Focus Perspective: Speech by SEC Commissioner, Risk Alert & more

Speech by SEC Commissioner Hester M. Peirce

On October 30, 2018 Commissioner Peirce addressed the National Membership Conference of the National Society of Compliance Professionals. Several comments she made struck us as quotable:

“…the majority of you are trying to do the right thing. It does not take an enforcement action or the fear of one to convince you to care about investors. You strive to improve the industry by working with your firms to build cultures of compliance. You are motivated by a desire to protect your firm’s customers, its brand, and thus your own reputation. We assist you in cultivating healthy habits not by targeting you when something goes awry, but by assisting you in understanding how the rules apply to the unique features of your firm and the products and services it offers.”

“[I]n 2017, the number of investment advisers that registered for the first time with the SEC increased by 20 percent from the year before. Today, OCIE has the daunting task of overseeing more than 13,000 investment advisers with nearly $84 trillion in assets under management. By 2019, there may be only one examiner for every 20 investment advisers.”

Then, items that we particularly liked, because they go so well together:

“Too often, firms drag their feet or provide patently inaccurate or obviously incomplete information. I understand that document requests can be large and time frames for their production can be short. It is therefore important for us to work with you to help you get us what we need in a way that does not unnecessarily tax your firm. Please raise concerns about the document requests with the staff so that they can work through those concerns with you.”

“When a firm needs to cobble the records together after the fact to satisfy our requests, the firm is likely not holding up its end of the compliance bargain. If you don’t have your records in order, we start to wonder how you are even able daily to do your job. The firm cannot conduct its own internal reporting and monitoring without complete records. How can you prepare an exception report if you do not know what is exceptional?”

Read Full Speech

OCIE Risk Alert – Cash Solicitation Rule

Key Takeaway: Advisers should review their practices and policies to ensure compliance with the Cash Solicitation Rule

“In general, investment advisers required to be registered under the Advisers Act (“advisers”) are prohibited from paying a cash fee, directly or indirectly, to any person who solicits clients for the adviser (a “solicitor”) unless the arrangement complies with a number of conditions. Among other things, the cash fee must be paid pursuant to a written agreement to which the adviser is a party (the “solicitation agreement”). The solicitor may not be a person subject to certain disqualifications specified in the Cash Solicitation Rule.”

When an adviser uses a third-party solicitor:

(1) the solicitation agreement must contain certain specified provisions (e.g., a description of the solicitation activities and compensation to be received);

(2) the solicitation agreement must require that, at the time of any solicitation activities, the solicitor provide the prospective client with a copy of (a) the adviser’s brochure pursuant to Advisers Act Rule 204-3 (“adviser brochure”) and (b) a separate, written disclosure document containing required information that highlights the solicitor’s financial interest in the client’s choice of an adviser (the “solicitor disclosure document”);

(3) the adviser must receive from the client, before or at the time of entering into any written or oral agreement with the client, a signed and dated acknowledgment that the client received the adviser brochure and the solicitor disclosure document (“client acknowledgement”); and

(4) the adviser must make a bona fide effort to ascertain whether the solicitor has complied with the solicitation agreement and must have a reasonable basis for believing that the solicitor has so complied.

Most frequent deficiencies:

  • Solicitor Disclosure Documents that did not contain all of the required information:
    • Disclose the nature of the relationship, including any affiliation, between the solicitor and the adviser.
    • Contain the terms of the compensation arrangement between the adviser and the solicitor.
    • Specify the actual compensation terms agreed to in the solicitation agreement and instead used vague or hypothetical terms to describe the solicitor’s compensation.
    • Specify the additional solicitation cost the solicited client will be charged in addition to the advisory fee.
  • Advisers did not timely receive a signed and dated client acknowledgement of receipt of the adviser brochure and the solicitor disclosure document.
  • Solicitation agreements that did not contain specific provisions:
    • Contain an undertaking by the solicitor to perform its duties under the solicitation agreement in a manner consistent with the instructions of the adviser.
    • Describe the solicitor’s activities and the compensation to be paid.
    • Oblige solicitors to provide clients (including prospective clients) with a current copy of the adviser brochure and the solicitor disclosure document.

Advisers did not make a bona fide effort to ascertain whether third-party solicitors complied with solicitation agreements and appeared to not have a reasonable basis for believing that the third-party solicitors so complied.

Read Full Risk Alert

Form CRS Relationship Summary

In November, the SEC released the results of a survey conducted by the RAND Corporation “…designed to collect information on the opinions, preferences, attitudes, and levels of self-assessed comprehension of the U.S. adult population with regard to a sample Relationship Summary. The survey was not designed to objectively assess comprehension of the document.”

RAND’s analysis of the survey responses indicated that respondents were generally positive about the format and content of the Relationship Summary.

Nearly 90 percent of respondents opined that the Relationship Summary would help them make more-informed decisions about investment accounts and services.

More than 75 percent of respondents considered the Relationship Summary as helpful in understanding key terms and conflicts of interest and as serving as the basis for a conversation with an investment professional.

Approximately 85 percent of respondents found the side-by-side comparisons to be helpful for the purposes of deciding between a BD and an IA.

Almost all of the respondents who reported that they would be likely to read any documents when choosing a financial professional or account type reported that they would read the Relationship Summary, alone or in addition to other documents.

A majority of respondents reported that the Relationship Summary was too long. In the section-by-section questioning, however, the most common response was to keep the section length as is.

With respect to the different topics covered in the Relationship Summary, information on fees and costs tends to be perceived as potentially the most helpful. The current “Fees and Costs” section is the most likely to be selected as one of the two most informative sections, yet it is also the section most likely found as the most difficult to understand in its current form and to be recommended to have more detail added.

Among current and potential key questions to ask, questions concerning fees and costs tended to generate the most interest.

Overall, respondents were split 60-40 in favor of using a question-and-answer format throughout the Relationship Summary.

Read Full Summary

Our Perspective

We really liked Commissioner Peirce’s Speech, as you can probably tell by the sections that we quoted above. The last two quotes regard issues that have been around since the 1980s. Seriously, how can you prepare an exception report if you do not know what is exceptional?

The Cash Solicitation Rule, again. This is not a new topic, and it is embarrassing to the industry that this is worthy of another Risk Alert. If you can’t figure it out, don’t do it.

The RAND study (122 pages) provides detail on comments of the respondents on each section of the Form, which was more information than we needed, but in our opinion, generally bears out what we have seen in the comments provided by investors and their representatives in comments received by the SEC. We also believe that in this case, comments from investors, in the RAND study and those received by the SEC will encourage the SEC to proceed with more disclosure rather than less.


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