AI-Powered Predictive Analytics in Investment Advice
The use of Artificial Intelligence (AI) in advising on investment strategies, i.e. (AI) Predictive Analysis is a regulatory hot topic. Investment advisers must ensure compliance with fiduciary duties and regulations and strive for best practices.
Key considerations include:
By proactively managing these risks, IAs can responsibly integrate AI-driven predictive analytics while staying compliant.
If you make use of AI-Powered Predictive Analysis in providing investment advice, it is important to put adequate policies and protocols in place to meet compliance requirements. For assistance, call 619.298.2880 or email [email protected].
Compliance FAQs: Understanding the Investment Adviser Marketing Rule
On March 19, 2025, the SEC released Marketing Compliance Frequently Asked Questions, addressing common concerns and clarifying best practices under the Marketing Rule. This update responds to ongoing compliance issues, including recent enforcement trends.
Key Takeaways:
• Extracted Performance: Advisers using performance data taken from a larger portfolio must ensure it’s not misleading. They must either include or offer the full portfolio’s performance to provide context and avoid cherry-picking only positive results.
• Portfolio Investment Characteristics: Since the Marketing Rule does not define “performance” explicitly, advisers have flexibility in presenting portfolio characteristics. However, to ensure compliance, they must:
1. Clearly label gross characteristics as excluding fees and expenses.
2. Include total portfolio gross and net performance per SEC rules.
3. Present total portfolio performance equally as prominently as gross characteristics for easy comparison.
4. Use a performance period that matches the characteristic’s time frame.
The SEC is increasing its focus on Marketing Rule compliance, making it crucial for advisers to understand how the rule and any updates impact their compliance programs.
Never-Before-Examined Advisers – Tips to Be Prepared
The SEC continues to focus on newly registered and never-before-examined advisers, emphasizing the need for a strong, proactive compliance program. To mitigate regulatory risks and enhance exam readiness, consider these key steps:
Proactive compliance measures can significantly reduce regulatory risks and demonstrate a firm’s commitment to upholding regulatory standards.
IAs & ERAs Must Implement AML/CFT Programs by Jan. 1, 2026
SEC registrants (RIAs) and other select advisers, including Exempt Reporting Advisers (ERAs) will soon be required to establish an Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) program under the Bank Secrecy Act (BSA). With a January 1, 2026, deadline, firms should act now to prepare.
Who is Affected?
RIAs and other select advisers will need to comply with FinCEN’s AML/CFT rules, aligning with broker-dealer requirements.
What to implement
Start risk assessments, policy development, and training initiatives now to avoid last-minute compliance issues.
What to Think About Before Transitioning a Brokerage Account to an Investment Advisory Accounts
Advisers must exercise caution when recommending broker-dealer clients to transition their accounts to an advisory account. As a fiduciary, an adviser must avoid conflicts of interest at all times; and seek to do what’s in the best interest of the client (considering their time horizon, investment needs, risk toleration, etc.). Moreover, SEC EXAMS is currently focusing on this issue. Before you consider transferring a BD Account to the IA side.
By being vigilant with these practices, you are mitigating risks and helping to ensure that you are acting in the clients’ best interests.
Advising on Complex, high-cost or illiquid Products
Investment advisers must uphold their fiduciary duty, especially when advising on complex, high-cost, or illiquid products. Adhering to the duty of loyalty, care, and best interest not only protects clients but also safeguards the adviser from compliance violations and reputational risk.
Key Actions:
By following these steps, advisers can demonstrate their commitment to prioritizing their client’s best interests in complex financial environments.
Regulatory Compliance Considerations During a Merger or Acquisition
Mergers and acquisitions can be a powerful growth strategy, but business owners must carefully navigate the regulatory compliance landscape during transitions. Business operations and compliance integration issues often pose challenges that are best addressed early on to avoid potential legal and regulatory issues later.
Key considerations include:
Compliance Considerations for Private Placement Investments
FINRA member firms have a duty to conduct a reasonable investigation of any security it recommends, which includes private placement offerings. Specifically, the member firm must evaluate the merits and risks of the investment with the suitability, and best interest considerations of its customers. For private placements, a broker-dealer must conduct a “reasonable investigation” concerning the security and the issuer’s representations about the offering. Should a “red flag” be found, additional due diligence is required. If the broker-dealer is unable to obtain important information, this fact may trigger additional disclosures from the broker-dealer to its customers about the risks that arise from this lack of information. This is required in light of the anti-fraud provisions to which broker-dealers are subject. These same steps serve as a good roadmap for investment advisers to follow as well when conducting due diligence on alternative investments. To substantiate your efforts, be sure to document the due diligence process undertaken, maintain meeting minutes of conversations undertaken with the issuer and other relevant parties, keep notes of findings, red flags, documents reviewed and the dates of such reviews, list the individuals involved in the review and summarize conclusions and recommendations.
2025 Regulatory Areas of Focus for Broker-Dealers
The SEC’s 2025 Examination Priorities, published on October 21, 2024, highlight key areas for broker-dealers. FINRA’s 2025 Annual Regulatory Oversight Report will be issued later this month. Broker-dealers are advised to use the SEC’s guidance to meet this year’s regulatory requirements, including:
– AI and Emerging Technologies: Expect scrutiny on automated tools, trading algorithms, and AI in trading, marketing, and other areas.
– Cybersecurity: The SEC will examine firms’ cybersecurity programs, focusing on third-party vendors and operational resiliency.
– Reg BI and Complex Products: Firms will continue facing scrutiny on Regulation Best Interest (Reg BI) compliance, especially with complex products and Form CRS obligations.
– T+1 Settlement Cycle: Firms must update practices to comply with the new shortened settlement cycle (T+1).
Broker-dealers should address these priorities proactively in their compliance and operations as the SEC intensifies its focus in 2025.
Essential Steps for Preparing Disclosures in Your Form ADV Filing
A vital part of properly filing your Form ADV or amendment is ensuring accurate and complete disclosures. Submitting the necessary disclosures for Parts 1 and 2 of Form ADV is essential to meeting compliance requirements. These disclosures must enable clients to make informed decisions about your service offerings.
Key steps to gathering the necessary disclosures:
Key Deadline: The deadline to submit Form ADV is March 31, 2025, for firms with a fiscal year ending December 31, 2024.
For assistance with your Form ADV, call us at 619.298.2880 or email [email protected].
Letter of Intent (“LOI”)
During a merger or acquisition, there are several key documents that lay out the foundation of the transaction. This includes the “Letter of Intent (“LOI”),” which is used to stipulate the deal terms and commits one party to another. It is therefore extremely important to address each item of the LOI carefully to ensure compliance as well as a smooth transaction.
An LOI should include:
If you are in the process of a business transaction such as an M&A, we recommend reviewing the items above to make sure you have addressed each carefully .
For assistance with a Letter of Intent (“LOI”) please contact us at 619.298.2880 or email [email protected].
Top Considerations for Compliance Professionals
Compliance professionals have long understood the importance of their role: to educate, guide and insist on adherence to the securities laws. The compliance function is essential and must constantly evolve to mitigate new risks within the business’ model. This begins with considering conflicts of interest and establishing strong disclosures to provide enough information for investors to have informed consent prior to engaging a financial services firm. This is supported by strong internal controls, including supervisory systems, policies and procedures, training, and forensic testing. As they say, trust but verify. For example, survey for and investigate undisclosed payments. Look at revenue-sharing arrangements, fund networking arrangements and other collected fees and ensure they have been disclosed to investors. Being proactive to detect, correct, and prevent is the hallmark to maintain compliance across your firm.
For assistance with meeting your compliance goals, please call us at 619.298.2880 or email [email protected].
Advisory Fees and Expenses Remain a Top Regulatory Priority for 2025
In 2025, regulators are increasing scrutiny on advisory fees and expenses, urging firms to align their fee structures with fiduciary duties. The SEC and state regulators are focused on how fees are calculated, disclosed, and presented. Recent enforcement actions highlight the importance of avoiding practices like low-return cash sweep programs that conflict with clients’ interests or double-charging clients.
Advisers must consider asset valuation, household definitions, and handling of additional expenses like reporting fees or 12b-1 fee offsets. They should also have documented exceptions for fee variations and ensure representatives are trained to explain fee aggregation and potential conflicts.
To reduce regulatory risk, firms must maintain transparent fee disclosures in client agreements and Form ADV filings, ensuring alignment between what’s disclosed to clients and what’s filed with regulators. Prioritizing transparency, fairness, and clear communication can help advisers fulfill fiduciary duties and minimize regulatory risks.
For assistance with crafting or revising advisory agreements, please call 619.298.2880 or email [email protected].
Strengthening Your Compliance Program for 2025: Key Insights from 2024
As 2024 comes to a close, RIAs should use the lessons learned to prepare for the new year including guidance provided by the SEC (through the EXAM Priorities, Risk Alerts and enforcement cases) which highlight hot topics and key regulatory risks that should be evaluated and addressed. Advisers should:
Taking these steps can help to prevent violations and greatly improve your firm’s overall risk management in 2025.
Key Considerations in Portfolio Management Compliance
Investment advisers must adhere to stringent due diligence practices in portfolio management, ensuring that recommendations are suitable, client assets are properly monitored, and portfolio management practices align with the advisers’ fiduciary duty.
Regulatory agencies remain vigilant to new and sophisticated threats. Therefore, it is in the best interest of investment managers to consider key aspects of portfolio management compliance:
Jacko Law Group works with portfolio managers to evaluate, identify, and address any gaps in their compliance programs. For assistance, please call us at 619.298.2880 or email [email protected].
Determining CCO Liability
Years ago, when I became a compliance officer (prior to the mandates prescribed under Rule 206(4)-7 of the Investment Advisers Act of 1940, as amended (“Advisers Act”), compliance officer liability was rare. Today, chief compliance officer (“CCO”) liability is at the forefront of every practitioner’s mind. What must I do, how must I do it, and if I cannot, how do I mitigate liability?
Over the past several years, the SEC has taken steps to define the framework of CCO liability. In November 2015, the Division of Enforcement Director Andrew Ceresney stated that the SEC will generally bring an action against a CCO when it fits into one of three categories:
Since then, various organizations (such as the NYC Bar Association and NSCP) have provided a framework for determining if wholesale compliance failures exist. A good first step is to consider the responses to the above questions to help determine if the CCO acted appropriately or if possible liability exists. It is always prudent to consult counsel to discuss specific facts and circumstances to evaluate this.
Steps to Protect Retail Clients and Vulnerable Customers
The SEC is continuing its focus on advancing protection of investors. Frequently, the SEC publishes Investor Alerts to advise clients of ways they can protect themselves. Two such articles include AI and Investment Fraud Alert (January 25, 2024),which identifies how bad actors are using AI to lure victims into scams, as well as Spotting and Reporting Investment Scams Targeting Older Investors (February 5, 2024), which informs investors on how to verify that they are speaking to an investment professional. When the SEC issues these Alerts, consider forwarding to your clients so that they can be educated on ways to protect themselves.
Other tips to further protect retail clients and vulnerable customers include:
Advancing such safeguards for these customers will help to fortify investor protection and help instill additional confidence with your clients.
For more information on developing internal controls for the protection of retail clients and vulnerable customers, contact Jacko Law Group at 619.298.2880 or at [email protected].
Effective Change Management
Change is inevitable but how a business reacts to change determines who will struggle and who will thrive. Having an effective Change Management policy and mindset that addresses transitions such as new regulations, customer needs, new hires, products and services, mergers and acquisitions and external forces like volatile markets or geopolitical shifts can serve as a powerful risk mitigation tool.
Here are some key steps to facilitate an effective change management approach:
If you would like assistance in adopting Change Management policies, or foresee internal changes that may affect your organization, please contact us at 619.298.2880 or email [email protected].
Tips for Meeting Your IARs Continuing Education (CE) Requirements Last Minute
Compliance requirement deadlines are fast approaching. Investment Adviser Representatives (IARs) must meet CE requirements by December 31st or face penalties. IARs in 19 states are required to satisfy 12 CE hours annually (Six in Ethics and Professional Responsibility, and six in Products and Practice). For those IARs who are yet to meet their CE quota, here are some tips on completing this requirement before the year’s end.
Visit NASAA for more information and contact us for assistance on this and other compliance requirements at 619.298.2880 or email [email protected].
Compliance Essentials for Investment Advisers Navigating Sub-Advisory Arrangements
Investment advisers (IAs) and their clients can benefit from sub-advisers, who often help to diversify portfolio offerings and specialized expertise. Prior to entering into an engagement with a sub-adviser, be sure to understand the following ongoing responsibilities:
• IAs with full discretion are responsible for vetting and the hiring and firing of the sub-adviser.
• IAs must conduct initial and ongoing due diligence and monitoring of the sub-adviser’s performance.
• IAs must disclose the sub-advisory relationship in its Form ADV and in advisory contracts with clients, including information related to the sub-advisory arrangement, conflicts of interest, fees, and other material details.
• IAs will need to ensure that the sub-adviser’s Form ADV is delivered to any client for which it provides investment management services.
When entering into a sub-advisory arrangement, carefully review the fee billing terms, determine if the custodian needs to approve the sub-adviser, and review provisions related to prompt notification by the sub-adviser of any cyber and privacy breaches.
Maintaining transparency with clients and ensuring that sub-advisory arrangements are thoroughly vetted and disclosed, are essential for regulatory compliance.
For more information, please contact us at 619.298.2880 or email [email protected].
The New AML Rule: Emerging Threats
The amended AML rule, which will go into effect in January 2026, contains several new and expanded requirements, one of which is a focus on emerging threats. The new rule stipulates that businesses must implement the necessary safeguards required to protect investors in relation to new technologies, digital currencies, new payment methods, and cyber threats.
The new rule applies to both Registered Investment Advisers and Exempt Registered Advisers. The rule, however, excludes mid-sized advisers, multi-state advisers, pension consultants, state RIAs, foreign advisers and family offices.
Here are several key requirements:
Should you require assistance with developing these new AML protocols, our attorneys stand ready to assist. Please call us at 619.298.2880 or email [email protected] to speak to one of our regulatory attorneys.
Compliance Requirements for State (verses SEC) Registered Investment Advisers
A common question that we receive is what regulatory compliance obligations differ between State verses SEC Registered Investment Advisers (“RIAs”)? Generally, there are several areas that differ based on regulatory requirements.
Firstly, state-registered investment advisers generally serve retail clients. Thus, state regulations tend to be geared towards disclosures to retail investors. This includes:
For SEC registrants, they are required to:
Solicitor / Promoter Registration Requirements
When the SEC passed amendments to Rule 206(4)-1 of the Investment Advisers Act (the “IA Marketing Rule”) to include new provisions about the use of promoters, questions arose as to whether that promoter would need to be licensed. The amended Rule, which replaced the former solicitor’s rule, defines a promoter as someone who provides a testimonial or endorsement for an investment adviser. To comply with the Rule, investment advisers are required to provide a disclosure statement to clients that describes the relationship with the client, compensation provided, and conflicts of interest; enter into a written agreement with the promoter; develop oversight of internal controls; and ensure the individual is not disqualified to act as a promoter.
Regarding the question of whether a promoter/solicitor should be licensed, it’s important to highlight that states, rather than the SEC, regulate the licensing requirements for solicitors.
Should your firm engage a solicitor, be sure to ask the solicitor where their solicitation activities will occur and where anticipated prospective clients reside so that you can prepare and research state registration requirements beforehand. Notably, the states did not amend their solicitor registration requirements as a result of the amended IA Marketing Rule, so be vigilant and informed before entering into any new promoter agreements.
IARD Renewals
As we come to the end of the year, it is important to keep track of upcoming renewal obligations and when they are due. It is vital to be aware of deadlines to prevent incurring penalties or other repercussions.
One renewal that is fast approaching is the deadline to pay IARD renewal fees. Investment Advisers (“IAs”) and their representatives are required to pay their IARD renewal fees to the Financial Industry Regulatory Agency (“FINRA”) to remain active. Failure to do so can result in penalties ranging from late fees to suspension or termination of the firm’s and representatives’ licenses to practice.
IAs and representatives can access their IARD “Preliminary Statement” via their account on IARD starting November 11, 2024. The statement will contain information on the firm’s annual IARD charges and state renewal fees. Please note that IARD renewal payments are due on December 9, 2024.
Those with sufficient funds in their IARD “Flex Funding Account” can opt to have those funds automatically transferred by the payment deadline.
For more information, please visit here.
SEC Compliance for Third-Party Vendors
The SEC holds firms accountable for their third-party vendors; therefore, it is the firm’s obligation to ensure that the vendors they work with meet and maintain regulatory requirements. This is especially important in areas such as cybersecurity, operations, and reporting practices.
Firms engaging with a third-party vendor, or already working with one, should:
How to Prepare for the New Regulation S-P Amendments
One of the biggest challenges for financial firms is to assess the impact that a new regulation may have on the business – and its customers. The Amendments to Reg S-P may not have a compliance date until the end of next year, but it is important to plan ahead, particularly given the operational challenges firms may face with implementation.
Amendments to Reg S-P are designed to address new technologies and corresponding risks. One of the largest threats to financial firms are security compromises where sensitive customer information was or is likely to be used or accessed without authorization. In this case, under the amendments, a “covered financial institution” will have 30-days to notify affected individuals. Thus, a communication template should be developed for ease of use in the event this occurs. Other requirements include:
FINRA Reminds Member Firms that Regulatory Rules Apply to Use of Generative AI
In June 2024, FINRA reminded firms that laws regulating the use of Technology and Tools used in the trade must be applied to Generative AI. No new regulations have been introduced and member firms who utilize Generative AI must adapt and apply existing laws to meet compliance requirements. Those regulations include:
How to Incorporate New Tests into Your Annual Review
Each year, the Division of Exams provides investment advisers with exam priorities, offering a useful guide to assess internal controls for fiduciary compliance and industry regulations. As you begin your review, consider whether your Annual Review covers the SEC’s 2024 exam priorities.
Use this list to identify areas of compliance to advance, keeping a checklist of areas that need to be addressed. Log your progress when implantation occurs and highlight to senior management the corrective measures taken or suggested.
Misclassification of Investment Can Bring About Enforcement Action
On August 28, NFT Marketplace, OpenSea received a Warning of Enforcement Action letter from the SEC for failing to register the NFTs on the platform as securities. NFTs (Non-Fungible Tokens) are digital certificates tied to a unique asset. The concept is relatively new and confusing. However, this enforcement action by the SEC makes it imperative for managers to understand the alternative currency or investments they manage and if they are at risk of enforcement action for misclassifying those investments. The first step is determining if the investment meets the four criteria of the Howey Test. If it does, the investment may need to be classified as securities.
Jacko Law Group helps clients with the classification of investments. For more information, please contact us at 619.298.2880 or email [email protected].
California’s non-compete ban v. the federal order against the FTC’s non-compete ban.
The recent barring of the FTC’s non-compete ban may cause some confusion for California employers operating under California’s umbrella ban of the non-compete clause. The FTC’s ban on non-compete clauses closely resembles California’s, with some differences, such as exceptions for senior executives and, in California’s case, for the sale of a business.
For firms operating within and outside California, the following can provide some guidelines on how to operate compliantly within the federal and state ban.
• Understand the fundamentals and differences of the California non-compete ban and the proposed FTC nationwide ban.
• Remain informed of developments to the status of the FTC’s non-compete ban.
• Review employment contracts and adjust accordingly for California employees and those outside California to meet both state and regulatory requirements.
• Retain experienced legal counsel to guide you through this process as it continues to develop.
Filing U5: Key Tips for Firms
Form U5 filings can have severe implications on the firm from which the transitioning RR or IAR is exiting. To avoid regulatory issues and possible dispute and litigation, it is important for firms to file form U5 with FINRA without malicious intent or bias. Here are some key items to remember to protect your business reputation and avoid litigation or regulatory scrutiny.
– File within 30 days of the RR/IAR’s exit.
– Accurately and clearly state the reasons for the exit.
– If the RR/IAR was terminated, provide clear and factual reasons for the termination.
– Undertake an internal review to ensure that all the information in the form is accurate.
– If termination is due to alleged misconduct, make sure supporting documentation is available.
– Approach Form U5 with fairness and transparency as the interests of the firm, and the exiting IA are at risk of regulatory investigation, and damage to reputation.
Regulatory Compliance Considerations for T+1 Settlement Cyc1e
Beginning May 28, 2024, the two-day (T-2) settlement cycle for transactions was reduced to one day (T+1) after a trade for most routine securities transactions. This impacts a significant number of financial industry participants, including broker-dealers, investment advisers and clearing agencies.
As this is one of the areas that the SEC will focus on during examinations, it is vital to implement this change to your operations ASAP. Here are some steps to take:
– Ensure all policies and procedures are updated to reflect this change.
– Document internal and external communications relating to this amendment and how it impacts your organization, including supervisory procedures.
– Make sure to carry out, and document employee training regarding the change.
– Update client disclosures, as necessary, in accordance with the amendment.
Are You in Compliance with the California Consumer Privacy Act (CCPA)?
Many businesses outside California may believe the CCPA does not apply to them, but it often does, especially for mid-size firms. The CCPA, effective January 1, 2020, enhances privacy rights and consumer protections for California residents. It applies to for-profit businesses that serve CA residents and either:
• Have gross annual revenue over $25 million
• Buy, sell, or share personal information of 100,000 or more CA residents
• Derive 50% or more of annual revenue from selling CA residents’ personal information
The CCPA requires businesses to inform CA consumers about collected personal data, its sale or disclosure, to limit the sale of personal data, and safeguard consumer rights, including protections against discrimination. In 2023, new protections were added, allowing consumers to correct inaccurate information and limit the use of sensitive data. Businesses must evaluate CCPA applicability and ensure proper disclosures via website links and other methods.
Important Tools Provided by the SEC for Registered Investment Advisers
If you have not been to https://hubs.ly/Q02J5LXz0 recently, you should visit. The website has a new improved user interface. In particular, for those in Compliance, I encourage you to become familiar with and bookmark the Resources Tab under “Compliance Outreach Program for Investment Adviser and Investment Company Chief Compliance Officers.” Here you will find valuable information related to examination focus areas, guidance about the requirements for compliance programs, information about frequent examination requests and analyses frequently performed, and even a risk assessment flow chart. For those Compliance Officers seeking guidance on what to consider for your Annual Review testing, the site contains examples of forensic tests to perform. Be sure to also click on the Helpful Resources tab to access key speeches from various SEC directors, which may offer additional guidance as you continue to enhance your compliance program.
Why Use the SEC’s Model Privacy Form
Recently, I was asked by an SEC-registered investment adviser to review the firm’s privacy policy. It consisted of a half-page narrative describing their privacy policy. When I asked whether the firm had considered using the SEC’s Model Privacy Form in lieu of their own, they asked, “What’s the benefit?”
Under the Gramm-Leach Bliley Act, the SEC provided a model privacy form which can be used by financial companies to describe how they use a consumer’s personal information. The form is a two-page document that is designed to help consumers more easily understand what personal information is collected, and if the consumer can limit the sharing of this information. While use of the form is voluntary, if an SEC registrant elects to use the form and completes it fully, there is a “safe harbor” for compliance with Regulation S-P disclosure requirements. Thus, whenever possible, we encourage firms to consider using the Model Privacy Form because of this safe harbor.
Risk Alert on RIA’s Policies and Procedures under the Marketing Rule
In April 2024, the SEC Division Staff issued a risk alert highlighting increased scrutiny on RIAs’ Policies and Procedures under the Marketing Rule. This heightened focus stems from findings indicating deficiencies in the design and implementation of internal policies to meet Rule 206(4)-1 compliance requirements. As a result, compliance with the Marketing Rule will be a primary focus area for upcoming EXAMS.
Take the following steps to bridge any compliance gaps in your firm’s policies and procedures:
Factors that May Lead to SEC Scrutiny
As we pass the year’s mid-mark, it is important to start thinking of factors related to your firm that may contribute to extra scrutiny and possible investigation from the SEC such as complaints related to the registrant, business practices and operations. In addition, it is important to determine if your business is deemed high risk. Here are some characteristics of advisers who may face possible scrutiny from the SEC during EXAMs.
Considerations for AI Washing and the Marketing Rule
RIAs are encouraged to pay close attention to the use of AI claims in their Marketing as the SEC will be scrutinizing marketing claims on the firm’s use of AI that may be false or misleading, i.e. AI Washing. If you use information regarding the benefits of AI implementation in your marketing, please consider taking the following steps:
Transitioning to a Non-Broker Protocol Firm
Advisors transitioning from their current employer to a new firm should check to see if the current employer and new firm are both members of Broker Protocol. If they are, the transition should be relatively simple, so long as the transitioning advisor follows the guidelines and only takes certain information (i.e. the client’s name, address, phone number, email and account number) and nothing else. If, however, a transitioning advisor is moving from or to a non-Broker Protocol member firm, it is crucial to carefully review your current Employment Contract before making the move. Pay attention to restrictive covenant language relating to non-solicit, confidentiality and trade secret provisions, and discuss with counsel sensitive issues, particularly if contract specifies that payment will be required for departing clients, or an outstanding loan if the transitioning advisor leaves the firm.
Purchase Agreements
One of the most important parts of a business sale is the Asset, Membership or Stock Purchase Agreement. This sales agreement – either for the company or the assets themselves – sets the terms for the transaction and must be approached carefully to avoid potential pitfalls or deal remorse. Here are items to pay close attention to when completing your purchase agreement:
Compliance Training for Managers
Throughout the year, Compliance typically conducts training or sends informational bulletins to firm personnel about new policies, procedures, and regulations that govern the firm’s business. But when was the last time that Compliance trained department managers? As personnel get promoted throughout the organization, oftentimes they are put in a supervisory position. The question is: do they know what to do and how to check for compliance infractions or circumventions?
Take time to sit with each manager and explain not only the “red flags” to look for but also how to document findings and reviews (even if there were no findings). In a regulatory exam, you will be asked to produce certain books and records demonstrating your reviews. Are your department managers ready?
Updating Policies and Procedures
Memorial Day is a time when many firms start to think about which policies and procedures require updating based on new regulations, Form ADV disclosure updates, or operational changes in the business. Some suggestions to consider for your 2024 policies and procedure manual updates include:
– IAR’s new state requirements for continuing education
– Expanding the firm’s expectations for off-channel communication and books and records requirements
– Adding provisions to Form N-PX
– Referencing compliance technologies used to enhance compliance controls
– Referencing new T+1 books and records requirements
– Evaluating current cybersecurity incident response plans and improving on incident report protocols
Once existing internal controls have been evaluated and updated, conduct training with personnel to ensure they understand any new protocols.
CE Requirements for California IARs
California, along with several other states, has become a member of the North American Securities Administrators Association (NASAA). As a result, effective May 1, 2024, investment adviser representatives (“IARs”) in California must now fulfill 12 Continuing Education (CE) units by December 31, 2024, to maintain active status. Failure to do so may result in suspension until the requirement is met.
Additionally, IARs must ensure that six of those units are completed in the Products and Practice category and six in the Ethics and Professional Responsibility category to meet their annual CE requirements. IARs in jurisdictions that have adopted the NASAA IAR CE requirement must satisfy the Products and Practice and Ethics and Professional Responsibility components to meet their CE requirement.
Preparing for the SEC Exam
Organization and preparation are key to a successful SEC exam. To begin, thoroughly review the initial document requests from the SEC staff and be sure that your responsive documents thoroughly address the SEC’s requests. Timely communication is key. Respond to SEC requests promptly and accurately. Next, assign a point of contact person and share this with the SEC. Designate someone to coordinate communication and document requests received from the Staff. Prepare your team for interviews with the examiners. Consider conducting mock interviews so that your team knows what to expect. Be prepared to address any known deficiencies. Be able to discuss corrective actions taken upon identification of any deficiencies. Importantly, stay organized! Maintain a centralized repository of compliance-related documents for easy access. When you engage with examiners, be cooperative and ask questions; if you do not understand a request, follow-up so that you can provide meaningful responses. Be sure to keep records of all communications and interactions with examiners so that you can reference as needed. Finally, remember to stay calm and maintain composure and professionalism throughout the examination process.
Strategies for Effective Business Continuity
For advisory firms, a business continuity plan is essential for preparing for the unexpected. Whether the owner has a short-term absence for an extended vacation or sabbatical, medium-term due to an unforeseen accident or illness, or long-term due to incapacity or even death, a succession plan provides a roadmap for your personnel and clients on what to do in response to the absence. To begin, identify what needs to be performed, such as financial planning and portfolio management. Next, evaluate potential candidates and consider whether they are approved on the same platform as your qualified custodian and have a similar style of management. Next, work with counsel to create the succession plan and consider the roles and responsibilities of the successor, as well as how much you would pay that individual for his/her services. Finally, analyze the plan. Share it with key personnel and evaluate what might have been missed.
Private Fund Advisers Rule – Quarterly Statements
The SEC has ramped up enforcement actions against those managing crypto or digital currencies with the goal of preventing fraud and price manipulation, and encouraging market transparency, compliance, and disclosure. The agency has expanded the Crypto Assets and Cyber Unit to ensure firms that handle major crypto exchanges that include securities, register with the SEC and follow established regulatory rules.
Succession Planning for Smaller Businesses
It is crucial for smaller businesses to have a solid succession plan in place for unexpected events where a business owner or key member of the team becomes unavailable either temporarily, short-term, or in the case of a permanent absence. Important considerations include:
– Identifying a successor or professionals who can assist with portfolio management
– Identifying those responsible for client servicing
– Agreeing on successor compensation, especially for long-term or permanent absences
– Best approach to client and employee communication on changes to leadership
Identifying and Addressing Risk
For compliance officers, identifying and assessing risks is at the forefront of their minds. But where should one begin? To conduct a risk review, consider taking the following steps:
Document findings and calendar when processes will be conducted.
Now that Form ADV is Filed, What Now?
Now that the Form ADV is filed, it is time to reflect on what else might need to occur.
– If disclosures were changed, would advisory contracts require updating and clarification?
– Do policies and procedures need to be developed to address new conflicts of interest in business practices?
– Is it better to send clients the entire Form ADV or just a summary of material changes?
The answer to this depends on the type of updates that occurred. Spend time reviewing how changes to the Form ADV impact the firm and its compliance program. Be sure to maintain copies of the changes that were made and be sure to keep a log of how and who you are sending your amended Form ADV to.
Private Fund Advisers Rule – Quarterly Statements
Last year, regulations for Private Fund Advisers underwent significant changes that will affect both SEC- registered advisers and private fund managers. One of those changes is that advisers must provide quarterly statements to investors on fees, expenses, fund performance and compensation. To remain compliant with this new rule, private fund advisers should:
– Implement a strong protocol that accounts for deadlines, accuracy, and details related to the transparency and impact of fees to the investor’s account. It is crucial to establish supervisory controls surrounding this process.
– Maintain awareness of SEC guidance on private fund best practices and regulatory requirements, including disclosures to investors.
Best Practices for Off-Channel Communications
The SEC continues to focus on off-channel communications with emphasis on recordkeeping. Although IAs face many challenges in maintaining records especially for communication via personal devices, it is crucial to implement and adopt company-wide policies and procedures and mandate ongoing employee training. The SEC has assessed steep fines for firms that fail to capture business communications, which most frequently are transmitted via text or applications such as WhatsApp on personal devices. Taking proactive steps to discuss with clients the best method to communicate with the advisor pursuant to your firm’s policies will help to avoid regulatory consequences.
Regulatory Compliance for New Hybrid Investment Advisers
Investment Advisers transitioning to their own investment advisory firm must be ready to oversee the adviser’s compliance program. Here are a few things to prioritize and consider.
– Timely completion of all annual regulatory filings. To stay on track, develop an annual compliance calendar.
– When you update your Form ADV, be sure to also update your advisory agreement and other disclosure documents as appropriate.
– Remember that you are responsible for your own compliance books and records, regardless of your broker- dealer affiliation. Make sure your compliance program addresses advisory recordkeeping requirements and takes into consideration how you are maintaining and surveying off-channel and electronic communications.
– legal counsel to address questions relating to compliance program challenges you may face.
Advisory Agreements
Remember that any changes to your client agreements must be reflected in your Form ADV filings and vice versa. Your client agreement reflects your servicing arrangement with a particular client, while the Form ADV brochure showcases your firm’s disclosures about your services. With this in mind, take the following steps when reviewing your servicing terms and disclosures:
– Consider changes to your business and its operations which necessitate amendments to existing disclosures
– Assess whether new legal requirements or regulatory guidance impact existing terms and conditions
– Review your fee structure and ensure it lines up with fee disclosures in your advisory contracts and Form ADV
– Always consider your conflicts of interest and provide meaningful disclosures for clients to have informed consent
Conflicts of Interest
Addressing conflicts of interest proactively and transparently is key to client trust. Conflicts of interest are always present and can be addressed with a strong compliance program:
– Start by identifying conflicts. Consider doing a conflict inventory.
– Determine if the conflict can be mitigated or, when possible, eliminated.
– Have processes in place to mitigate or eliminate conflicts of interest.
Supervisory controls, disclosures to clients, strong policies and procedures, and training often help to mitigate conflicts.
It is important to adopt a formal protocol on how your firm identifies, evaluates, and mitigates conflicts of interest. Not only is this a regulatory requirement under Rule 206(4)-7, but it is an important part of your fiduciary duty to clients.
SEC EXAMS and Cybersecurity
Cybersecurity remains one of the hottest SEC examination areas. As a fiduciary, it is critical for advisers to review their cybersecurity framework often to protect investors.
The NIST recommends key steps to take when handling cyber security incidents:
– Prevention: Use strong passwords, multi-factor authentication and encrypted internet connections.
– Detection: Investigate to identify the root cause and document findings.
– Containment and Recovery: Contain the incident and identify vulnerabilities to prevent further attack.
– Post-incident: Complete the incident report, retest systems, and address existing vulnerabilities.
– Cyber training: Mandate employee cyber training to educate end-users on preventing future attacks.
Taking time to train is key. Most often, the end user is the weakest link.
Pre-dispute Arbitration Agreements
When drafting pre-dispute arbitration agreements, it is important to note that FINRA examiners will red-flag agreements containing language that may infringe on your clients’ rights to take legal action against the firm. Such language violates Regulatory Notice 21-16 and may alert FINRA to scrutinize your firm’s compliance program. This includes language that:
– contains indemnification or hold harmless provisions
– prevents or limits awards by the arbitrator
– limits class-action claims
– sets a self-imposed time limit for customer claims
Work with counsel to ensure that your language aligns with these expectations.
Compliance and Artificial Intelligence
Artificial Intelligence (“AI”) is a powerful tool increasingly being used by financial institutions. AI allows software programs and computer systems to perform tasks such as investment decisions, company analysis and even trading, which historically was performed by human beings.
During recent regulatory examinations, the SEC is looking at whether firms have considered how AI is being used within the organization – in marketing and promoting the adviser, with trading and portfolio models, and even with supervision activities. Consequently, it is critically important for you to evaluate your supervisory controls and procedures when using AI.
Consider whether your compliance policies and procedures address the supervision of AI systems used by the firm, including how AI outputs are managed. Assess what data security measures are employed when using AI and what conflicts of interest may exist related to AI outputs.
Evaluate how you are validating processes and algorithms and ensure that adequate resources are used to train personnel on how to manage and supervise AI. In this fast-growing area, consider if an AI Committee should be established to explore these and other AI-related issues to help stay ahead of the curve to address these regulatory and business risks.
Trusted Contact information
As the US population continues to age, so too do we see an increase in senior client issues. Of late, we have seen an increase in the number of unexpected life events with advisory clients – be it dementia, financial exploitation, or death. When the unexpected occurs, advisers are often the only ones that can take steps to help ensure that their client’s finances are taken care of in response to that event. That is why it is so important to gather Trusted Contact information. This allows the advisor to reach out to the client’s trusted family member, friend, or fiduciary to gather important information needed to assist the client in their life situation. When you meet with your clients this year, be sure that their Trusted Contact information is up to date and explain the importance of having this information on file.
The Importance of Succession Planning
VUCA, or Volatility, Uncertainty, Complexity, and Ambiguity is a term known by many successful executives. As a business owner, you must plan for the unexpected. But have you done so in terms of succession planning? Updating your succession plan and creating an exit strategy provides peace of mind to you, family members, company personnel and your clients. Make your succession plan a priority in early 2024 to prepare for the future.
When Was the Last Time Your Advisory Contracts Were Updated?
As you review your advisory client agreements, consider adding provisions for electronic signatures and if desired, have any amendments to contracts be made through negative consent. Be sure that any changes to disclosures in your advisory contract are also made in your Forms ADV.
Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC (“JLG”), which offers securities, corporate, real estate, and employment law counsel to broker-dealers, investment advise...
