Welcome to the Regulatory Roundup. 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 Division of Enforcement Director Gurbir Grewal Discusses AI Risks and Liability

• In an April 15 speech at NYU School of Law’s Program on Corporate Compliance and Enforcement, SEC Division of Enforcement Director Gurbir Grewal discussed potential risks and liabilities arising from the use of artificial intelligence (AI) by investment advisers, broker-dealers and public companies. Director Grewal’s speech follows a speech by SEC Chair Gary Gensler in March, where he cautioned broker-dealers and investment advisers against exaggerating or misleading investors as to how they utilize AI.
• Director Grewal stated that investors’ interest in AI has created a financial incentive for broker-dealers and investment advisers to exaggerate or make misleading statements about their purported use of AI in analyzing or recommending investments or formulating investment strategies. He explained that firms should carefully review any representations they make about their use of AI and reflect on whether those representations accurately reflect their practices.
• To combat the purported risks caused by AI, Director Grewal suggests that firms: (i) educate themselves about emerging and heightened AI risk areas, (ii) engage with personnel in different business units to learn how AI intersects with their activities, and (iii) review and implement policies, procedures and controls.

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SEC’s Division of Examinations Issues a Risk Alert Concerning Marketing Rule Compliance

• On April 17, the Securities and Exchange Commission’s (SEC) Division of Examinations (Division) published a Risk Alert summarizing its initial observations regarding investment advisers’ compliance with the Marketing Rule. The Risk Alert primarily focused on the Marketing Rule’s “general prohibitions” while also addressing investment advisers’ obligation to adopt and implement policies and procedures, maintain and preserve books and records and accurately report information on Form ADV.
• With regard to the “general prohibitions,” SEC staff observed, among other things, advertisements that included untrue and/or unsubstantiated statements of material fact, such as statements that the adviser was “free of all conflicts” when conflicts existed or inaccurate descriptions of the services or products offered by the adviser. SEC staff further observed advertisements that omitted material facts or created a misleading inference, such as untrue or misleading performance claims or third-party ratings. Finally, SEC staff observed advertisements that included or excluded certain performance results or presented performance time periods in a manner that was not fair or balanced.
• Beyond the “general prohibitions,” SEC staff observed: (i) policies and procedures that consisted only of general descriptions and expectations of the Marketing Rule but were not tailored to address advisers’ specific advertisements, (ii) books and records deficiencies related to advisers’ failure to maintain copies of information posted on social media or documentation to support performance claims, and (iii) inaccurate reporting on Form ADV, Part 1A.

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FINRA’s Head of Enforcement Highlights Key Enforcement Objectives

• On April 17, FINRA’s Head of Enforcement, Bill St. Louis, published a blog post discussing FINRA’s key enforcement objectives. He highlighted a focus on: (i) protecting senior and vulnerable investors from fraud and misconduct, (ii) bringing cases that involve direct harm to customers, and (iii) combatting the efforts of bad actors who have a history of misconduct.
• He noted that FINRA Enforcement will continue to focus on Reg BI – highlighting past cases involving excessive trading, complex products and variable annuities while noting that there are “more [cases] in the pipeline.” Finally, he noted several ongoing targeted examinations (i.e., sweeps) and highlighted a recent settled enforcement action resulting from FINRA’s sweep concerning social media influencers and customer acquisition programs.

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FinCEN Reports on Elder Financial Exploitation Patterns and Trends

• On April 18, the US Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis focusing on patterns and trends identified in Bank Secrecy Act (BSA) data linked to Elder Financial Exploitation (EFE), or the illegal or improper use of an older adult’s funds, property or assets.
• FinCEN examined BSA reports filed between June 15, 2022 and June 15, 2023, which noted EFE as the “suspicious activity type” and identified 155,415 filings indicating roughly $27 billion in suspicious activity. FinCEN further noted that the reports fall into two categories: elder scams (which involve the transfer of money to a stranger) and elder theft (which involves a trusted person stealing an older adult’s assets).
• They noted that elder scams made up 80% of the BSA reports, with the most common scams including tech support scams, romance scams and impersonation scams. With regard to elder theft, they noted that adult children were the most frequent perpetrators.

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The Department of Labor Releases its Finalized Retirement Security Rule

• On April 23, the Department of Labor (DOL) released its latest attempt at a new regulation defining an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). Like DOL’s vacated 2016 regulation, the final rule expands the universe of financial professionals and institutions who will be fiduciaries under ERISA, in both marketing and delivering their services. At the same time, DOL finalized significant amendments to several prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.
• Full coverage of the DOL’s new fiduciary rule can be found here.

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