Advisers Act Regulatory Series - dolfiduciaryrule.com...Mar 11, 2020 · Advisers Act Regulatory...

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First Quarter UpdateAdvisers Act Regulatory Series

March 11, 2020Clifford Kirsch, Michael Koffler, John Walsh, Issa Hanna, Bria Adams, and Hannah Jones

Eversheds Sutherland

Speakers

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Clifford KirschNew York, NY+1 212 389 [email protected]

Michael KofflerNew York, NY+1 212 389 [email protected]

Issa HannaNew York, NY+1 212 389 [email protected]

Bria AdamsWashington DC+1 202 383 [email protected]

John WalshWashington DC+1 202 383 [email protected]

Hannah JonesLondon, UK+44 207 919 [email protected]


Today’s discussion:

First Quarter UpdateAdvisers Act Regulatory Series

─ COVID-19 – Steps to take now

─ SEC’s rulemaking agenda

─ 2020 ADV update season and hot topics

─ SEC examination and enforcement update

─ UK regulatory developments

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COVID-19 – Steps to take now


COVID-19 – Steps to take now

─ Review business continuity plan

─ Review client servicing issues in light of remote workers

─ Plan for market volatility

─ Revise policies and procedures, if appropriate, to reflect revised supervision practices

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SEC’s rulemaking agenda


Proposed Amendments to the Advertising Rule and Solicitation Rule – Update─ On November 4, 2019, the SEC issued a proposal to modernize the rules under the

Advisers Act addressing advertisements (“Advertising Rule”) and payments to solicitors (“Solicitation Rule”)

─ The proposal seeks to update the existing advertising framework governing investment advisers to reflect advances in technology, communication mediums and evolution in industry practice

─ Advertising Rule Takeaways• Replace the current rule’s broad limitations with principles-based provisions• Permit the use of testimonials, endorsements and third-party ratings, subject to certain conditions • Tailor requirements for presenting performance results based on an advertisement’s intended audience• Increase standards for showing certain types of performance, including hypothetical performance

─ Solicitation Rule Takeaways• Expand the current rule to cover all forms of compensation, rather than only cash• Introduce new de minimis and nonprofit exceptions• Update who is disqualified from acting as a solicitor

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Advertising Rule and Solicitation Rule─ Advertising Rule Comments

• The Commission should narrow the definition of “advertisement”• Exclude: (1) communications by intermediaries; (2) communications by employees in their personal capacity; (3)

communications designed to obtain or retain existing clients; (4) communications shared by the adviser that do not offer advisory services; (5) communications by broker-dealers that are regulated under FINRA Rule 2210; (5) individualized communications; (6) all registered fund communications; (7) communications for institutional use only; and (8) advertisements by, or on behalf of, any regulated non-US funds

• Reconsider approach to hypothetical performance (e.g., revise the definition of hypothetical performance to exclude useful target, projected, and certain forms of model performance that do not present enhanced risk to investors)

• Reconsider proposal requiring review and preapproval of all advertisements (subject to limited exceptions for one-on-one communication and live, broadcasted oral communications)

• Generally, align the Advertising Rule with applicable FINRA Rule 2210

─ Solicitation Rule Comments• Focus the definition of solicitor on activity that is directed at specific clients or investors in return for success-

based compensation• Differentiate between advertising and solicitation activities• Clarify when a solicitor must register as an investment adviser• Exclude solicitation of private fund investors• Exclude refer-a-friend programs and programs with de minimis compensation• Clarify that broker-dealer receipt of solicitation compensation is incidental to brokerage activities

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Custody Rule

─ In 2009, the SEC adopted amendments to the custody and recordkeeping rules under the Investment Advisers Act of 1940 and related forms• The amendments were designed to provide additional safeguards when a registered adviser has legal custody of

client funds or securities by requiring such an adviser, among other things: • to undergo an annual surprise examination by an independent public accountant to verify client assets; • to have the qualified custodian maintaining client funds and securities send account statements directly to the advisory

clients; and • where the adviser or a related person is serving as a qualified custodian, to obtain or receive from a related person a report

of the internal controls relating to the custody of those assets from an independent public accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board.

─ In fall of 2019, the SEC announced the review of the Custody Rule pursuant to the Regulatory Flexibility Act and invited comment on whether the rules should continue without change, or should be amended or rescinded to minimize the economic impact of the rule

─ The SEC is likely to announce proposed amendments to the Custody Rule in the coming weeks

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2020 Form ADV update season


Preparing for Form ADV Updates

Form ADV Update Season

─ Filing Mechanics• Filing deadline• Avoiding last-minute complications

─ Part 1 of Form ADV• RAUM• Custody

─ Part 2A of Form ADV• Summary of material changes

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Preparing for Form ADV Updates

Form ADV – Hot Topics

─ Hot Topics• Part 3 of Form ADV: Form CRS• Capacity disclosure• Continued scrutiny of conflicts disclosure

• Revenue sharing• Custodial arrangements and mark-ups of custodian fees• Bank sweep

• Duty of care• Senior investors

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SEC exam and enforcement update


OCIE Hot Topics for 2020

─ Robo-advisers

─ Vulnerable populations (seniors, teachers and military)

─ ESG

─ Alternative data

─ Share classes and revenue sharing

─ Central risk books

─ Zero commissions

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SEC focus on cash sweep programs


Cash Sweep Exams and Investigations

─ Co-Director of Enforcement’s speech

─ Exams and investigations

─ Issues• Impact on return to investors• Rates of return to investors vs. amounts paid to firms• Liquidity • Value of FDIC insurance

• Client monitoring• Scope of coverage• Investments in US Treasuries

• Advisory fees

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OCIE’s cyber risk alert


OCIE Report on Cybersecurity and Resiliency1. Governance and Risk Management

• Senior-level engagement • Risk assessment • Policies and procedures• Testing and monitoring• Continuous evaluation and adaptation to changes• Communication

2. Access Rights and Controls• User access• Access management• Access monitoring

3. Data loss prevention• Vulnerability scanning • Perimeter security • Detective security • Patch management • Inventory hardware and software • Encryption and network segmentation • Insider threat monitoring• Securing legacy systems and equipment

4. Mobile Security• Policies and procedures• Managing the use of mobile devices• Implementing security measures • Training employees

5. Incident Response and Resiliency• Development of a plan • Addressing applicable reporting requirements• Maintaining an inventory of core business operations and

systems• Assessing risks and prioritizing business operations

6. Vendor Management• Understanding vendor relationships• Vendor monitoring and testing

7. Training and Awareness• Policies and procedures• Assessing training effectiveness

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UK regulatory developments


ESG hot topics

─ EU Disclosure Regulation• Intends to solve lack of consistent set of criteria defining sustainability and risks of

sustainable investment• “Financial market participants” will need to make a number of disclosures to investors

─ EU Climate Benchmarks Regulation• Aim of increasing transparency and uniformity in the use of low-carbon indices• Introduces two prescribed categories:

• EU Climate Transition Benchmarks• EU Paris-Aligned Benchmarks

─ EU MiFID II changes• Changes to suitability determination• Firms have to consider investors’ ESG preferences

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Questions?

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eversheds-sutherland.com© 2020 Eversheds Sutherland (US) LLPAll rights reserved.

Clifford KirschNew York, NY+1 212 389 [email protected]

Michael KofflerNew York, NY+1 212 389 [email protected]

Issa HannaNew York, NY+1 212 389 [email protected]

Bria AdamsWashington DC+1 202 383 [email protected]

John WalshWashington DC+1 202 383 [email protected]

Hannah JonesLondon, UK+44 207 919 [email protected]

Advisers Act Regulatory Series - dolfiduciaryrule.com...Mar 11, 2020 · Advisers Act Regulatory...

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