Welcome to the third edition of On The Docket, which is the recently-ascribed name to the Beach Street Legal blog. This edition includes the following content:
- A Guide To Conducting And Documenting An Annual Compliance Review
- Be Wary of Hypothetical Performance
- PSA – Misleading Cybersecurity Services Solicitations
- Practice Tip – SEC Rulemaking Activity
- Practice Tip – SEC No-Action Letter & Interpretive Letter Resource
- Sunlight Is The Best Disinfectant – Podcast Appearance
- Disclose Referral Fee Arrangements
- The Advisor/Client Relationship Equitable Split Agreement (in partnership with Michael Kitces)
🌐 All past On The Docket editions (as well as other article, video, and podcast content) are available by visiting the On The Docket page of the Beach Street Legal website.
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Happy reading.
– Chris
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A Guide To Conducting And Documenting An Annual Compliance Review
This latest article is intended to be a practical guide for how to actually perform an annual compliance review (an obligation imposed on all SEC-registered investment advisers).
Notwithstanding a few core components that should be included, the SEC affords significant flexibility as to its ultimate scope, length, detail, and structure.
An adviser’s annual compliance review will almost certainly be requested during the course of an SEC exam, so it’s best not to let this fundamental obligation slip through the cracks.
Be Wary of Hypothetical Performance
The SEC’s Marketing Rule de facto prohibits hypothetical performance to be advertised to mass audiences or for general circulation. A package of 9 recent SEC enforcement actions drives home this point.
To thread the needle of including hypothetical performance in an advertisement, an adviser must be able to demonstrate that such hypothetical performance “is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.”
This is effectively impossible to prove in a mass audience / general circulation advertisement, as the SEC itself admits: “We believe that advisers generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation. In that case, because the advertisement would be available to mass audiences, an adviser generally could not form any expectations about their financial situation or investment objectives.”
To make matters even more challenging, hypothetical performance is defined quite broadly: “performance results that were not actually achieved by any portfolio of the investment adviser” (including model portfolios, backtested performance, and targeted / projected performance).
Takeaway: don’t include hypothetical performance in advertisements that are broadly available to the general public, or that are otherwise available to those whose financial situation and investment objectives you are unfamiliar with.
PSA – Misleading Cybersecurity Services Solicitations
If you’re an RIA (that’s not a public co.) and have received an email from a tech vendor that suggests you need to comply with a new SEC cybersecurity rule, it is a misleading solicitation that is N/A to you.
Several of our clients have received ominous emails from several such tech vendors that are simply inaccurate.
The SEC did indeed adopt a new rule regarding cybersecurity risk management, strategy, governance, and incident reporting back on July 26th, but it only applies to public companies.
Practice Tip – SEC Rulemaking Activity
With the flurry of new SEC rule proposals and adoptions, it can be hard to keep track of which rules are final/adopted and which rules are still only proposed but unadopted. Here’s a list of SEC Rulemaking Activity, with search functionality and filtering by “Final” and “Proposed”:
Drilling down into a proposal will reveal an easy way to view the proposal in its entirety, any associated fact sheet, received comments, and important dates. There’s also a link to submit a comment.
Drilling down into a final/adopted rule will reveal the final adopting release, any associated fact sheet, the originally-proposed rule, and the effective date.
Practice Tip – SEC No-Action Letter & Interpretive Letter Resource
Want to search for a particular SEC Division of Investment Management no-action letter or interpretive letter published during the last 20 years? Here’s a list, sorted by both subject categories and chronologically.
While not official “guidance” of the SEC or its staff, no-action letters and interpretive letters are often relied upon by investment advisers when determining how to comply with certain SEC rules or expectations.
Somewhat ironically, no-action letters and interpretive letters are listed under the “Guidance” category of the SEC’s website, despite the SEC making it abundantly clear in all such letters that they are, in fact, not official guidance of the SEC.
Basically the SEC is saying “Don’t not use these letters for guidance, but don’t use them for guidance either…?”
Sunlight Is The Best Disinfectant – Podcast Appearance
In this episode of The Perfect RIA Podcast, I was privileged to join Matthew Jarvis for a conversation about compliance program organization, documentation, collaboration, and exam expectations. The episode is available through your podcast player of choice (the episode title is “Sunlight Is The Best Disinfectant – Compliance Talk With Guest Chris Stanley”) or via YouTube.
Disclose Referral Fee Arrangements
An adviser’s failure to disclose referral fees paid to social media influencers = SEC administrative proceeding.
If an adviser is compensating someone for client referrals (even pay-per-click + email address arrangements, as was the case here), the referred client must receive timely disclosure of the financial incentive the solicitor/promoter has to make the referral.
Such arrangements are generally considered a testimonial (if the referral was made by a client) or an endorsement (if the referral was made by a non-client).
Check out this prior article for a deeper dive into testimonial and endorsement compliance obligations (including compensated referral arrangements).
The Advisor/Client Relationship Equitable Split Agreement (in partnership with Michael Kitces)
I’m privileged to partner with Michael Kitces on the creation of the Advisor/Client Relationship Equitable Split Agreement template (the “ACRES Agreement”) included in this article from the Nerd’s Eye View: Crafting More Equitable Advisor Non-Solicit Agreements with the ACRES Agreement.
Advisor / Advisory Firm splits can get very messy very quickly, and clients are usually caught in the crosshairs. We hope this template agreement can help pave a mutually-beneficial path forward by identifying client “ownership” and portability decisions to be made between advisors and their employing advisory firms at the outset.
And because I can’t help myself from a CYA perspective 😉, I’ll remind everyone that the template agreement is intended as a general resource, isn’t customized to any specific advisor / advisory firm relationship or any particular state’s laws, and should not be considered legal advice. Please consult with your own legal counsel before signing on the dotted line.