New Rules Mean More Work For Advisors In 2017

by: John Lohr


The SEC has been busy changing the ADV and adopting new rules and regulations. It all means more work for advisors.

OCIE has piled it on Lagos with a new exam initiative.

Conflicts of interest, fraud prevention, new disclosure, performance calculations (and did we say more disclosure) face advisors.

The markets, the economy, and who knows what else is looming in 2017. What else? More rules and regulations for advisors.

First, the SEC has changed the ADV. Here are the high (or low) points:

Separately Managed Accounts ("SMAs") require more information from the Money Manager/RIA.

The information required to be reported includes the type of assets held in SMAs, the use of borrowing and derivatives in SMAs, any custodian that accounts for at least 10 percent of SMA regulatory assets under management (RAUM), and the amount of the advisor's Regulatory Assets Under Management ("RAUM") attributable to SMAs held at the custodian. This will affect almost all RIAs who deal with a Third Party Asset Management Provider ("TAMP") or Big Box custodian like Pershing, LPL, TD, Fidelity, Schwab. So, here you have more accounting, number slicing and dicing. More work.

RIAs will now have to report more detailed identification information. New information that will have to be reported includes:

  • All of its CIK Numbers if it has one or more such numbers assigned.
  • The total number of offices at which it conducts investment advisory business.
  • Information about its 25 largest offices in terms of number of employees.
  • Disclosing whether its chief compliance officer is compensated or employed by any person other than the advisor (or a related person of the advisor) for providing chief compliance officer services to the advisor, and if so, to report the name and IRS Employer Identification Number of that other person.

As I said, more work.

If an advisor only advises Private funds and qualified investors, and has sub-advisor RIAs that are under common control with a single policy and procedures and code of ethics, they can all register under an umbrella registration.

Not more work here.

Next the SEC added some rules. Here are those low points:

Advisors will have to maintain records supporting the calculation of any performance that is calculated or distributed directly or indirectly to any person, including the information required by Rule 204-2(a)(16):

All accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of any or all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment advisor circulates or distributes, directly or indirectly, to 10 or more persons (other than persons connected with such investment advisor); provided, however, that, with respect to the performance of managed accounts, the retention of all account statements, if they reflect all debits, credits, and other transactions in a client's account for the period of the statement, and all worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts shall be deemed to satisfy the requirements of this paragraph."

Advisors will be required to also maintain originals of all written communications received and copies of written communications sent by an investment advisor relating to the performance or rate of return of any or all managed accounts or securities recommendations.

Hmm, more work.

In addition, the Office of Compliance and Inspections ("OCIE") has been busy creating work for Advisors.

There is a new exam initiative that will focus on how investment advisors registered under the Investment Advisers Act of 1940 are addressing the conflicts of interest that arise when advisors receive compensation or other financial incentives for recommending mutual fund and 529 plan share classes that have substantial loads or distribution fees.

Conflicts of interest may be related to share class recommendations in which the advisor is also a broker-dealer or affiliated with a broker-dealer that receives fees from sales of certain share classes, and situations where the advisor recommends that clients purchase more expensive share classes of funds for which an affiliate of the advisor receives more fees.

OCIE will conduct "focused, risk-based examinations of high-risk areas."

They will examine whether advisors are meeting their obligations under Section 206 of the Advisers Act by acting in the clients' best interests and seeking best execution when recommending or selecting mutual fund and 529 Plan investments to clients.

They will also examine whether advisors are meeting their obligations to make full and fair disclosure of all material facts, including all material conflicts of interest that could affect the advisory relationship in this connection, by assessing the adequacy and effectiveness of advisors' disclosures regarding compensation for the sale of shares and related conflicts of interest.

Last, they will examine whether advisors' written policies and procedures surrounding its selection of mutual fund and 529 plan share class investments in clients' accounts are adequate and effective.

You guessed it. More work.

All this in the wake of the SEC's record enforcement results for its 2016 fiscal year.

During 2016, the SEC filed 868 enforcement actions alleging financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers.

The 2016 enforcement actions included a single-year record of 160 cases involving investment advisors or investment companies, found in some of these categories:

  • Financial fraud
  • Insider trading
  • General misconduct
  • Market manipulation
  • Affinity-based investment frauds

The SEC recovered over $4 billion. No word on whether any of it went to defrauded investors, or back into the SEC budget. Where do you think it went?

Pile on top of all this new Fiduciary obligations (maybe).

Have a great 2017. Keep those lawyers employed, and read our Dante's Corner on for the latest up to date frauds being perpetrated.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Parts of this article will also be published in The Ethical Treatment Of Somebody Else's Money at

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Tagged: Financial Advisors, Building Your Business, 2017 Outlook
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