What's in your Annual Review Process?
Since
2004, the Securities and Exchange Commission (SEC) has required its registrants
to conduct annual reviews to determine the adequacy and effectiveness of firm
procedures (ref. Rule 206(4)-7). In 2011 the commission voted to
increase its oversight of private funds (Form PF), establish new exemptions,
and concurrently reallocate its jurisdictional authority over many mid-sized
advisors (firms with AUM under $100 million) to state regulators.
Six years later, the
securities industry is undergoing another shift and updating procedures for
firms moving towards Robo-Advisors and Blockchain Technologies.
Ultimately, the annual review
process will pivot to include provisions for these new technologies.
Under Rule 206(4)-7, current
requirements are that firms must:
Develop policies and procedures: Adopt and implement written policies and procedures
reasonably designed to detect, identify, or prevent violations of the Investment Advisors Act.
Conduct an annual review:
Review at least annually the adequacy of the firm’s policies and
procedures. (i.e. updates, forensic testing, risk assessment, etc.).
Designate
a Chief Compliance Officer: Select a supervised individual responsible for administering the firm’s policies and
procedures.
Best
Practices for updating compliance manuals:
Compliance manuals should be customized to the firm’s
business practices.
Examples of customization include specifying: (1) investment strategies, (2) all types of clients, (3) firm trading procedures, (4) valuation procedures (sources of data, fair value, illiquid securities), and (5) advisory fees.
Examples of customization include specifying: (1) investment strategies, (2) all types of clients, (3) firm trading procedures, (4) valuation procedures (sources of data, fair value, illiquid securities), and (5) advisory fees.
What about Blockchain/cryptocurrency reviews?
In July 2017, the SEC issued guidance on Cryptocurrency, ICO's and DAO
tokens/offerings that operate on Blockchain/distributed ledger
technology. In this guidance, the agency deemed virtual currency as a 'Security' under Section 2(a)(1) of the Securities Act and Section
3(a)(10) of the Exchange Act. A Security includes an "investment contract.”
This means that such contracts must be SEC-registered through an appropriate
issuer.
Congress, and ultimately the SEC, are
still interpreting what bitcoin technologies will mean for the securities
industry on a broader scale. The House of Representatives is currently reviewing a
nationwide Bitcoin/Blockchain policy (HR. 835).
On December 11th, SEC Chairman Jay Clayton weighed in on the issue of cryptocurrency and blockchain technologies.
On December 11th, SEC Chairman Jay Clayton weighed in on the issue of cryptocurrency and blockchain technologies.
He says, “I encourage Main Street
investors to be open to these opportunities, but to ask good questions, demand
clear answers and apply good common sense when doing so. When
advising clients, designing products and engaging in transactions, market
participants and their advisers should thoughtfully consider our laws,
regulations and guidance, as well as our principles-based securities law
framework, which has served us well in the face of new developments for more
than 80 years.”
New technologies are always speculative
in nature. For now, most advisors would have a difficult time justifying
these investment types into their client's objectives or investment policy statements. With that said, firms with employees who invest in cryptocurrency should consider adding these new products to their code of ethics.
With the emergence of Betterment, Wealthfront, and hybrid (robo/human advisor) models from established firms like Charles Schwab, more advisors are adopting these services into their business models. In tandem, the SEC is providing more guidance on compliance for robo-advisors.
With the emergence of Betterment, Wealthfront, and hybrid (robo/human advisor) models from established firms like Charles Schwab, more advisors are adopting these services into their business models. In tandem, the SEC is providing more guidance on compliance for robo-advisors.
How
can your firm update your Reviews for Robo Advisory Services?
In
February 2017, the SEC Division of Investment Management issued a whitepaper
(“IM Guidance”) on automated trading algorithmic platforms also known as 'Robo-Advisors.' The
guidance is meant to help firms to determine the implications for using automated
trading capabilities as a service for its advisory client base.
Similar
to all registrants, robo-advisers are subject to the same fiduciary
requirements as described in the Advisers Act. In light of the unique business model, firms may need to think about disclosing additional
information to comply with the Advisers Act.
Click
Here if interested in our procedures Annual Review Center: RIA Review
Robo-Firms
should focus on three areas:
Provide
substantive disclosures to clients about automated trading:
Disclose material facts
Methodology of trading algorithms used
Business model, scope of services, fees
Risk, limitations
Disclose material facts
Methodology of trading algorithms used
Business model, scope of services, fees
Risk, limitations
Oversight process
Provide
client suitability documentation specific to robo-advice:
Client Questionnaire (e.g. Client objectives, financial pictures, net worth)
Investment policy statement (e.g. showing recommendations, periodic changes to strategy)
Client Questionnaire (e.g. Client objectives, financial pictures, net worth)
Investment policy statement (e.g. showing recommendations, periodic changes to strategy)
Develop
a compliance program tailored to automated advice:
Annual (or periodic) compliance reviews
Testing/detection methods for algorithms/automated trading
Oversight of vendors/cybersecurityProtection/safeguarding client information
Annual (or periodic) compliance reviews
Testing/detection methods for algorithms/automated trading
Oversight of vendors/cybersecurityProtection/safeguarding client information
Compliance and Business Management
FIN Compliance (FINCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, and FINLancer is a business management portal featuring: E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q3 2019). Access all services on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs. In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.
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