The North American Securities Administrators Association (NASAA) recently released its annual report on the state-registered investment adviser industry and the related regulatory activities of state securities regulators.
NASAA’s 2021 Investment Adviser Section Annual Report includes an updated snapshot of the investment adviser population in the United States, an updated profile of the average state-registered investment adviser, and a recap of the work of the Investment Adviser Section over the past year. It also includes suggestions for compliance areas that state-registered investment advisers should consider in handling the remote working environments that have become common due to the COVID-19 pandemic.
“State securities regulators devote significant resources toward helping state-registered investment advisers, many of which are small- and mid-size businesses, better serve their clients by remaining in compliance with state securities law,” said Lisa A. Hopkins, NASAA President and West Virginia Senior Deputy Securities Commissioner, in announcing the release of NASAA’s annual investment adviser report.
Model rules to help advisers and their clients
In this year’s report, NASAA highlighted new model rules that states could implement to strengthen protections for investors and compliance by advisers.
IAR continuing education model rule
The Investment Adviser Representative Continuing Education Model Rule that NASAA members approved in November set parameters by which states can implement continuing education programs for investment adviser representatives (IARs) in their jurisdictions. Unlike other financial service professionals, IARs have not been subject to a continuing education requirement to maintain their licenses with state regulators but the model rule helps states close that gap, NASAA explained in its investment adviser report.
NASAA’s IAR continuing education model rule requires IARs to take 12 hours of continuing education annually and includes a products and practices component as well as an ethics component. The model rule is intended to be compatible with other continuing education programs.
“The model rule represents the culmination of years of work by state securities regulators and industry to develop a relevant and responsive continuing education program,” NASAA wrote in its report. “The collaboration between the public and private sectors is intended to promote heightened regulatory compliance while also helping IARs better serve their clients by remaining knowledgeable of current regulatory requirements and best practices.”
NASAA expects the CE program criteria, requirements, and application material to be complete and available by the end of the second quarter, according to an IAR continuing education update released in January. NASAA and Prometric planned to spend the first four months of 2021 standardizing the criteria under which potential IAR CE content providers, instructors, and courses will be approved.
NASAA answers frequently asked questions about the model rule for continuing education for IARS on its website in the meantime.
IA written policies and procedures model rule
Like the continuing education model rule, NASAA members approved the Investment Adviser Policies and Procedures Model Rule and accompanying Compliance Grid in November. NASAA’s IA Policies and Procedures model rule requires investment advisers to establish, maintain, and enforce written policies and procedures tailored to their business model, accounting for the size of the firm, type(s) of services provided, and the number of locations.
The model rule is meant to facilitate compliance with state securities laws, rules, and regulations. “Enhanced investment adviser compliance inures to the benefit of investors, regulators, and advisers themselves,” NASAA wrote in its investment adviser report.
The Compliance Grid that accompanies the model rule addresses common compliance and supervision issues that should be considered in the creation of policies and procedures, NASAA explained. “Ultimately, an enhanced culture of investment adviser regulatory compliance minimizes the effects of conflicts and other risks unique to investment advisers; minimizing the effects of these conflicts and risks serves to protect the investing public,” it wrote.
NASAA intended for the model rule to align with the Securities and Exchange Commission (SEC) Rule 17 CFR 275.206(4)-7 (SEC Rule 206(4)-7), thereby “enhancing uniformity with federal investment adviser regulatory standards on the topic.” Like SEC Rule 206(4)-7, the model rule stops short of identifying specific topics that firms must address in their compliance and supervision policies and procedures. Instead, it requires advisers “to identify their own unique conflicts and risk exposures” and to design their policies and procedures accordingly.
“The Model Rule coupled with the Compliance Grid establish regulatory expectations for registrants, create a blueprint for examiners to follow in reviewing policies and procedures, encourage uniformity with SEC standards on the topic, and further the goal of identifying and minimizing conflicts and risks to the investors that we all serve,” NASAA summarized.
Guidance for maintaining compliance during the COVID-19 pandemic
NASAA also suggested that firms implement and update their written procedures and practices to address changes brought by the COVID-19 pandemic. “These new realities include the possibility of serious health and safety risks for firm personnel and clients, remote work environments, the increased use of electronic communication and devices, and recent market volatility,” according to its report.
A firm should have a business continuity and succession plan (BCS plan), for example. Though requirements for such plans may vary by state, NASAA’s model rule on business continuity and succession planning requires firms to provide for at least the following measures in their policies and procedures.
- Protection, backup, and recovery of books and records
- Alternate means of communications with customers, key personnel, employees, vendors, and service providers
- Office relocation in the event of temporary or permanent loss of a principal place of business
- Re-assignment of duties in the event of the death or unavailability of key personnel
- Minimizing service disruptions and client harm that could result from a sudden significant business interruption
In addition to revisiting their BCS plans, NASAA suggests that firms assess their cybersecurity plans and consider the potential risks and vulnerabilities associated with remote work. It recommends reviewing NASAA’s Cybersecurity Checklist for Investment Advisers as well as contacting state securities regulators about any state-specific resources or training they may offer on cybersecurity topics.
Regulations for investment advisers and protections for investors
State securities regulators have regulatory oversight responsibility for almost 17,500 investment advisers with assets under management of $100 million or less. States also have sole regulatory oversight of all investment adviser representatives, the financial professionals who work directly with retail investors, whether the adviser is registered with a state or with the SEC.
According to NASAA’s report on state-registered investment advisers and the related regulatory activities of state securities regulators, the organization’s regulatory policy and review priorities for 2021 include:
- Engaging investor advocacy and industry groups to discuss the evolving nature of investment adviser fee models;
- Creating a guidance document related to investment adviser alternative fee models;
- Monitoring and assisting in commentary to SEC rule proposals to amend or add to investment adviser rules and forms;
- Reviewing the adequacy of current model rules related to investment adviser marketing;
- Collaborating with the broker-dealer section to propose a model rule on unpaid arbitration awards;
- Finalizing written guidance on standing letters of authorization as they relate to custody; and
- Other topics of interest to the investment adviser and regulatory communities.
“NASAA and its members remain very involved in helping investment advisers and protecting investors. From their new model rules for IAR training and IA policies and procedures to their ongoing guidance for maintaining compliance during the pandemic, they prioritize investor protection through state regulations for investment advisers,” said Margie Webber, director of regulatory compliance for RegEd.
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