally important to the potential for regulators connecting your compliance monitoring duties to technology, investors, both private and institutional, expect evidence of your firm’s ability to secure data and provide continuous services. The final critical consideration in vetting your technology program in general is the growing threat of breach and corresponding business risk. I have heard the words many times “our perimeter is secure.” Industry surveys, daily reports in the media, and our own experience teaches that this is a special form of hubris.1 Are you, the Chief Compliance Officer, working to validate such statements?

The New Security Risk

When it comes to mobile devices, investment advisers used to have two choices – either they could provide new employees with a company-issued cell phone or they could adopt a flexible policy permitting the employee to bring in his or her own device. When cell phones were primarily devices used to make and receive telephone calls, the distinction had little regulatory implications. However, the consumerization of information technology has led to powerful mobile computing devices now in the hands of many employees. But left unchecked, the Bring Your Own Device, or “BYOD,” phenomenon has left many advisers with a plethora of mobile platforms and devices accessing their corporate network with varying and often inconsistent levels of security.

New product offerings continue to proliferate as Wall Street strives to meet consumer demand. What is driving this process? Among other factors, today’s low interest rate environment has all investors chasing yields into potentially unknown territory, perhaps without fully understanding all of the risks involved. Increasingly, institutional investors, who are generally sophisticated investors experienced at evaluating risks, are seeking higher yielding investments by allocating more dollars to alternative investments such as hedge or private equity funds. Meanwhile, retail investors, who may not be experienced at evaluating these risks, continue to be deeply concerned about accumulating sufficient assets to generate retirement income, thereby nudging them to take on more risk to generate higher returns and, many would argue, without understanding the risk vs. reward trade-off. An investment adviser or registered representative also must have the relevant experience to evaluate such risks.

Social media took center stage again when the Division of Investment Management of the Securities and Exchange Commission (“SEC”) released long awaited guidance on the applicability of the testimonial rule under the Advisers Act to the growing use of social media by investment advisers. But is it the Liberty Bell of social media freedom ringing in a new era of marketing, or is it the death knell of current investment advisory practices?

While the March 2014 Guidance Update expands on the social media risk alert issued by the SEC in January 2012, the latest guidance appears to have missed its mark. Rather than substantive guidance pertaining to the application of the testimonial prohibition, the guidance instead announced the permissibility of electronic social activity that, to date, has largely gone unused or perhaps even desired by investment advisers, such as republishing Angie’s List or Yelp reviews of their firms. As such, the Guidance Update remains noticeably silent as to the clarifications on which many advisers sought guidance – namely, issues like “How can my firm and employees leverage Facebook for business purposes?” and “What marketing can my firm do on LinkedIn or Twitter without running afoul of the prohibition under the Advisers Act on testimonials?”