Failing to meet compliance guidelines can be costly for your business. The SEC can – and does – fine broker-dealers and investment advisors who fail to comply with recordkeeping rules and other compliance requirements. It can be challenging for busy advisors to keep up with the constant changes to regulatory guidelines, but monitoring compliance trends can help you stay ahead of the curve.
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Financial Advisor Compliance Trends to Watch in 2024 and Beyond
Emerging trends and technologies in the financial services space can influence where the SEC and other regulatory agencies focus their attention. The compliance trends below are some of the ones that are most likely to be top of mind for regulators in the months and even years to come.
1. Recordkeeping
The SEC is taking steps to crack down on advisory firms and broker-dealers that fail to meet recordkeeping compliance standards. In February 2024, the regulatory agency fined 16 firms more than $81 million for failing to maintain proper records. Some of the most significant violations involved:
- Use of unapproved (off-channel) communication methods, including text messages, to discuss business operations and proposed investment advice
- Failure to maintain records of these communications
- Failure to reasonably supervise to prevent recordkeeping violations
What It Means for Advisors
Advisors should be aware that the SEC is scrutinizing firms to ensure that records are properly maintained, and the case cited above may be just the start. Reviewing your recordkeeping policies and procedures, particularly when it comes to electronic communication, as well as your framework for addressing potential issues, can help you reduce the risk of a noncompliance violation.
2. Pay to Play
The SEC’s pay-to-play rule, Rule 206(4)-5, prohibits registered investment advisors (RIAs) from providing their services to government entities for money if they’ve made a campaign contribution within the previous two years. Given that 2024 is an election year, it’s expected that the SEC will be paying close attention to ensure firms are compliant with this rule.
In April 2024, the SEC charged one RIA with pay-to-play rule violations, resulting in a $60,000 penalty. An employee of the firm in question was found to have contributed $4,000 to a state government official’s political campaign. Said official was in a position to influence the selection of investment advisors for the state’s board of investment.
What It Means for Advisors
Advisors should review their internal policies regarding political campaign contributions, as the SEC may be inclined to increase audit activity surrounding these contributions leading up to the election. All employees should be familiar with your firm’s written compliance policy surrounding contributions. Should you become aware of a possible violation, it’s important to take steps to mitigate it as quickly as possible.
3. Cybersecurity
Cyber security is a hot topic in compliance circles, as the threat of cyber attacks continues to loom over the financial services industry. As compliance trends go, advisors should be aware of how the SEC and other regulatory agencies are taking steps to minimize the potential risk to both firms and investors.
Some of the most recent updates center on reporting. The SEC issued a new rule requiring firms to:
- Disclose cybersecurity incidents on Form 8-K within four business days (for domestic registrants)
- Make an annual disclosure of cyber security risk management, strategy and governance using Form 10-K (for domestic registrants)
Foreign private issues (FPIs) must report using Form 6-K and Form 20-F, respectively.
What It Means for Advisors
Advisors should consider reviewing their firm’s cyber security policies, including security measures and reporting procedures. It’s also important to review the SEC’s new cyber security rules to ensure that you are not only reporting incidents promptly, but also providing all the necessary information required by the updated regulations.
4. Artificial Intelligence
AI is reshaping the financial services landscape in a multitude of ways. Some advisors have embraced it, others remain skeptical. And while the SEC has not issued any firm rules regarding its use as of yet, investors can expect rules to be forthcoming at some point in the future.
In July 2023, the SEC proposed a rule that would require broker-dealers and RIAs to address potential conflicts of interest associated with using predictive data analytics and similar AI tools to interact with clients. If the rule becomes final, firms would be required to:
- Determine if the use of AI technology creates conflicts of interest that put the firm’s interests ahead of clients’
- Eliminate or neutralize the effect of any such conflicts that are created
- Establish written policies and procedures that are designed to ensure compliance with the proposed rules and maintain proper records
What It Means for Advisors
If your firm is experimenting with AI tools or considering them, you should be aware that the SEC has expressed an interest in how they’re used. The biggest challenge for advisors is ensuring that any AI applications or software they’re using are trained to detect biases that could create skewed predictions that favor the firm, rather than the client.
5. Environmental, Social and Governance (ESG)
Environmental, social and governance (ESG) investment strategies have gained popularity as more investors focus on responsibility and sustainability. The SEC has proposed rules requiring advisors to be more transparent in discussing ESG offerings with their clients.
Specifically, firms would be expected to:
- Offer enhanced disclosures regarding ESG strategies in fund prospectuses, annual reports and advisor brochures
- Implement a layered disclosure approach that would allow investors to compare ESG funds at a glance
Environmentally focused funds would also be required to disclose greenhouse gas emissions associated with their underlying investments.
What It Means for Advisors
If you offer advice on ESG strategies, the SEC may require greater transparency surrounding those investments, should the proposed rules become final. In the meantime, you can prepare your firm by reviewing your disclosure policies surrounding ESG investments and ensuring that you’re providing clients with everything they need to make informed decisions.
6. Cryptocurrency
Cryptocurrency remains largely unregulated, but that could change as demand grows among investors. The SEC, FinCEN (Financial Crimes Enforcement Network) and the IRS have all taken an interest in how cryptocurrency should be regulated.
Proposed changes to the SEC’s custody rule, for example, would require RIAs to maintain all assets with a custodian, including cryptocurrency. Additionally, advisors should know what securities laws may apply when advising on initial coin offerings (ICOs).
What It Means for Advisors
If you offer cryptocurrency as an investment option to clients, it’s important to ensure that you maintain all assets with a custodian. It’s also wise to review your crypto partner’s recordkeeping and reporting policies for compliance.
7. Regulation Best Interest (Reg BI)
Regulation BI establishes a best-interest standard of conduct for broker-dealers. Any recommendations a broker-dealer makes must promote the best interest of the client at all times.
Reg BI is on the list of compliance trends for 2024, as the SEC is expected to prioritize enforcement actions. In January 2024, the SEC announced a $2.2 million penalty levied against a broker-dealer for violating the best interest rule.
What It Means for Advisors
Registered broker-dealers must file a comprehensive Form CRS detailing products and services, as well as fees and potential conflicts of interest. They must exercise reasonable care in making recommendations and avoid conflicts of interest. It’s also important to have a written compliance policy detailing your firm’s procedures for enforcing the Reg BI standard.
8. Anti-Money Laundering
Anti-money laundering regulations are designed to prevent criminal financial activity by requiring firms to verify who they’re working with and monitor for suspicious transactions. In May 2024, the SEC and FinCEN proposed a rule that would require RIAs and exempt reporting advisors (ERAs) to establish, document and maintain written customer identification programs (CIPs).
The proposal is meant to strengthen existing anti-money laundering laws and follows another rule proposed in February 2024 that would designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act. This change, if it takes effect, would obligate RIAs to file suspicious activity reports, among other requirements.
What It Means for Advisors
Should the SEC finalize these proposed rules, it would likely have a direct impact on your firm’s reporting procedures and policies. Reviewing your current systems for verifying client identities and monitoring financial transactions can help you identify where you might need to make changes should the rules take effect.
Bottom Line
Compliance trends may come and go, but the more you pay attention to current SEC rulings and other news, the easier it may be to adapt as new regulations come along. These trends are not the only issues the SEC and other rulemaking bodies are paying attention to for 2024, but they are among the most notable.
Tips for Growing Your Advisory Business
- Compliance extends to every aspect of your business, including how you market your services. If you’re looking for a way to simplify your marketing while remaining compliant, you might consider partnering with a platform like SmartAsset AMP. This innovative service helps you connect with leads and nurture relationships automatically while leaving you free to focus on other aspects of running your business. Schedule a free demo to learn how you can use it to grow your client list.
- Broker-dealers and RIAs are required to have a chief compliance officer (CCO), though it’s up to you to decide who fills this role. You might handle the responsibilities yourself in the initial stages of growing your business, and decide to hire a full-time or part-time CCO consultant later. Investing in compliance software can make it easier for whoever acts as your firm’s CCO to do their job.
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