Compliance for Financial Advisors: A Regulatory Year in Review
Beth Haddock

By: Beth Haddock on December 3rd, 2019

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Compliance for Financial Advisors: A Regulatory Year in Review

Financial Advisors  |  Wealth Management  |  Investment Advisors  |  Compliance

This year the SEC provided a steady stream of guidance illustrating which compliance and governance programs worked and which ones fell short. To help you plan for 2020, we have distilled the highlights in this Regulatory Year in Review. As you study enforcement cases, rule proposals and risk alerts, you’ll see there are trends for RIAs to consider in the year ahead.

Enforcement Wrap-Up

Registered investment advisors remained a top enforcement priority for the SEC with cases focused on failures with cybersecurity, fair valuation of assets and appropriate client and investor charges and fees. 36% of the 862 SEC enforcement actions pertained to investment advisors and investment company issues. See: SEC Enforcement Annual Report 

Stand-alone enforcement actions pursued against investment advisers or investment companies totaled 191 which represents a nearly 77% annual increase compared to the 108 stand-alone enforcement actions filed in the 2018 fiscal year. 

See page 23 for notable enforcement cases including an action against BMO Harris Financial Advisors and BMO Asset Management for failing to inform clients about certain aspects of how they selected investments in their advisory program, which included the selection of more expensive investments from which BMO profited. 

For state advisors and brokers, there is a similar report from NASAA. See: NASAA Annual Enforcement Report 

If you are an advisor that is focused on retail clients or senior citizens, you should expect your business model to continue to be a priority for the regulators. Regardless, it’s a good idea to calendar a way to stay on top of enforcement cases in 2020, so you can review and confirm you haven’t made similar mistakes within your own compliance program.

New Rules and Proposals 

One of the most important changes for 2019 will continue as a focus in 2020: the dual SEC releases in June which announced a new Part 3 to the Form ADV (Form CRS) and a new standard for broker-dealers under Regulation Best Interest. One of the biggest takeaways for you is to start your annual review of the Form ADV early and add a conflicts of interest review matrix to your compliance program if you don’t already have one. See: SEC Press Release Reg BI & Form CRS

In November, the SEC also announced proposed changes to the rules related to investment adviser advertisements and compensation for solicitations to include non-cash compensation

The proposal covers many areas including permitting testimonials in certain circumstances, exempting unsolicited communications from the definition of advertisements and enhancing requirements and prohibitions related to use of gross and hypothetical performance. There is also a new requirement to disclose advertising practices on the Form ADV to facilitate SEC oversight. See: SEC Rule Proposal - Advertisements and Solicitors

If you are interested in the full list of proposals, the SEC publishes an index on their website.

Risk Alerts

Another key point from the SEC’s guidance this year is the importance of understanding and testing adherence with privacy, information security and cybersecurity including cloud storage as well as potential or actual conflicts of interest with clients.  

The SEC announced its top findings in an important mid-year risk alert for RIAs covering supervision, testing and oversight, disclosures and conflicts of interest. See: RIA Exam Findings Risk Alert 

For more information, below is a reading list of the 6 SEC Office of Compliance Inspections (OCIE) Alerts:

Nov. 7th

Top Compliance Topics Observed in Examinations of Investment Companies and Observations from Money Market Fund and Target Date Fund Initiatives

Sept. 4th

Investment Adviser Principal and Agency Cross Trading Compliance Issues

July 23rd

Observations from Examinations of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest

May 23rd

Risk Alert:  Safeguarding Customer Records and Information in Network Storage – Use of Third Party Security Features

April 16th

Risk Alert: Investment Adviser and Broker-Dealer Compliance Issues Related to Regulation S-P - Privacy Notices and Safeguard Policies 

Feb. 13th

Transfer Agent Safeguarding of Funds and Securities 


SEC (OCIE) Examination Guidance 

Finally, the SEC announced its examination priorities almost a year ago. We saw the results of those priorities in the enforcement cases and guidance issued throughout the year. You may want to review that report as we await the announcement of the 2020 priorities expected before year-end. See: SEC 2019 Exam Priorities 

By way of reminder, the SEC indicated a focused commitment to retail investors and that examinations would focus on 9 specific areas. Three of which are identified below:

  • Fees and Expenses: Disclosure of the Cost of investing: "For these examinations, OCIE will select firms with practices or business models that may create increased risks of inadequately disclosed fees, expenses, or other charges. With respect to mutual fund share classes, OCIE will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes. In addition, OCIE remains focused on investment advisers participating in wrap fee programs, which charge investors a single bundled fee for both advisory and brokerage services. Continued areas of interest include the adequacy of disclosures and brokerage practices." See: SEC OCIE 2019 Priorities Report (page 6)

  • Conflicts of Interest:  The SEC identified three areas vulnerable to conflicts of interest for investment advisors. Examinations will review policies and procedures addressing the following: advisers using affiliates services and products; securities backed by non-purpose loans and lines of credit; and loans from clients. See: SEC OCIE 2019 Priorities Report (pages 6 and 7)

  • Portfolio Management and Trading:  The SEC will also examine investment advisor portfolio recommendations to assess, among other things, whether investment or trading strategies of advisers are: (1) suitable for and in the best interests of investors based on their investment objectives and risk tolerance; (2) contrary to, or have drifted from, disclosures to investors; (3) venturing into new, risky investments or products without adequate risk disclosure; and (4) appropriately monitored for attendant risks. See: SEC OCIE 2019 Priorities Report (page 7)

We can expect to see a similar volume of developments in 2020, so you may want to calendar a quarterly review to ensure you are addressing compliance issues as needed.   


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About Beth Haddock

Beth Haddock is Managing Partner at Warburton Advisers, a compliance consultancy firm, and author of Triple Bottom-line Compliance – How to Deliver Protection, Productivity and Impact. AdvisorEngine is a client of Warburton Advisers.