2023 Investment Adviser Association Compliance Conference Recap
The Investment Adviser Association (“IAA”) recently held its annual investment adviser compliance conference in Washington D.C. The conference took place March 12-14, 2023, and included many notable industry speakers including staff from the Securities and Exchange Commission (“SEC”). Here is a summary of some of the topics discussed at the conference and a few key takeaways.
Focus on the SEC's Proposed Rules
Many of the presentations covered the SEC’s ambitious slate of proposed rules. This includes the proposals covering cybersecurity, vendor due diligence and custody. Keep in mind the conference took place only a couple of days before March 15th when the SEC released three new rule proposals and the reopening of the cybersecurity proposal. Members of the IAA discussed how both the number of proposed rules as well as the requirements in the proposals would be a very heavy lift for investment advisers. Members of the SEC’s staff discussed the rationale for the proposals in a friendly debate with the IAA members and guest speakers.
Key Takeaway: As we have seen in the past, many rule proposals never make it to the final stage. So, the chances of all the current proposed rules becoming final are slim. Most of the recent rule proposals do center around cybersecurity and client data protection, so expect some of these to make it to the final stages.
Small Businesses Rule and Implementation
A majority of registered investment advisers are considered small businesses, many with less than 100 employees. When the SEC adopts a new rule, it can be very hard for these small advisers to implement and put in place the requirements. There was much discussion on how the SEC can help small businesses with its adoption of new or amended rules. One way to address this is to provide a longer time period for small advisers to adopt the requirements of a new rule. In essence, a rule would have two compliance dates: one for small advisers and one for large advisers. Another way to address this is to stagger the compliance effective dates of new rules. Remember last year when the industry had to deal with effective dates for Rules 2a-5 and 18f-4 for registered funds and the new marketing rule within a few months of each other? Staggering the dates would be a viable solution to help small advisers.
Key Takeaway Both of these solutions would help small advisers deal with the requirements of new rules, so let's hope the SEC considers these for any new rule adoptions.
The focus on Diversity, Equity and Inclusion (“DEI”) is becoming more prevalent in the industry. Advisers of all sizes are adopting DEI initiatives as part of their hiring practices and ongoing human resource practices. Larger firms are beginning to appoint Chief Diversity Officers. The SEC has resources available to firms who are interested in learning more about DEI. Check out this link for more information.
Key Takeaway: DEI can be incorporated into both small and large advisory firms. Check out the SEC resources and discuss this topic with other advisers. There are certain to be resources available from other industries that will be helpful.
Managing Conflicts of Interest
We have heard for years now the importance of having a risk assessment. Risk assessments are now a common item for SEC exam requests. Risk assessments can help identify conflicts of interest, but is your firm reviewing all possible conflicts of interest? Conflicts are a very broad compliance item and, in some cases, can be difficult to identify. The panel for this topic discussed some ways to think about how to identify conflicts, including how they arise through situations involving employee vs. client, client vs. client and firm vs. client. Once conflicts are identified, a firm should try to eliminate the conflict if possible. If it can’t be eliminated, then the conflict should be mitigated and disclosed to clients. The request for a firm’s “conflicts inventory” is becoming a common item on SEC exam request letters.
Key Takeaway: Conflicts of interest can lead to compliance issues and possibly client harm, so firms should develop ways to identify conflicts and eliminate or mitigate and disclose. Consider developing an inventory of conflicts as a way to help with this process. Not only would your firm be able to deliver the inventory during an SEC exam, but it could also lead to identifying conflicts when changes to business and regulation occur.
SEC Exam Trends
Probably the most interesting topic at any compliance conference is discussion on SEC exam trends. These discussions, along with the risk alerts issued by the SEC, are great tools to use when reviewing your compliance program and trying to make sure your firm is exam ready. The panel discussed these recent trends:
- Increase in the scope period from the usual 2-year lookback to 5 years.
- Request lists are getting longer.
- Exams are taking longer to close out.
- More scrutiny on technical violations, similar to the broken windows approach.
- Increased focus on off-channel communications, such as text messaging.
- Private fund manager exams are on the rise.
Members of the SEC staff noted that there will be an increase in on-site exams going forward. This doesn’t mean that all SEC exams will be on-site, but rather a hybrid approach of both on-site and remote.
Key Takeaway: Based on these trends, it appears SEC exams will be more time-consuming and focused than in the past (especially with the SEC resuming on-site visits). In order to prepare for an exam, it’s important to test your procedures and review risk alerts and other guidance issued by the SEC. Also, talk to your peers and consultants about the areas of focus in recent exams they have seen. This can provide valuable insight into items that may be applicable to your business model.