Page 50 - Investment Advisor - October 2021

THE COMPLIANCE COACH

By Thomas D. Giachetti

4 SEC Hot Buttons to Address Immediately

The agency is in a prickly mood, and may compel advisors to reimburse
clients if certain disclosures aren’t met.

he Securities and Exchange imitigation issues. This includes a let-
Commission continues to be ter to clients and corresponding Part
Tvery aggressive, progressive and 2A disclosure, and whether, based
punitive and often seeks every oppor- upon the resulting amount of economic
tunity to compel advisors to reimburse windfall to the advisor, the firm, dur-
clients. Advisors need to stay on top of ing an upcoming examination, could be
these hot buttons. pressed by the SEC to reimburse clients.
Each of the above ADV amendments
MARGIN INTEREST should be treated as material and should
If you have clients on margin, and bill be provided to all affected clients.
on the higher margin value, beware. The
SEC has been aggressively reviewing BACK-TESTED HYPOTHETICAL
margin balances and seeking reimburse- To protect your firm, adopt a writ- PRESENTATIONS
ment to clients unless there is clear 2A ten policies and procedures document. The SEC despises these types of pre-
Brochure disclosure. The policy should state that you con- sentations and continues to review
Thus, if you bill on the higher margin sider cash to be an asset class, and — as them aggressively. We have prepared
value, there should be unambiguous dis- a result — you include it in your fee cal- disclosures for clients who use such
closure on your 2A Brochure indicating culation, regardless of your fee model. presentations.
the same, including the conflict of inter- Also include corresponding disclo- However, as a result of the SEC’s pos-
est that arises (i.e., because you earn sure on your 2A Brochure, including ture, and corresponding issues raised by
a higher fee, there is a disincentive to that at times (such as now) your fee will the new Marketing rule, all advisors who
encourage the client to trim or eliminate exceed the money market yield. Without use such presentations should have them
the margin balance). the above clear disclosure — you con- reviewed, as well as enhance the corre-
In addition, because the SEC recent- tinue to charge on cash at your peril. sponding disclosures. This will help mit-
ly has sought express client acknowl- igate potential adverse SEC comments
edgment of such a billing arrangement, WRAP PROGRAM SPONSORS and reviews, which can be punitive.
consider a short corresponding Margin The SEC equally loathes wrap programs. There is a caveat. The SEC views
Acknowledgment to be executed by the The onus will continue to be on the all non-Global Investment Performance
client. Or, you can include the disclo- advisory firm to prove that it does not Standards-verified presentations aggres-
sure on the Fee Schedule to his Advisory economically benefit from sponsoring sively, regardless of type (i.e., back-tested
Agreement in lieu of the Acknowledgment. such programs. Clear and concise Part hypotheticals, representative accounts,
However, I prefer the Acknowledg- 2A and corresponding wrap brochure composites, etc.). Therefore, some
ment at the time that the client commenc- disclosures are a must. issues to address include: cessation of
es the use of margin because he may not Also, if you manage individual equi- gross of fees performance, solicited vs.
use margin for a long time subsequent to ties (including ETFs) as part of the wrap unsolicited presentations, maintaining
the execution of the Advisory Agreement. program, and utilize a custodian that a list of recipients, applicability to the
has ceased charging transaction fees on recipient’s objective and the impact of
CASH BALANCES POLICY such securities, the SEC could inquire as transaction/custodial fees.
Also beware if you bill on cash (i.e., to why the firm did not correspondingly
money market funds). The SEC doesn’t decrease the firm’s advisory fee to its Thomas D. Giachetti is chairman of the
like that, especially in this very low-yield program clients. Investment Management and Securities
environment when your advisory fee is We urge those affected wrap spon- Practice Group of Stark & Stark. He can be Adobe Stock
substantially higher than the yield. sors to contact us to discuss potential reached at [email protected].

48 INVESTMENT ADVISOR OCTOBER 2021 | ThinkAdvisor.com