The Securities Compliance Podcast: Compliance In Context Patrick Hayes

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.
 
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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.
 
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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

Welcome back to the Compliance in Context Podcast! On today’s show, we welcome in David Scalzetti, Senior Director of Regulatory Products and Strategy at ICE, as part one of a two-part program looking at the impact of data on compliance. In the first part of our interview, David will look at how data can support your firm’s compliance program in any number of areas including portfolio management, liquidity, valuation, fund reporting. In our Headlines section, we look at Commissioner Uyeda’s second term and a recent challenge from SIFMA regarding the Department of Labor’s new “Retirement Security Rule” proposal. And finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where we look at an interesting characteristic of the American bison and what it can teach us about the upcoming busy season for compliance officers.
 
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Headlines

Mark T. Uyeda was recently sworn in for his second term as SEC Commissioner
SIFMA comment letter requesting DOL to withdraw “Retirement Security Rule” proposal

 
Interview with David Scalzetti

How has the topic of valuation continued to evolve in the compliance space and how can data be used with valuation to enhance a firm’s compliance program?
What are the compliance obligations associated with SEC Rule 2a-5 of the Investment Company Act?
How can data support compliance with good faith determinations of fair value in compliance with 2a-5?
How can data support compliance with valuation methodologies across investment strategies?
Best practices when thinking about and establishing a valuation process
The impact of data on liquidity and portfolio management
Establishing a liquidity risk management program in compliance with SEC Rule 22e-4 under the Investment Company Act
How can firms use data on liquidity to manage through volatile markets?
How can portfolio management and liquidity data be used to substantiate compliance with the SEC Marketing Rule?

 
What’s On My Mind

Understanding the American bison and how it faces adversity

 
Quotes
11:28 – “We’ve been a major consumer of underlying input data and analytics information. So collecting bids, and quotes, and tree data, and other information that is very useful to understanding the valuation. Historically, most clients just want the answer key. Like, you know, ‘I don’t care what the inputs are, just tell me what your good faith estimate of that fair value price is.’ But as we’ve evolved over time as an industry and the regulators have evolved, you’ve seen more and more requests from the regulators to better understand what went into that valuation and how they get comfortable using a particular valuation. When, in a lot of cases, the underlying input data could lead to a range of good faith estimates. So what we’ve noticed and what we’ve been focusing on is repurposing a lot of that input data into metadata that is useful for whether it’s an IPV team or a compliance officer or someone in regulation or reporting to better understand how that evaluation works.” – David Scalzetti
20:17 – “So backtesting is a huge piece…Being as large of a provider as we are and [with the] number o

Welcome back to the Compliance in Context Podcast! On today’s show, we welcome in Brian Rubin to discuss the current state of CCO liability and revisit the NSCP Firm and CCO Liability Framework and review its impact on the investment management industry nearly two years after its original publication. In our Headlines section, we look at recent data collected on the growth of the accredited investor population and review the SEC’s denial of a Coinbase petition for digital asset rulemaking. And finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where we review how a recent Supreme Court hearing could signal the end of SEC administrative proceedings as we know it.
 
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Headlines

Review of the accredited investor definition
SEC denial of Coinbase petition

 
Interview with Brian Rubin

When does the Commission typically bring enforcement actions against compliance personnel?
Are compliance officers on the front line?
Are compliance officers responsible for implementing and executing policies and procedures?
Do compliance officers need to become experts of everything?
What is a wholesale failure?
Did Grewal cite any examples of CCOs being charged for purely compliance-related failures?
Are there other instructive examples of CCO liability cases?
What was the SEC’s approach to determining CCO liability in the Hamilton case?
How could the SEC have applied the NSCP Framework in the Hamilton case?
How do you see the issue of CCO liability evolving in the future?

 
What’s On My Mind

US Supreme Court case on SEC could have wide impact on agency enforcement.

 
Quotes
11:42 – “I would tend, I think, to slightly take a different perspective than Mr. Grewal and agree with you that I think traditionally, the way most of the time I think about compliance, it's not that it's the front-line supervision. I do think that compliance, just in as much as they are another person at the firm who should engage in practice compliance. Compliance as a functional ar

Welcome back to the Compliance in Context Podcast! On today’s show, we feature a Lessons From The Front Lines episode we welcome back to the show a very special guest, namely SEC Division of Examinations Senior Counsel Christopher Mulligan to review how the Division of Exams is approaching the SEC Marketing Rule one year after the compliance date, best practices the SEC has seen firms implement, and some of the challenges or issues examiners have seen firms dealing with as it relates to the Marketing Rule.
 
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Interview with Christopher Mulligan

How is the Division of Examinations approaching the new SEC Marketing Rule one year after the compliance date?
What are some of the best practices you’ve seen successful firms implement into their compliance programs?
How can firms best substantiate the statements and claims they make in their marketing?
What are some of the challenges you’ve seen firms struggle with during examinations of the new Marketing Rule?
What are some of the issues you’re seeing with regard to testimonials and endorsements?
What are some of the issues you’re seeing with regard to performance marketing?
How can firms avoid the traps associated with marketing templates and stale information?
How do you see SEC examinations continuing to evolve in the marketing and advertising space?

 
Quotes
09:11 – “So in exams, what we have tried to do is train our staff and be as prepared as possible. We know registrants are doing that, right? So we want to work as hard as they are in terms of understanding the new rule and being able to analyze the compliance with it. But we also want to communicate as clearly as possible what we're looking for and what we're analyzing to help registrants who are trying their best to comply with the new rule to understand how, what we're going to be looking for so they can spend the time to be prepared.” – Christopher Mulligan
21:17 – “We've also seen examples of policies that just weren't tailored. And this is where off the shelf can be very dangerous. So policies and procedures that either reference activities that they don't do and have no intention of doing or worse, they don't address testimonials or endorsements even in their engaged in those activities. Or they share on top in the policy procedure, they're still talking about the Cash Solicitation Rule, and they haven't been replaced with the endorsement and testimonial section.” – Christopher Mulligan
31:03 – “I don't want to be scary, but we have seen deficiencies across most of the elements of the new marketing rule, while also seeing great work. So I hope that this is balanced and that this is motivation to make sure you don't have any of these issues, but also for those advisors that are, that have done a great job, to keep up.” – Christopher Mulligan
32:15 – “People will put together templates or have a stable of pre-approved materials and stuff like that. That's great. That's a good thing that you can have pre-approved materials, but the one thing you've got to be conscious of and one of the things you talked about is don't just let it sit there and get stale and grow moss on it over time. You've got to go back and look at that because sometimes some of the services that are provided in that pre-approved template or those other types of offerings, those persons may no longer be at the firm.” – Patrick Hayes

Welcome back to the Compliance in Context Podcast! on today’s show, we do a deep dive on the recent rule proposal from the SEC on predictive data analytics technologies and some of the significant compliance challenges associated with that rule proposal and the push back we’ve seen from the industry. In our Headlines section, and in record-breaking time this year, we’ll review the 2024 SEC Examination Priorities pushed out by the Division of Examinations. And finally, we’ll wrap up today’s show with another installment of History Has Your Back, where a famous story involving the renowned anthropologist Margaret Mead gives us a little insight into the mark of where civilization begins, and perhaps a little insight into the mark of a good compliance program.
 
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Headlines

The SEC Division of Examinations releases its 2024 Examination Priorities.

Interview with Dalia Blass

What does the SEC rule proposal say?
What are some of the issues or challenges with the rule proposal and what are some of the key issues involved?
What “covered technologies” are included in the rule proposal?
What constitutes an “investor interaction”?
How is conflict of interest defined in the rule proposal?
What does “neutralization” of a conflict really mean?
How does the definition in the rule proposal reconcile with the standards of conduct used by the Commission in other contexts?
Does the proposal contemplate the impact to other rule proposals?
Does the proposal provide details regarding the cost of complying with the rules as proposed?
For those firms using predictive data analytics, does the proposal discuss who should be conducting the relevant assessments and testing or supervising this activity?
Have there been any additional developments since the rule was proposed and what can firms do now?

History Has Your Back

Developing an appreciation for the mark of civilization and how to approach issues inside your firm’s compliance program.

 
Quotes
09:19 - “It actually tracks some of these statements that we had heard from Chair Gensler. He has spoken previously several times about the use of technology by broker-dealers and investment advisors, and the potential for conflict to be embedded in the use of that technology when it comes to interactions with investors. So what this rule proposal does–the target of this rule proposal is to look at the conflicts of interest that could be associated with the use of predictive data analytics and find ways to make sure that these conflicts are being addressed by the brokers or the advisors. So that, you know, at its core, it is about understanding the conflicts and managing these conflicts with respect to these technologies.” - Dalia Blass  
20:08 - “It's really important to, first of all, appreciate the power of technology in our space and what it has delivered to the American main street investor, American investor in general.” - Dalia Blass   
22:52 - “So yes, there could be issues, but let's understand what the issues are (and if they're addressed) and do a cost benefit. Because the last thing we want is something that, frankly, would raise the cost so much, would be so onerous, would be so complex that, you know, it will not enable, you know, smaller broker dealers and advisors to compete and also become a significant barrier to entry for anybody wanting to come into this space.&rdq