On The Docket – The 2024 Regulatory Environment for RIAs, Off-Channel Communications, and (too) much more

Posted on Chris Stanley

Welcome to the September 6, 2024 edition of On The Docket, which includes the following content:

  1. The 2024 Regulatory Environment for RIAs
  2. FinCEN Adopts Its Proposed Rule to Subject Certain RIAs to AML Obligations
  3. Form 13-F Filer = Form N-PX Filer
  4. Off-Channel SEC Enforcement Actions Continue
  5. The 2025 Registration Renewal Calendar Has Been Posted
  6. The State v. Federal Divide In Securities Law and Federal Preemption
  7. The New RIA Recordkeeping Obligation Related To T+1 Settlement Cycle Shortening
  8. How To Register And Remain Registered With The SEC As An Internet Investment Adviser
  9. The SEC Playbook For Newly-Registered Advisers: Preparing For The SEC Examination And Complying With The Information Request Letter
  10. Missouri Regulators Send Warning Letter to Advisors Using Data Aggregation Tech
  11. For RIA Stat Nerds
  12. Tennessee issues policy statement re: custody & standing letters of authorization
  13. Another addition to the “State Regulatory Quirks” file for RIAs
  14. Once again, the SEC sends a blast email about the Internet Adviser Exemption to seemingly all SEC-registered investment advisers…

🌐 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.

📥 If this edition was forwarded to you, you can subscribe directly by clicking here.

💬 Prefer to follow along via social media? You can follow us below:

Happy reading.

– Chris

* * * * *


The 2024 Regulatory Environment for RIAs

I created the following image to describe what I perceive as the 2024 regulatory environment for RIAs:


For a bit of additional context, I’ve listed the truckload of recently proposed, finalized, court-vacated, or court-stayed regulations I’m referring to:

To quote Joe Pesci in My Cousin Vinny, “Let me see, what else can we pile on?”


FinCEN Adopts Its Proposed Rule to Subject Certain RIAs to AML Obligations

Here’s a brief rundown:

☑️ Applies to (most) SEC-registered advisers and exempt reporting advisers, not state-registered advisers

☑️ Requires adoption of a risk-based and reasonably-designed AML program, filing of Suspicious Activity Reports, maintain certain records, and compliance certain other Bank Secrecy Act regulations

☑️ FinCEN is delegating exam authority to the SEC

☑️ Additional Customer Identification Program requirements are still forthcoming under a separate rule

☑️ “Independent” testing is required by unaffiliated service providers or internal personnel, but only if such internal personnel is not the same personnel involved in the operation and oversight of the AML program

☑️ Interestingly, it does not apply to mid-sized advisers, multi-state advisers, pension consultants,  and advisers that are not required to report any AUM to the SEC

⏰ Compliance date is January 1, 2026

🌐 Fact Sheet; Final Rule


Form 13-F Filer = Form N-PX Filer

If you’re an adviser required to file Form 13-F, your first Form N-PX filing is due to be filed by August 31, 2024. Form N-PX captures proxy voting records related to “say-on-pay” voting power exercised by the adviser.

Even if the adviser cannot and does not vote proxies, a Form N-PX “notice filing” is still required. This article provides a brief / helpful explanation.

If you’re not sure if you have a Form 13-F filing obligation, check out my prior article here.


Off-Channel SEC Enforcement Actions Continue

The SEC’s recordkeeping rule – especially as applied to “off channel communications” – can easily insert itself into seemingly innocuous communications with colleagues or clients. 

I’ve highlighted a few specific examples from the SEC’s recent enforcement sweep to drive home the point:

* * * * *

* * * * *

* * * * *


The 2025 Registration Renewal Calendar Has Been Posted

For further detail, refer to the IARD Renewal Program website here. An excerpt of highlighted important dates has been included below:


The State v. Federal Divide in Securities Law and Federal Preemption

I’ve written a lot over the years about the state v. federal divide in securities law, and the federal preemption afforded by NSMIA.

A recent Missouri federal district court reenforced NSMIA’s preemptive power by striking down a Missouri rule that impermissibly regulated SEC-registered advisers beyond the mere state authorization to “license, register, or otherwise qualify any investment adviser representative.”

Given the broadening interpretive discretion I’ve observed at various state securities regulators over the last few years, I’m also encouraged to see that the court cited the “void-for-vagueness doctrine” as another rationale for striking down the Missouri rule: “a law is unconstitutional if it fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement.”

One final nugget: just because one firm complies with a vague rule (Edward Jones, in this case) doesn’t mean the rule isn’t vague and therefore unconstitutional: “The Court further rejects Defendants’ argument that the Rules are not vague because Edward Jones “demonstrated its understanding that the Rules applied to some of its employees and that it understood how to comply with the Rules.” […] As explained by Plaintiff, “this argument does not insulate the Rules from a vagueness challenge. Just because one member has applied the Rules to collect consents does not mean they provide sufficient clarity.”

* * * * *


The New RIA Recordkeeping Obligation Related to T+1 Settlement Cycle Shortening

Perhaps the most under the radar regulatory development affecting SEC registered investment advisers? 

Shortening the securities transaction settlement cycle to T+1.

Though the primary implications apply to broker-dealers under the Exchange Act, the SEC also adopted new recordkeeping obligations under the Advisers Act that apply to SEC registered investment advisers. Such advisers are now required to maintain:

“… each confirmation received, and any allocation and each affirmation sent or received, with a date and time stamp for each allocation and affirmation that indicates when the allocation and affirmation was sent or received.”

Generally speaking, such recordkeeping obligations apply when an adviser allocates a trade among different client accounts and when trade confirmations/ affirmations are exchanged between an adviser and the executing broker-dealer.

T+1, including the new recordkeeping obligations under the Advisers Act, took effect on May 28, 2024.

Adviser takeaways:

  1. Review (and likely update) the recordkeeping section of your compliance policies and procedures; and
  1. Review a sample of recent trade allocation, confirmation, and affirmation records to ensure they exist, and are appropriate date and time stamped when sent or received.

🌐 SEC Adopting Release


How to Register and Remain Registered with the SEC as an Internet Investment Adviser

When the SEC first laid the path for registration as an “Internet investment adviser” in late 2002, the business model of rendering investment advice exclusively through an interactive website was still very much in its infancy. Wealthfront and Betterment, 2 of the earliest robo-advisers on the scene, didn’t register with the SEC until 2008 and 2009, respectively. 

Somewhat hilariously, the original Adopting Release for rule 203A-2(f) under the Advisers Act (colloquially referred to as the “Internet Adviser Exemption” and subsequently renumbered as Rule 203A-2(e)) estimated that “as many as 20 firms” would be eligible to register with the SEC as Internet investment advisers as a result of the new rule. The Adopting Release cited unidentified “news articles” as the basis for this staggering number of impacted advisers.

Joking aside, it’s important to give credit where credit is due. The SEC was quite prescient in predicting that the ensuing years would see a significant increase in the number of Internet investment advisers as well as the initial boom of robo-advisers. According to the Adopting Release, as of June 2023, 261 advisers with an aggregate of $1.09 billion in assets under management were registered with the SEC under the Internet Adviser Exemption. Between the 2002 introduction of the Internet Adviser Exemption and June 2023, approximately 937 advisers have relied on the Internet Adviser Exemption, of which 772 initially registered exclusively in reliance on the exemption.

On March 27, 2024, the SEC amended the Internet Adviser Exemption for the first time since its original adoption in 2002. While the amendments do not turn the existing rule on its head, they do afford an opportunity to revisit how an adviser can register – and remain registered – as an Internet investment adviser.

Read my entire article on the recently-revised Internet Adviser Exemption here.


The SEC Playbook for Newly-Registered Advisers: Preparing for the SEC Examination and Complying with the Information Request Letter

In academia, the specific content of an upcoming exam is kept under lock and key by the proctoring teacher until it is presented to students on the day of the exam. Students are expected to have studied the subject matter and class material with such thoroughness that – without knowing the exact questions that will be asked in advance – they can accurately respond to whatever the teacher throws their way.

A student who surreptitiously obtains an advance copy of the questions to be asked in an upcoming exam is viewed as a cheater, as it gives such student an unfair advantage compared to other students who do not have the same ability to shortcut the exam with rote memorization and regurgitation.

With respect to its new investment adviser registrants and the exams to which they are subject, the SEC takes a bit of a different approach. In March of 2023, the SEC’s Division of Examinations essentially published the exam questions it will initially ask of newly registered advisers during their first exams. This publication took the form of a Risk Alert entitled “Observations from Examinations of Newly-Registered Advisers“.

While the Risk Alert does indeed cover the Exam Staff’s observations from examinations of newly registered advisers (i.e., how advisers are failing certain exam elements), I’d argue that the introductory section of the Risk Alert entitled “Examination Scope” is actually where SEC registrants can glean the most value.

What follows is a list and analysis of each exam question that the Risk Alert states will likely be included in the actual information request list initially sent to advisers being examined for the first time by the SEC. Advisers whose cards have yet to be drawn by SEC Exam Staff would do well to use what follows as a study guide/dry run of sorts, as the Risk Alert’s exam content list very closely tracks reality for most such advisers in my experience.

Read my entire article on the SEC Playbook For Newly-Registered Advisers here.


Missouri Regulators Send Warning Letter to Advisors Using Data Aggregation Tech

This is yet another example of a state exercising broad regulatory discretion to deem RIA business practices to be “dishonest and unethical”.

Categorizing data aggregation technology as such is misguided, especially since such technology is utilized at the request of and for the benefit of the client.

First Washington, now Missouri. Hopefully this trend does not continue.


For RIA Stat Nerds

The SEC’s latest Investment Adviser Statistics Report is a treasure trove of sliced/diced Form ADV data:

“This report provides statistics and trends for investment advisers that file Form ADV Part 1A, reflecting data collected through May 06, 2024.”


Tennessee Issues Policy Statement Regarding Custody and Standing Letters of Authorization

In a nutshell:

1. SLOAs = custody.

2. Both first and third party SLOAs = custody.

3. Tennessee does not adopt the SEC’s 2017 IAA No Action Letter that moots the annual surprise custody exam if seven conditions are met.

Takeaway: For RIAs registered in Tennessee, the choice is effectively to eliminate all first and third party SLOA authority, or comply with the full brunt of Tennessee’s custody rule (Tenn. Comp. R. & Regs. 0780-04-03-.07).

Personal Opinion: The state-by-state web of rules and opinions that state-registered RIAs are forced to navigate continues to expand, further making SEC-registration the preferred path if viable.

Check out the entire policy statement here.


Another Addition to the “State Regulatory Quirks” File for RIAs

North Carolina is the only state I’m aware of that requires a solicitor/promoter to register as an IAR of the RIA(s) to whom they are referring clients.

Thus, a North Carolina solicitor/promoter that refers clients to multiple RIAs conceptually has to register with each such RIA.

At the same time, North Carolina prohibits dual IAR registration (i.e., an IAR being registered with more than one RIA at the same time) unless the RIAs are under common ownership.

To address this incongruity (both requiring and prohibiting dual IAR registration for solicitors/promoters), the North Carolina Investment Advisers Act includes a specific carve-out for solicitors/promoters:

“An investment adviser representative may be registered with more than one investment adviser registered under this Chapter or investment adviser covered under federal law for the purposes of soliciting, offering, or negotiating for the sale of, or for selling investment advisory services for or on behalf of, those investment advisers. If an investment adviser representative is registered with more than one investment adviser pursuant to this subsection, the representative shall be registered separately with each investment adviser for whom the representative solicits business…”

As a sidebar, here‘s a list of states that permit, prohibit, or conditionally permit dual IAR registration (see the “Dual RA Registration” column).


Once again, the SEC sends a blast email about the Internet Adviser Exemption to seemingly all SEC-registered investment advisers…

… even those not relying on the Internet Adviser Exemption and for whom the email has no relevance.

Here’s what our inbox looked like.

It appears all SEC-registered investment advisers received the same overnight email with the subject line “An Important Message from the SECURITIES AND EXCHANGE COMMISSION”.

The email is legit, but is only applicable to RIAs registered with the SEC as internet advisers relying on rule 203A-2(e).

If your RIA is registered with the SEC under any other basis besides the internet adviser exemption (i.e., any other box besides (11) in the screenshot below), the email is N/A to you.

Not sure about your basis for registration with the SEC? You can always visit the Investment Adviser Public Disclosure website, search for your firm, and review Item 2 of Form ADV Part 1.