Key takeaways from investment compliance roundtable 

ICEN’s inaugural event explores new rules, cybersecurity risks, and regulatory best practices

Kaufman Rossin recently held the inaugural event for its newly formed Investment Compliance Executive Network (ICEN). This exclusive event featured a roundtable discussion with five panelists from South Florida-based broker-dealers and investment advisers: Gennady Bekasov of Strenta Investment Management, Samantha Santiago of Neon Money, Alvaro Soto of White Wolf Capital, Carolina Rivas of BCI Securities, and Brandy McLaughlin of Matthias Private Wealth. Alex Egan, director of risk advisory services at Kaufman Rossin, moderated the discussion.

Topics included:

• Modernized Marketing Rule
• Regulation Best Interest
• Regulatory examinations
• Cybersecurity
• Compliance programs

Below are a few key insights and takeaways from the discussion.

SEC’s Modernized Marketing Rule

With the evolving landscape of digital marketing and communications, the SEC’s Modernized Marketing Rule (Rule 206(4)-1 under the Investment Advisers Act), effective May 4, 2021, introduced a host of requirements and opportunities for investment advisers.

Some advisers may find compliance implementation for testimonials and endorsements to be a more challenging aspect of the rule, particularly if the adviser does not regularly leverage social media marketing. As a reminder, when it comes to testimonials or endorsements, Rule 206(4)-1 requires certain disclosures to be clear and prominent. The disclosure should indicate whether the promoter is a current client or not, if there was cash or non-cash compensation provided, and should include a brief statement addressing any material conflicts of interest.

One specific issue that came up during the roundtable discussion is hypothetical performance. Section 206(4)-1 is very prescriptive when it comes to hypothetical performance, and including it on your website can lead to regulatory scrutiny, as evidenced by recent SEC enforcement actions. When reviewing marketing materials, which includes website content, be aware of anything that could be deemed to be hypothetical performance.

An adviser must adopt and implement policies and procedures that are reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the “intended audience.” In other words, if your marketing material contains hypothetical performance, avoid posting the content on your website or any other public platform, as it can be accessed by anyone and therefore cannot be restricted to your intended audience.

SEC’s Regulation Best Interest

Regulation Best Interest, also known as Reg BI, under the Securities Exchange Act of 1934, establishes a best interest standard of conduct for broker-dealers and its associated persons when making a recommendation to retail customers.

There are four main obligations under Reg BI:

1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation

Similar to the investment adviser’s fiduciary duty (specifically the duty of loyalty), the Conflict of Interest Obligation for a broker-dealer speaks to a firm’s obligations to mitigate and disclose its conflicts of interest.

Your firm may want to consider forming a governance committee, with members from all business units, to identify conflicts and mitigate them where possible. Additionally, consider maintaining a “conflict of interest inventory” to memorialize actions taken to mitigate conflicts, which may include disclosing all conflicts identified and building controls to supervise such conflicts.

Approaching regulatory examinations

Whether you are a broker-dealer or investment adviser being examined by the state, FINRA or SEC, there are some common challenges related to regulatory examinations.

The panelists discussed two main schools of thought when it comes to answering questions from regulatory examiners:

1. Overly explain and leave no room for leading questions or interpretation
2. Be short, concise, and directly to the point

As some panelists suggested during the roundtable discussion, perhaps a balance between the two methods may be best. Regardless of which style you choose to use when facing your examination team, one panelist reminded us that examiners are human beings just like you.

It is highly recommended that the chief compliance officer (CCO), or their delegate, be the point of contact for questions during examinations. It’s best to be prepared, so consider taking some time with your team internally and outside advisors to prepare for examination. A mock exam conducted by an external consultant can be a valuable tool to help you get ready.

Mitigating cybersecurity risks

These days many businesses are wary of the constant cyber threats from malware, ransomware, phishing scams, etc. For financial service firms, it’s especially important to take precautions against cyber threats.

Most firms maintain sensitive client information combined with potential access to those clients’ funds. Hackers and criminals posing as clients may attempt to wire large sums of money out of client accounts, steal clients’ information, hold your proprietary system for ransom, and the list goes on.

Technology and cybersecurity are fast-paced and ever-changing. As such, it’s important to be proactive and work with your security team and/or IT department to safeguard against ongoing cyber threats – and be prepared to respond quickly if you do fall victim.

When was the last time you reviewed or tested your incident response plan? Everything is digital these days; however, one panelist advised firms to have a hard copy of their plan onsite in case you’re ever locked out of your system.

Further, in the event of a cyber incident, your firm may be required to file notices with regulators, including FINRA, the SEC, and various states.

Running an effective compliance program

Compliance with applicable rules and regulations is pivotal to the success of broker-dealers and investment advisers. It’s vital for your firm to have a culture of compliance, established from the top down.

Consider establishing a committee that meets regularly to discuss compliance issues, such as new and updated regulations, the challenges your firm may face to comply with certain rules and regulations, and compliance concerns stemming from changes to the business.

Compliance can be challenging, but you don’t have to face it alone. Reach out to Kaufman Rossin’s risk advisory services team for assistance with these and other SEC and FINRA regulatory compliance matters. Additionally, if you are a compliance executive, consider joining Kaufman Rossin’s Investment Compliance Executive Network to connect with your peers, share best practices, and discuss challenges. Contact us to learn more.