The Securities and Exchange Commission’s Division of Examinations announced on Tuesday its top exam priorities for 2023. Not surprisingly, the SEC’s historic new marketing rule and Regulation Best Interest (Reg BI) topped the list.
The priorities, which are published annually, provide financial advisors, and the wealth management industry in general, with insights about which areas the SEC believes pose the biggest potential risk to investors. They also act as a guide for those taking exams.
“It’s not surprising that both the Marketing Rule and Reg BI are prominently featured, given the [SEC’s] recently issued Risk Alerts,” Tim Nagy and Steffen Hemmerich, partners at Mayer Brown, a law firm focused on financial institutions, told RIA Intel.
Two of the last four risk alerts sent out by the SEC concerned the new marketing rule. The updated rule, which went into effect in November, allows advisors for the first time in more than 50 years to use client testimonials. The new rules also provided updated guidelines around performance advertising and the archiving of records.
However, despite what many people consider to be a positive change, advisors have been slow to take advantage of the new rules, and compliance officers at many firms have also been wary about allowing their advisors to take part, due to a lack of precedence when it comes to how the SEC will handle its exams.
“We haven’t been able to get feedback from our peers — ‘Hey, what did the SEC say to do? Were your disclosures adequate? Is everything good on your website? On your social media?’ Things like that. So it’s nerve-racking,” said Stacy Sizemore, the chief compliance officer at Tru Independence, in an interview with RIA Intel last month.
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Nagy and Hemmerich said that potential compliance pitfalls for advisors utilizing the new marketing rule include the need to demonstrate a reasonable basis for the belief that advisors can adequately substantiate statements in testimonials and endorsements, as well as the need to ensure sufficient support for any performance advertising and ratings.
Reg BI, which was also featured in the most recent risk alert sent out by the SEC, states that financial professionals must act in the best interest of the retail customer when any recommendation is made about a securities transaction, or an investment strategy that involves securities, including account recommendations to a retail customer, without placing the advisor’s own financial interest ahead of the retail customer’s interest.
According to the priorities, exams will focus on how RIAs, broker-dealers, and affiliated firms address standards of conduct issues related to Reg BI. The exams will include assessments of practices surrounding the review of investment alternatives, the management of conflicts of interest, and the consideration of investment goals and account characteristics.
Nagy said that while the marketing rule’s newness and Reg BI’s increased regulatory maturity have stood out to many, advisors should pay attention to all of the priorities listed by the SEC, which include a focus on ESG, crypto and emerging technologies, security and operational resilience, and RIAs who manage private funds.
“Our priorities reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base,” said Division of Examinations’ director Richard R. Best in a statement. “We will emphasize compliance with new SEC rules applicable to investment advisers and investment companies as well as continue our focus on emerging issues and rules aimed at protecting retail investors.”
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