INVESTMENT MANAGEMENT FIRMS’ COMPLIANCE CONSIDERATIONS FOR 2017
INTRODUCTION
As a reminder to readers, under rule 206(4) of the Investment Advisers Act 1940, investment advisers must have a Compliance Program (the ‘Program’) that includes:
(i) Written compliance policies and procedures
(ii) A Chief Compliance Officer, and
(iii) An annual review of the adequacy and implementation of the Compliance Program
A key point regularly meted out by the SEC is the importance of building and improving on the investment industry’s culture of compliance.
Part of that culture is the importance of number (iii) above – to review the adequacy and implementation of the Program – and the question of what to review depends on changes in the firm's business, its structure, its products, and its service providers.
As we prepare for the SEC’s examination priorities for 2017, it is worth reconsidering a few broad areas that are likely to remain important:
1. DISCLOSURE:
Protecting retail investors and retirement investors is likely to remain a priority for the SEC in 2017 and, as fiduciaries, investment managers have a fundamental obligation to act in the best interests of their clients.
Inadequate disclosure is a consistent deficiency that SEC examiners find, and there is likely to be the same level of focus on conflicts of interest with regards to investment recommendations made to investors, marketing and sales literature, the adequacy of risk disclosure and suitability of investments.
Focus is likely to remain on compensation arrangements with solicitors, finders and other service providers, fees paid by clients to the firm or affiliates of the firm and the use of commissions to pay for products and services.
2. FINTECH:
The growth of financial technology may have been incorporated in some capacity. For example:
• Automated investing advice (robo-advisers) - these are registered investment advisers and must meet fiduciary and other regulatory requirements under the Advisers Act. They need to provide relevant disclosures to investors and questions will be asked as to how their compliance programs are structured.
• Securities based crowdfunding – this is an area where brokers and funding portals brokers must be active gatekeepers to protect investors
• Online market lending space – here it is important to consider the adequacy of information available to the investor such as information as to the loans and borrowers underlying the investments as well as the platform’s proprietary risk and lending models. As investors are drawn to higher yields, information about the borrower’s ability to pay underlying the investment in critical
3. ANTI-MONEY LAUNDERING:
Always a hot topic, the SEC is likely to continue to examine clearing and broker-dealers’ AML programs. Their focus will be on those firms who:
• have not filed the number of suspicious activity reports (“SARs”) that would be consistent with their business models or
• have filed incomplete or late SARs
The emphasis on broker-dealers’ AML programs has emphasized the adequacy of the independent testing obligation to ensure that these programs are robust and are targeted to each firm’s specific business model, and the extent to which firms consider and adapt, as appropriate, their programs to current money laundering and terrorist financing risks.
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SOME KEY STATISTICS:
• The number of SEC registered investment advisers grew in 2016 with a net increase of 3.3% in 2016 from 2015
• Most of these investment advisers are small businesses (56.8% of advisory firms reported that they employ 10 or fewer employees and 87.8% reported employing 50 or fewer individuals
• SEC Registered investment advisers serve more than 36.4 million clients which is an increase of 22.4% since 2015. This is primarily due to the rise of automated advice for retirement plan participants and gaining popularity of web and app based savings and investment models
