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Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!
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SCA Client News Brief
By Cheryl YoungNov 09, 2021

Smart Brevity™ count: 3.5 mins... 926 words

Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!

Required AML Programs for IA’s is Inching Forward

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What’s new - Congress is moving closer to mandating that IA’s have an AML program. This is where we are:

  • A leaked FBI memo noted that private funds are susceptible to money laundering activity due to lack of regulations.

  • Congress has reached out to the current administration to revive the 2015 proposal to require AML programs for investment advisers.

  • Congress introduced a bi-partisan bill, the ENABLERS Act, imposing due diligence requirements on advisers for non -US clients.

Why it matters-Although many IA’s maintain an AML program as a sound risk management practice and to meet AML requirements for third party service providers, (e.g. brokers), additional regulatory requirements and scrutiny means these programs need another look. For those IA’s that do not maintain AML policies and procedures, this is a wake-up call to start focusing on AML sooner rather than later.

A good starting point is to prepare an assessment of AML risks for your firm and develop P&P’s to mitigate those risks. Areas to focus on include:

  • Non-US clients or investors

  • Risks associated with foreign assets and other assets that are considered high risk (e.g. digital assets)

  • Due diligence on key third parties, such as third party administrators, that carry out AML requirements for your firm

  • Consistency between AML representations to third parties and actual practice

DOL Rollover Exemption Enforcement Rolled Back

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What’s new: The DOL rolled back the date for enforcing the prohibited transaction rule exemption for retirement plan (IRA and Qualified Plan) rollovers. You have until February 1, 2022 to meet the requirements of the exemption and June 30, 2022 to meet the documentation requirements of the exemption.

Why it matters: The DOL considers a rollover of an employer sponsored retirement plan that effects your compensation to automatically be a prohibited transaction under ERISA. In this case, an exemption is required to proceed with the transaction. The requirements, in order to meet this exemption, are onerous so a little more time to make sure all components are in place is a good thing.

Yes, but: this isn’t much additional time to meet all the exemption requirements, so, stay on track. If you decide not to make recommendations on rollovers, you should document the reasons why.

The requirements are:

  • Continued compliance with the impartial conduct standards - Advice in the best interests of clients, reasonable compensation and no misleading statements.

  • Acknowledge in writing the fiduciary status of your firm and investment professionals.

  • Describe in writing the services to be provided and conflicts of interest.

  • Document and provide to retirement investment clients the reasons that a rollover recommendation is in their best interest.

  • Adopt policies and procedures designed to ensure compliance.

  • Conduct an annual compliance review and prepare a written report of the results certified by a senior executive of your firm.

Proposed New Rule Requires Certain Advisers to File Proxy Votes on Executive Comp with SEC

Illustration of the U.S. Capitol

Watch for this: Your firm may be required to report certain proxy votes to the SEC under proposed rule 14Ad-1. If you are required to file Form 13-F and exercise proxy voting authority, the proposal requires you to file proxy votes covering executive compensation on Form N-PX annually. Comments on the proposed rule are due by December 14, 2021.

Latest Insights on SEC Priorities

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What’s new: Recent congressional testimony by SEC Chair, Gary Gensler, offers more insight on current SEC priorities.

What's next:

  • ESG continues as a top priority. Gensler spoke specifically about supporting information for ESG claims such as sustainable, green, etc.

  • A proposal is in the works dealing with cyber governance issues such as cyber hygiene and incident reporting.

  • Disclosures around conflicts of interest and fees charged for private equity funds is a top item.

  • Greater resiliency in money market funds and open ended bond funds based upon the challenges in the Spring of 2020.

Advisers Managing Digital Assets

In this illustration, a red dart flies towards a bitcoin.

What the SEC is saying: As the battle over regulation of digital assets continues, many advisers are now including digital assets in their portfolio strategies. SEC expectations for managing digital assets were laid out in a risk alert earlier this year.

SEC will focus on the following portfolio management issues when examining advisers managing digital assets for clients:

  • Classification of digital assets - (are they securities?)

  • Due Diligence on digital assets

  • Mitigation of risks associated with trading venues, trade execution and settlement facilities

  • Risk management around “forked” and “airdropped” digital assets

  • Fulfillment of the adviser’s fiduciary duty

Other areas of focus include custody, books and records, disclosures to investors, pricing of portfolios, and registration issues including exemptions from registration as an investment company for private funds.

Digital asset mangers should read the alert carefully and make sure these areas are addressed.

We hope you found this news brief helpful. Please let us know if there is a topic you would like for us to cover by contacting cyoung@secadvisors.com.

The information in this newsletter is for general guidance, only. It does not constitute the provision of legal or tax advice, or professional consulting of any kind.

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