Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.

SEC’s Division of Examinations Publishes a Risk Alert Regarding the Shortening of the Securities Transaction Settlement Cycle

• On March 27, 2024, the Securities and Exchange Commission’s (SEC) Division of Examinations (Division) published a Risk Alert regarding new and amended rules under the Securities Exchange Act of 1934, as amended, and the Investment Advisers Act of 1940, as amended (Advisers Act) that will shorten the settlement cycle of most broker-dealer transactions in US securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). The Risk Alert, among other things, provides information to registrants about the scope and content of future Division examinations and outreach regarding the shortened settlement cycle.
• The Division notes that it will continue to conduct examinations and engage in outreach with registrants to assess their preparedness for the shortened settlement cycle and will review firms’ changes to their systems, controls, policies, and processes. The Division further notes that it will review disclosures, representations and communications that firms make to customers, clients and/or vendors. The Risk Alert includes an Appendix that details the type of information and documents that the Division may request and review during the course of its examination and outreach.
• The rule changes that will shorten the settlement cycle to T+1 go into effect on May 28, 2024.

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SEC Adopts Amendments to Rule Related to Investment Advisers Operating Exclusively Through the Internet

• On March 27, the SEC adopted amendments to Rule 203A-2(e) under the Advisers Act to narrow an exemption such rule provides to certain so-called internet investment advisers that allows them to register with the SEC. By way of background, investment advisers are generally prohibited from registering with the SEC unless they reach a regulatory assets under management (RAUM) threshold or otherwise qualify for an exemption from such general prohibition. The internet adviser exemption located at Rule 203A-2(e), adopted in 2002, allows an adviser that conducts its business exclusively through the internet (and does not otherwise meet the RAUM threshold) to register with the SEC, rather than applicable state securities regulators, if it meets certain conditions.
• The amendments to the exemption will: (1) require an investment adviser relying on the exemption to at all times have an operational interactive website through which the adviser provides investment advisory services on an ongoing basis to more than one client, and (2) eliminate the current rule’s de minimis exemption for non-internet clients, thus requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website.
• An adviser that is currently relying on the exemption, but is no longer eligible under the amended rule, must register in one or more states and withdraw its registration with the SEC by June 29, 2025.

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FinCEN Issues an Administrative Ruling Impacting Broker-Dealers’ Customer Identification and Customer Due Diligence Programs

• On March 15, the Financial Crimes Enforcement Network (FinCEN) issued an administrative ruling (Ruling) regarding the applicability of Customer Identification Program (CIP) and Customer Due Diligence (CDD) rules for legal entity customers who serve as designated beneficiaries of Individual Retirement Accounts (IRAs).
• The Ruling notes, to the extent that a broker-dealer requires the opening of an account to distribute IRA funds to a legal entity beneficiary, a broker-dealer is required to collect information about the legal entity customer under CIP and CDD rules, including obtaining, at a minimum, the name, address and employer identification number, prior to opening an account.
• In addition, the Ruling notes that BSA regulations also require that broker-dealers must establish and maintain written CDD procedures to identify and verify the beneficial owners of legal entity customers, including the collection of the above elements for beneficial owners at the time a new account is opened.

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