Compliance Lessons Learned in 2019

Now that we are in mid-January, a few things are evident. We have likely broken one or more New Year’s resolutions, the effect of any rest over the holidays has worn off and we need to complete our annual compliance reviews for 2019 and firm up our 2020 plans.

While I don’t have solid advice on the first two points, looking back at the lessons of 2019 can help us as we complete our annual review and look ahead.

Lesson 1: Protect the Retail Investor

Since assuming the role of SEC Chair in 2017, Jay Clayton has stressed the importance of protecting the retail investor. The SEC commissioners and staff have been clear and consistent in this message through rulemaking, guidance and examinations. Examples include:

  • In their 2019 Examination Priorities release, the Office of Compliance Inspections and Examinations (OCIE) of the SEC stressed the importance of protecting the retail investor, including those saving for retirement.
  • On June 5, the SEC adopted a fiduciary rulemaking package. Included in that package was Regulation Best Interest (Reg BI) for broker-dealers, which raises the standard of care for a broker-dealer to act in the client’s best interest. In conjunction with this, the SEC also adopted a requirement for broker-dealers and investment advisers to provide their retail customers with a “Relationship Summary” on new Form CRS. This form will need to be filed by June 30, 2020. Also included was the Commission Interpretation Regarding Standard of Conduct for Investment Advisers (Interpretation), which is discussed below, and the Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser.

Lesson 2: Disclose, Disclose and Disclose Some More

Clear and accurate disclosure is at the heart of a productive client relationship. One area of focus for the SEC in 2019 was around the use of the word “may” in client disclosures. The SEC staff has stated that an adviser should not say that it “may” do something when it will always do that thing or can articulate the circumstances under which it will do that thing. In the Interpretation, the SEC stated that disclosing that an adviser “may” have a particular conflict is not adequate when the conflict actually exists.

Further, the failure to disclose fully conflicts through the use of the words “may” or “could” was reflected in several enforcement actions. In October, the staff built on the Interpretation with a frequently asked questions (FAQ) release regarding disclosure of investment adviser compensation. In the FAQ, the staff addressed topics relating to revenue sharing and other compensation arrangements, the conflicts presented and the expected disclosures to clients.

We also note that Reg BI states that a broker-dealer’s obligation to act in its client’s best interest includes a disclosure obligation. This obligation requires a broker-dealer to provide certain prescribed disclosures before or at the time of the recommendations, about the recommendation and the relationship between the retail customer and the broker-dealer. Such disclosures must address all material facts relating to the scope and terms of the relationship with the retail customer, including capacity as a broker-dealer, material fees and costs, and type and scope of services.

Lesson 3: Compliance Never Sleeps

For seasoned compliance professionals, this may not be a new lesson, but the pace of regulatory activity in 2019 had most of us gasping for air. In 2019:

SEC Chair Clayton has indicated a desire to meet the targets set forth in the Commission’s rulemaking agenda, giving us a realistic look at what’s ahead. For compliance teams, applying the lessons of 2019 will help us meet our obligations as we move into the new decade


Need compliance help? CSS offers a thorough range of compliance management services that are designed to help clients meet their regulatory responsibilities while allowing them to focus on their core businesses. Check out our services or contact us for more information.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Service Provider Due Diligence – Building Effective Partnerships

In 2009, the SEC stated at its CCOutreach Program that “when a service provider is utilized, the adviser still retains its fiduciary responsibilities for the delegated services.” This philosophy is as true today as it was 10-plus years ago. Therefore, the question becomes how do you establish a due diligence oversight program for your firm’s … Continued

SEC Adopts Changes to Reporting Forms

Regulation of Derivatives Use by RICs and BDCs Recognizing the proliferation of new derivate products in our markets, the SEC voted to adopt a new regulatory framework for the use of derivatives by mutual funds, ETFs, closed-end funds, and business development companies. The SEC’s press release stated that, “The new rule and rule amendments will … Continued

Time to Use the Bat Phone: Who to Call When a Compliance Officer Needs Help?

It seems that the burden of work continues to increase for compliance professionals in the investment management industry. While also ensuring that their compliance program is effective, compliance officers must also be aware of cybersecurity threats, business continuity plans, new regulations, changes in business strategy, and more – all while doing this under a work … Continued