OMG! SEC Gives Tips on IM and Texting, More Advisers Caught in 12b-1 Fee Scandal, and FINRA Releases 2018 Exam Results: Regulatory Update January 2019

Hardin Compliance Consulting LLC

For Investment Advisers: SEC Actions

SEC Risk Alert - Observations from Investment Adviser Examinations Relating to Electronic Messaging:  In 2017, the OCIE performed a sweep exam targeting the use of electronic communications by investment advisers.  OCIE focused on the newer alternative methods of electronic messaging (including instant messaging apps, personal email and texting), rather than email traffic.

As stated in the release, the use of mobile and personally-owned devices “pose challenges for advisers in meeting their obligations under the Books and Records Rule (Rule 204-2) and the Compliance Rule (Rule 206(4)-7). “  In the alert, OCIE recommends that advisers take these steps:

  1. Adopt policies and procedures that
    1. require employees to use messaging systems that are retained on the firm’s books and records,
    2. require employees to switch to an approved messaging system when they receive communication through an unapproved channel,
    3. address the monitoring, review, and retention of required records on electronic messaging systems, and
    4. reinforce that violations of a firm’s procedures may result in discipline or dismissal;
  2. Institute employee training and compliance attestations starting at the time of hire and regularly occurring throughout employment;
  3. Supervise electronic communications, including hiring vendors to monitor employees’ electronic messaging (such as a service that archives a firm’s and its employee’s  LinkedIn and Facebook pages) and regularly review employee social media and web activity; and
  4. Use device control mechanisms such as a pre-approval requirement to access the firm’s systems from a personal device, installation of security applications on personal devices to facilitate installing patches and remote “wiping” if a device is stolen or lost, and the use of technology (such as VPN) that blocks an employee’s remote access to the firm’s server.

Firms can leverage this framework to evaluate and respond to new messaging technologies.  Contributed by Cari Hopfensperger, Senior Compliance Consultant.

SEC Continues to Pound Advisers for Inadequate Disclosures on 12b-1 Fees and Revenue Sharing.  The SEC’s Enforcement Division is sending out document requests to dually-registered investment advisers and investment advisers with broker-dealer affiliates that did not self-report during the Share Class Disclosure Initiative.  (See our blog post for more details.) The SEC published two more settlements against investment advisers for selecting mutual fund share classes inconsistent with disclosures to clients.  See American Portfolio Advisers, Inc. and PPS Advisors, Inc., and PassarettiContributed by Jaqueline M. Hummel, Partner and Managing Director.

For Broker-Dealers:  FINRA Actions 

FINRA Releases Its Second Annual Report on Examination Findings:  The 2018 Report on FINRA Examination Findings (“Report”) is now available as a resource for firms looking to enhance their compliance programs in 2019.  The Report identifies common examination deficiencies and highlights policies and procedures that have helped firms comply with certain rules and regulations.  The Report focuses on suitability for retail customers, fixed income mark-up disclosure, due diligence for private placements, and abuse of authority.  We encourage you to read the Report along with FINRA’s Regulatory and Examination Priorities Letter for 2019 to identify and correct potential weaknesses in your existing compliance program before the regulators arrive.  These are great tools for identifying and managing compliance risk.  Contributed by Rochelle Truzzi, Senior Compliance Consultant.

Photo Credits: Photo by Rawpixel  on Unsplash

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Hardin Compliance Consulting LLC

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