10 Compliance Tips for Starting 2020 Off on the Right Foot

No rest for the weary. With the new year upon us, our attention turns to new budgets, change and planning. With renewed energy as we roll into January thaw, we worry if our compliance program is ready. To give you a leg up, here are 10 tips for investment adviser and broker-dealer compliance teams for starting 2020 off on the right foot by putting your program in line with current regulatory focus:

1) Recognize the Significance of OCIE’s (Office of Compliance and Examinations) 2020 Examination Priorities on your Compliance Program

The SEC’s new rules and interpretations adopted in 2019 are the crux of 2020 examination priorities for staff, center stage for upcoming examinations, and at the forefront for new expectations regarding compliance programs.

2) Be prepared, plan and execute

Integrate the 2020 exam focus into your compliance program. Conduct a risk assessment of 2020 priorities. Specifically, incorporate:

  • New Regulation Best Interest
  • The new Form CRS Relationship Summary
  • The Standard of Care Interpretation for Investment Advisers
  • The “solely incidental” interpretation (exclusion from the definition of investment adviser under the Advisers Act for broker-dealers).

Stay up to date with these developments through ComplianceSolutionsStrategies.com and SEC.gov.

3) Adapt & update your program

OCIE’s expectations continue to be focused on key aspects of the SEC’s regulatory oversight, such as disclosures concerning services, fees and expenses; conflicts of interest; and sales practice, trading and execution quality issues for broker-dealers. And of course, cybersecurity and privacy.

OCIE and FINRA examiners will be focused on whether your compliance programs have been appropriately adapted in light of focus areas. Make sure policies and procedures cover new topics.  Consider also prior exam findings, as well as any substantial growth or change in your business model or personnel.

4) Don’t forget the basics

Assess your compliance program in the following core areas:

  • The appropriateness of account selection
  • Portfolio management practices
  • Custody and safekeeping of client assets
  • Best execution
  • Fees and expenses
  • Valuation of client assets
  • The adequacy of disclosures
  • Regulatory reporting/shareholder reporting
  • Cybersecurity, privacy and safeguarding client information
  • Governance practices

5) For firms with affiliated entities and dual registrants, and those with registered representatives of broker-dealers, tighten up policies and controls. Review supervision of outside business activities of employees and associated persons, and any related conflicts.

6) Investment Advisers, affiliate, dual registrants and broker-dealers must carefully review requirements for Form CRS.

Plan for processes, supervisory controls around Form CRS Conversation Starters, such as creating Conversation Starter FAQs, scripts, training. Utilize technology solutions. For more information, visit the following resources:

7) Conduct a compliance program risk assessment regarding:

  • Due diligence practices, policies and procedures related to the use of third-party asset managers
  • A conflict inventory
  • The accuracy and adequacy of disclosures for new types or emerging investment strategies, such as ESG strategies (environmental, social, and governance criteria)
  • Test recommendations and advice given to retail investors and higher risk products. OCIE indicated a particular focus on recommendations targeting retirement communities and teachers and military personnel
  • Evaluate written policies and procedures related to private placements and securities of issuers in new and emerging risk areas—such as with high fees and expenses; or where an issuer is affiliated with or related to the registered firm making the recommendation

8) Duty of Care

OCIE has indicated it will “examine advisers to assess whether, as fiduciaries, they have fulfilled their duties of care and loyalty, including whether the RIAs provide advice in the best interests of their clients…”  OCIE has indicated it will focus on risks associated with fees and expenses, compensation arrangements, revenue sharing arrangements, service providers, as well as compensation to advisory personnel for executing client transactions.

9) Inventory actual and potential conflicts of interest and risk factors.

Essential for Reg Best Interest, standard of care, and Form CRS summary relationship disclosures. OCIE stated conflicts can include products and services, compensation and funding arrangements; changes in firm leadership or other personnel; and, whether a firm has custody of client assets.

10) Conduct a Reg BI and standard of care readiness assessment.

Update your compliance program and testing with a fresh assessment. 2020 compliance program planning requires careful analysis and planning. Count on the fact that Form CRS, Reg BI, standard of care, duty of loyalty, the solely incidental interpretation, as well as core focus areas and all things retail are front and center.

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Keeping your compliance program in line with SEC exam priorities remains a challenge. If you require additional help, check out our consulting services and contact us.


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