The Securities Compliance Podcast: Compliance In Context Patrick Hayes

Welcome back to the Compliance In Context podcast! On today’s show, we review an incredibly important topic for all SEC-registered broker-dealers and investment advisers, namely third-party due diligence of service providers—what situations require it, regulatory considerations, and what are the basic building blocks for establishing a successful due diligence program inside your firm. In our Headlines section, we review the recent SEC rulemaking amending Regulation S-P. And finally, we’ll wrap up today’s show with another installment of History Has Your Back, where an old quote from an ancient stoic might just help you make the best of a bad situation when things in your compliance program don’t go exactly as planned.
 
Show
Headlines
 

SEC adopts rule amendments to Regulation S-P to enhance protection of customer information

 
Interview with Kevin Gleason
 

Reviewing the importance of third-party due diligence in the investment management space
What are the basic building blocks of a successful third-party due diligence program?
What key elements of service provider agreements should be reviewed?
What risk factors should be considered when building your due diligence program?
What are some of the common situations requiring third-party due diligence and what regulatory considerations should be examined?
How can firms make sure to avoid regulatory enforcement in this area?
When designing your firm’s due diligence program, what key considerations can help support proper supervision and ongoing monitoring?
Are there other business units outside of compliance that should be involved in the process?
Establishing a frequency of review that works with your firm’s compliance program
Understanding the value of third-party due diligence and how to navigate challenges in the process
Reviewing practical takeaways and lessons learned

 
History Has Your Back
 

Examining a famous quote from the Stoic philosopher Epictetus and what it can teach us about dealing with the pressures of compliance

 
Quotes
17:20 – “Does the level of scrutiny need to be the same for, you know, someone that, you know, provides you maybe some training and content for your employees as it does for someone who, you know, maybe executes trades or who, you know, performs sort of risk analytics, maybe a fact set or someone or, you know, right? You know, I'm not here to say it does or doesn't, but to be able to do all of those people and provide the same sort of level of rigor, I think, is rather would be rather difficult for firms.” – Kevin Gleason
 
25:43 – “I mean, that is sort of the next step, I think, in the process, which is working on developing a questionnaire. With regards to sub-advisors, at least in my mind, right, they provide a similar service. It may be in regard to different asset types or asset classes. It may be taking different risks but really, they manage assets on behalf of your clients or on behalf of a fund or account. Where, I think, it’s more challenging is, now you

Welcome back to the Compliance In Context podcast! On today’s show, we review one of the most important topics impacting broker-dealers this year, namely the issue of remote supervision and how to address the new Residential Supervisory Location Designation and the Remote Inspections Pilot Program. In our Headlines section, we review the recent Supreme Court decision impacting 10b-5 disclosures and a recent FinCEN report tracking new information and trends surrounding elder financial exploitation. And finally, we’ll wrap up today’s show with another installment of Outtakes, where we look at the recent risk alert from the Division of Examinations focusing on new SEC Marketing Rule violations.
Headlines

Supreme Court decision impacting 10b-5 disclosures
FinCEN Issues Analysis on Elder Financial Exploitation

Show
Interview with Ben Marzouk and Andrew Mount

Reviewing the history of remote work and related compliance monitoring and supervision
What does FINRA consider an office? What are the implications of how that’s defined?
How FINRA is managing remote work in general?
What is Regulatory Notice 24-02?
Discussing the impact of FINRA Rule 3110.19 (Residential Supervisory Location) and FINRA Rule 3110.18 (Remote Inspections Pilot Program)
What are the practical applications of these new rules?
How do you see the issue or remote work evolving throughout the course 2024?

Outtakes

SEC Risk Alert: Initial Observations Regarding Advisers Act Marketing Rule Compliance

Quotes
14:50 – “People soon realized that no one was really going back to the way things used to be five days a week in a set physical office location. To some extent, people were going to continue to work from home for some period of time, even at the pandemic subsided. So with that in mind, FINRA reminded firms that, ‘hey, if you’re going to continue to allow people to operate their home and do brokerage business from their homes, you’re going to need to supervise that location.’ And that supervision would mean inspection on some regular set schedule. It would also mean, and we can get into it later, thinking about your membership agreement.” – Ben Marzouk
20:13 – “If an associated person works two days a week from home and three days from the office, FINRA’s staff has said that that would mean towards being a regularly working at home arrangement, and you’d have to count that residential location and as a person. office. I would say that that’s not to say that just because someone’s one day at home and four days in the office during the week you don’t need to count the one day at home, you need to look at the locations where your associated persons work on a routine and predictable schedule with a firm’s knowledge and some sort of formalized arrangement and, you know, make that determination. by case basis. It’s a really a facts and circumstances analysis. You know, that FINRA, as staff has said recently, at least, that of locations that you use on an ad hoc basis, so I’m thinking locations where you work from the office five days a week, but you stay at home on Friday because you have a contra

Welcome back to the Compliance In Context podcast! On today’s show, we feature a Lessons From The Front Lines episode with renowned retirement plan fiduciary expert, Mr. Fred Reish, to help us through another groundbreaking DOL Fiduciary Rule and unpacking where and how it will affect investment adviser and broker-dealer firms across the country. This is an episode you won’t want to miss!
 
Show
Interview with Fred Reish

Reviewing the evolving standards of care (Reg BI, RIA, DOL, NAIC)
How have disclosures evolved to comply with the differentiated standards of care?
What does the new DOL Fiduciary Rule say and what’s changing?
Who is going to be impacted by the changes to this new rule?
What are the impartial conduct standards?
Are there disclosures and other exemptions out there to help mitigate the conflicts noted in the new rule and how can firms comply with them?
What triggers an investment recommendation under the new rule?
Is there a wholesaler exception?
What is the compliance date for the new rule?
What kinds of information does an individual need to review in order to effectively perform a comparative analysis between for an IRA recommendation?

 
Quotes
7:54 – “If you look at both of those, I think Reg BI for broker dealers is actually a tougher standard. I know that’s going to surprise some investment advisers to hear, that but, and part of that’s because the interpretation for investment advisors is really principles, truly principles-based. And, you know, the SEC said the duty of care and the duty of loyalty for investment advisors together is a best-interest standard of care, but very principles-based. If you get into Reg BI, the standard of care is principles-based, but then there are a bunch of rules-based parts to Reg BI, so for no other reason other than just the volume of rules alone under Reg BI make it a more complicated and more demanding set of requirements.” – Fred Reish
21:32 – “Number one, the advisor has to satisfy the impartial conduct standards. Well, what are impartial conduct standards? That's a label from the Department of Labor. It has meaning, though. You have to act with a duty of care, sort of thing of a fiduciary duty, and a duty of loyalty. Similarly, a fiduciary duty. You can't put your interest ahead of the investors. No more than reasonable compensation relative to the services provided, no materially misleading statements. There is a group of things like that that are called the impartial conduct standards.” – Fred Reish

Welcome back to the Compliance In Context podcast! On today’s show, I am thrilled to welcome back to the show, Mr. Rob Tull, who talks us through what’s in the complete toolkit every CCO needs to build an effective compliance program. In our Headlines section, we review recent comments from the SEC’s Enforcement Division responding to criticisms from the crypto industry. And finally, we’ll wrap up today’s show with another installment of Outtakes, we look at the first-of-its-kind enforcement action against investment advisers for misleading statements about their use of artificial intelligence.
 
Show
Headlines

SEC Division of Enforcement Director Gurbir S. Grewal responded to criticisms by the crypto industry challenging the agency’s authority and motivations regarding the treatment of cryptoassets.

 
Interview with Rob Tull

What’s the complete CCO toolkit needed to build an effective compliance program?
What skills help make a great CCO?
Simple steps CCOs can take to improve detection of issues
How can you enhance your ability to communicate and process information?
What can I do to help ensure my firm empowers me in my role as CCO?
What are some best practices to maximize the resources I have available?
How understanding the firm’s strategic plan can significantly help your compliance program and your role as CCO.

 
Final Segment – Outtakes

SEC settled charges against two investment advisers for making false and misleading statements about their use of artificial intelligence in a first-of-its-kind enforcement action

 
Quotes
11:58 – “So if I had to stack these things in priority, the first thing is, do I know the rules? Am I knowledgeable? So is a compliance officer knowledgeable? That’s kind of, it’s rough. There are layers to that. The first thing is, do you know the regs that apply to your business? And that’s where, you know, that’s where there’s a ton of content from NSCP, from law firms, from consulting firms—like, we get that, we get the knowledge. But then there’s two layers on top of that. Then there’s also, do you know the industry you’re in? Like, it’s one thing to know the rules, but do you know what’s going on in the industry? What’s happening for investment managers and broker-dealers in aggregate? And then what’s happening in your business? Like you need to know your business. And that’s kind of like the foundation, like that knowledge piece.” – Rob Tull
20:29 – “The beauty about empowerment is we tend to think, once I’m the named CCO, I am, by default, empowered. That’s the way we tend to get because the rules are title-focused, we get title-focused. But what we forget is that title has nothing to do other than who gets to wear the target. What it really talks to in our ability to be empowered is our ability to demonstrate–it’s how well we demonstrate our competence and our knowledge. And it’s not an ivory tower task. It is a ‘what do you bring to the business as a value-add, to take compliance from a checklist to make it something that is additive to the business. And that is the most important thing. And it’s not just–and this is beyond the concept of profitability, beyond that concept–it is how do you mak

Welcome back to the Compliance In Context podcast! On today’s show, we have with us two very special guests in the investment management space, Karen Barr from the Investment Adviser Association and Lisa Crossley from the National Society of Compliance Professionals, to discuss the current state of the Investment Adviser industry, what new regulations impacting investment advisers are on the horizon for 2024, and other priorities both organizations are focusing on in 2024. In our Headlines section, we look at a new FinCEN proposal to include “investment adviser” in the definition of “financial institution” under the Bank Secrecy Act (“BSA”) and a new FAQ for registered investment advisers relating to the SEC Marketing Rule. And finally, we’ll wrap up today’s show with another installment of History Has Your Back, where we revisit a famous quote from a tennis legend provides us some inspirational words heading into a busy regulatory filing season.
 
Show
Headlines

FinCEN proposed to include “investment adviser” in the definition of “financial institution” under the Bank Secrecy Act (“BSA”)
SEC”) issued an updated FAQ for investment advisers relating to SEC Rule 206(4)-1 (the “Marketing Rule”), and the reporting of gross and net performance within advertisements

 
Interview with Karen Barr and Lisa Crossley

General overview of the IAA and the NSCP
What is the state of the investment adviser industry?
What were some of the key metrics from the Investment Adviser Industry Snapshot 2023?
What are some of the current policy initiatives coming out of the SEC and where do these proposals stand now?
What are some of the sleeper policy initiatives you anticipate hearing about in 2024?
What are 2024 organizational initiatives for the NSCP?
What are 2024 organizational initiatives for the IAA?

 
Final Segment – History Has Your Back

Understanding what Billie Jean King meant when she said “Pressure is a Privilege” and what it can teach all compliance officers heading into a busy 2024

 
Quotes
11:18 - “I think one of the things that I heard in both of your quick responses there and thinking about both organizations that I personally love, being someone who’s obviously very involved in the space, is this idea of community. With the IAA, it is the community of those that are providing services in that trade. On the NSCP side, it’s those that are kind of practicing the specific trade inside of the firms doing compliance. You build these fantastic communities that really help lift each other up in a lot of different ways.” – Patrick Hayes 
23:52 - “It’s very important to let folks know that they need to advocate on this issue. And I just want to say we appreciate that advocacy. It’s your advocacy that inherently helps NSCP members, especially on that issue and so I just wanted to add one thing that we did a little bit differently than this year. It was always–When I was a CCO, I never understood why there was an educational bridge between the SEC and the compliance professionals. And I was fortunate this year to get the

Welcome back to the Compliance in Context Podcast! On today’s show, we welcome back in welcome in David Scalzetti, Senior Director of Regulatory Products and Strategy at ICE, for Part II of a part of a two-part program looking at the impact of data on compliance. In this program, David will focus on how data can dramatically help firms trying to navigate new regulations, especially in areas affecting mutual funds and broker dealers. In our Headlines section, we review two recently adopted rules from the SEC that expand the definition of “broker-dealer” under the SEA. And finally, we’ll wrap up today’s show with another installment of Outtakes, where we review another significant enforcement action relating to text messaging and related messaging applications.
 
Show
Headlines

The SEC adopted two new rules under the Securities Exchange Act (Rule 3a5-4 and 3a44-2) to further define the term “as a part of a regular business.”
The new rules expand the scope of firms that are required to register as broker-dealers and as government securities broker-dealers.

 
Interview with David Scalzetti

Background on the SEC Names Rule requiring registered investment companies whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”).
What specifically do managers of a mutual fund need to do to comply with the Names Rule?
What are some of the ways firms can do to better manage the data to ensure compliance with the Names Rule?
How can data assist in the portfolio management process to benchmark against how other firms are evaluating their growth, value, or sustainable investment strategies?
What are some best practices firms can utilize to comply with the Names Rule or enhance its own internal controls?
Background on SEC Rule 15c2-11 (Broker Dealer Quotations over a quotation medium)
What can firms do to ensure compliance in difficult areas like fixed income that carry new requirements under SEC Rule 15c2-11?
How can data assist in determining which fixed income securities may be eligible for the relief provided in the SEC Staff’s December 16 No-Action Letter?

 
Outtakes

SEC Fines 16 Firms More Than $81 Million for Off-Channel Communications

 
Quotes
11:24 - “So the names rule dates back to the dot.com era. Really when the SEC was finding some nefarious actors were marketing themselves as technology funds because everyone was getting in on technology. Although, they may not have been investing in true technology funds. So they introduced the requirement to have an 80 percent investment policy requirement for the use of thematic or even industry-specific or even location-specific terms implied in the fund’s name, that at least 80 percent of investments need to align with that. That rule was recently amended to add two things. Explicitly add strategy terms like value and growth which were considered exempt from the 80 percent policy.” – Da