The Securities Compliance Podcast: Compliance In Context

Welcome back to the Compliance In Context podcast! On today’s show, we discuss how to build a culture of compliance in AI world and some best practices firms are using now to build AI into their respective operations and compliance programs. In our Headlines section, the SEC to Raise Qualified Client Threshold for Performance-Based Fees, SIFMA Re-urges the SEC to Overhaul Communications Retention Rules, and SIFMA Urges SEC to Overhaul Communications Retention Rules, and finally, we close up today with another installment of Outtakes, where we review a recent enforcement action involving fraud and registration charges against three venture capital fund managers and their owner. Show Headlines SEC issued a final order that adjusts the dollar amount thresholds for “qualified clients” under Rule 205-3 of the Investment Advisers Act SIFMA Urges SEC to Overhaul Communications Retention Rules Interview with Erik Olsen How are you seeing firms successfully use AI, both inside and outside of compliance? Have you developed an AI policy? What voices inside the firm did you engage to help draft it (i.e. what departments were consulted)? From an operational perspective, what are the key considerations firms should consider before implementing AI into their systems and processes? What impact has incorporating AI into your firm had from a compliance perspective? What are some of the best practices you see firms implementing across the compliance program to foster a “culture of compliance” where AI feels ever present? Where do you see AI going in the future and what steps are you taking now to help accommodate the changing environment? Outtakes SEC charges venture capital fund managers for making false and misleading disclosures, failing to disclose certain conflicts of interest and failing to comply with Securities Act and Investment Company Act registration requirements. Quotes 14:13 – “Well, it’s, it’s the new shiny toy, right? It’s the souped-up new shiny toy that, as we always hear, you know, our neighbors down the street have and we don’t have, right? The same way they do marketing or, or something like that. So yeah, I agree with you. We got to figure out what is the use case for us because in, you know, us, you, them, it-it’s not going to be equal. Even though we all do asset management, you know, as we know within even the product lineup and the strategies we offer, it’s not all equal. So we do have to do that analysis. What do we use it for? What type of firm are we? Like I said at the top, we’re about 39 people. That AI use may look totally different than a shop that’s 1,000 people, right? Not only just what it... how you use it, what you’re using it for, but even how you even get to implement it.” – Erik Olsen 16:43 – “We are Microsoft Suite users, right? Copilot is basically in there. So we gave everyone the ability to use Copilot for work-related stuff. And in our acceptable use policy, which is an IT-owned policy, we had a section dedicated to large language learning models and AI and what you--basically the limitations. It was basically Copilot or bust. Here are the finer points. You know, put restrictions around trying to get backdoor access to Claude or Gemini or ChatGPT, whatever, et cetera. So that’s been kind of the last, again, let’s say, call it a year. And of course, people want more, which is fine. And the constant pullback was, “Yes, we want, we want more. Explain that to us,” and us re...

Welcome back to the Compliance In Context podcast! On today’s show, we discuss the FINRA Forward initiative and review some of the recent FINRA rulemaking activity in areas like outside business activities, personal securities transactions, gifts and gratuities, and performance advertising. In our Headlines section, the DOL reinstates the prior fiduciary standard under ERISA and Senator Warren Questions SEC Chair on alleged political interference in enforcement, and finally, we close up today with another installment of Outtakes, where a recent lawsuit filed by a former client against an RIA raises important considerations around appropriate disclosures and applicable standards of care. Show Headlines The U.S. Department of Labor (“DOL”) restored its prior five-part test for determining “fiduciary” status under the Employee Retirement Income Security Act (“ERISA”) Senate Banking Committee Member Elizabeth Warren pressed SEC Chair Paul Atkins to address allegations of political interference in enforcement matters before the agency Interview with Ed Wegener What is FINRA Forward? What does FINRA hope to achieve with the FINRA Forward Initiatives? What have we seen to-date? What are the potential benefits? What are some potential challenges? What are the key changes in proposed Rule 3290? What are the key changes for Rule 3220 related to Gifts and Gratuities? What are the key changes Proposed for Advertising (Performance)? Outtakes SEC-registered investment advisor allegedly assured a client that a $10 million bond investment was “guaranteed” before the underlying project collapsed entirely Quotes 10:55 – “It’s clear that things don’t stay the same. Things change. The way we do business, technology, all of that changes, and it’s important for the rules to keep up with that. As well as show regulators enforce those rules. And so, from time to time, it’s really important to take a look and say, ‘What’s changed?’ and ‘Do we need to realign the rules with those changes?” – Ed Wegener 22:00 – “What you’re going to see is not just much more efficient regulators, which is always good, but more effective regulators. And so it’s important for firms to keep up because what you don’t want is regulators coming in with all this information and data and things that you don’t know about.” – Ed Wegener 22:37 – “There’s an opportunity for a great partnership there, between compliance departments and regulators, and this could be a really good way to do that. And the other thing, too, is all of these things are great. It only takes one big scandal to happen for things to just snap back into a much more reactive mode. So that’s one of the things the industry’s got to keep their eye on the ball, just make sure we’re keeping things in check, because we want to continue the momentum of all these changes and don’t want to have to take a step back.” – Ed Wegener 26:44 – “Probably the most important change in the proposal is that it would only apply to investment-related outside activities. So non-investment-related outside activities (such as being employed at a ride share company or working in a retai...

Welcome back to the Compliance In Context podcast! On today’s show, we will be diving into the SEC Enforcement Manual, and more specifically, to some of the recent amendments that were made and what it tells us about the state of SEC Enforcement right now. To help guide us through the conversation, we are very pleased to welcome in Brian Rubin and Ellen Connell. In our Headlines section, SEC and CFTC begin to clarify application of federal securities laws to cryptocurrency, and finally, we close up today with another installment of Outtakes, where we try to help spread the word about an active phishing campaign targeting FINRA and SEC-registered financial services firms and advisers and how to make sure to avoid getting caught flat-footed. Show Headlines SEC and CFTC jointly issued an interpretive release regarding the application of federal securities laws and federal commodities laws to certain crypto assets and transactions Interview with Brian Rubin and Ellen Connell What is the SEC Enforcement Manual and what is its purpose? The SEC recently announced a broad set of revisions to its Enforcement Manual. At a high level, what was the rationale for the update and what does it tell us about the current state of the Division of Enforcement? What is the new process for obtaining cooperation credit? What are some of other factors the SEC weighs when determining whether to apply cooperation credit? Were there any other noteworthy changes to the manual that firms and individuals should be aware of as they are going through an investigation? The staff indicated greater access to the investigative file, evaluating whether providing access would help the recipient respond meaningfully and help both sides assess the strength of the evidence. Does this really mean greater access to the file?  Are we talking full open jacket? Overall, what is your reaction to the SEC Enforcement Manual updates?  What is the longest lasting impact? Regardless of the increase or decrease in numbers, where do you expect most of the enforcement cases to come from—exams or elsewhere? Keeping in mind the new changes to the SEC Enforcement Manual, do you think firms should take a harder look at self-reporting? Outtakes Active phishing campaign targeting FINRA and SEC-registered financial services firms and advisers Quotes 11:20 – “So the enforcement manual is basically an internal playbook guiding the staff on how to conduct investigations and recommend enforcement actions. When I was there, and I don’t know if this is still the case, it was in a red plastic binder, and we referred to it as the Red Book. It’s to help ensure fairness and consistency, and transparency for the process. And it covers everything from opening investigation to collecting evidence, engaging with companies and individuals, the Wells process, negotiations, cooperation, as we’ll talk about.” – Brian Rubin 13:11 – “This is the first set of updates since 2017, so it’s been quite a while. And the then SEC enforcement director (who just as we’re recording, announced her resignation just yesterday)she was quoted, Judge Margaret Ryan, in the press release explaining the relevance, saying that these updates to the enforcement manual are intended to ensure greater uniformity, to reflect the division’s best practices, to improve the staff’s ability to carry out the SEC’s mission of work on behalf of investors.” – E...

Welcome back to the Compliance In Context podcast! On today’s show, we will be taking an in-depth look at two of the hottest areas in the investment management space, namely—tokenization and crypto. To help guide us through the conversation, we are very pleased to welcome in two fantastic experts in the space, Louis Froelich and Fizza Khan. In our Headlines section, the SEC is taking a hard look at an electronic delivery rule and the SEC Enforcement Director share details on the Divisions current enforcement approach, and finally, we close up today with another installment of History Has Your Back, where some old quotes from a Stoic philosopher might just give us the push we need to navigate the regulatory filing season. Show Headlines SEC Working on Off-Channel Communications, E-Delivery Rules SEC Enforcement Director Ryan Details Back-to-Basics Approach Interview with Fizza Khan and Louis Froelich What is tokenization? How is it different from crypto? What are some examples of things people are tokenizing? What is the hope with tokenization and also importantly what does tokenization not do? Who can actually invest in tokens? How does tokenization impact compliance? Is this a threat to compliance? How does AI impact tokenization? How does the SEC view this type of innovation? What is one of the biggest things that folks listening to this podcast should keep in mind regarding tokenization? History Has Your Back Using the wisdom of Stoic philosopher Seneca to help compliance officers survive the regulatory filing season Quotes 09:26 – “I think a good way to start to think about tokenization is to focus on what it does, not what it is, right? Tokenization is itself a very technical process. Just like sending an email to someone else is actually very technical, how that all works, right? But everyone knows what it’s like to send and receive an email. Tokenization is not unlike sending and receiving email for digital assets, and digital assets here are legally, and that’s the goal tied to something in the real world. So you can create a tokenized version of something, which is really a digital version of something. It could be a cup, it could be a tape roller…And it could be, or it could be something like a stock, right? You create something that could be transacted digitally. And, as long as we’re going to talk about this today, as long as you take the proper steps, when you create the digital version of it, then what you get is a legally enforceable, standardized version of the thing that can be more easily transferred.” – Louis Froelich 11:55 – “I think the biggest differentiator between crypto and tokenization is crypto is this catch-all term. It’s a catch-all term to define digitalized or digitized assets. And it’s also a catch-all term that these assets, these digital assets, are then transacted on a blockchain. So that in and of itself is something that we can use kind of synonymously when referring to digital assets. I think that’s kind of like the nomenclature people are just reverting back to is saying crypto. And more importantly, I think crypto is, interestingly, the systems on which you transact. So I mentioned the blockchain, but they, you know, everything’s governed by a code as, as what Louis had alluded to with the tokenization process, and it’s all on this blockchain network. Tokenization is...

Welcome back to the Compliance In Context podcast! On today’s show, we get to dive deep into one of our favorite topics on this fine show, namely what’s happening with the SEC Marketing Rule and some recent guidance that’s come out from the Division of Examinations and the Division of Investment Management.  To help guide us through the conversation, we are very pleased to welcome back to the show, Chris Mulligan and Jeff Blumberg.  In our Headlines section, we pay tribute to the service of former Commissioner Caroline Crenshaw, and we will also review a recent FINRA proposal covering the financial exploitation of senior investors and a new rule addressing suspected fraud for all customers, and finally, we close up today with another installment of Outtakes, where we continue to see an increased focus from the SEC Division of Enforcement on insider trading and related fraud schemes. Show Headlines SEC Statement on Departure of Commissioner Caroline Crenshaw FINRA Proposes Increased Protections for Senior Investors and Other Vulnerable Customers Interview with Chris Mulligan and Jeff Blumberg Overview of the new Marketing Rule FAQs What is the impact on Footnote 590? Discussion of the purpose and process behind SEC Risk Alerts What does the new Risk Alert tell us about the Marketing Rule? What is the impact on testimonials and endorsements? Reviewing the sufficiency of disclosure requirements, including links to websites and the “clear and prominent” standard What does the Risk Alert say about third-party ratings?  What satisfies the “reasonable belief” standard regarding preparation of third-party ratings? What does the Risk Alert disclose regarding the SEC’s stance regarding compensation structures? When does a statement from a third-party trigger the Marketing Rule? Reviewing the “adoption and entanglement” doctrine and related issues Outtakes SEC Charges Six in $41M Insider Trading Scheme Quotes 08:03 – “I think this FAQ is going to be very welcome by the industry. And it really stems from the fact that the rule itself does not seem to require a model fee. Net returns are defined as gross returns minus the fees and expenses you pay the advisor. There’s a pretty clear definition. And it provides guidance around how you can use a model fee. But it doesn’t really require it in the rule itself. However, Footnote 590–and this is why it was so controversial—said that if the fee to be charged to the intended audience is anticipated to be higher than the actual fees charged, the advisor must use the model fee that reflects the anticipated fee to be charged in order not to violate the rule’s general prohibitions.” – Chris Mulligan 15:24 – “So risk alerts are a really important part of the Division of Examinations. And, you know, they really express what the Staff is seeing on examinations, right? So the priorities come out every year and receive a lot of attention. You know, the reality is the priorities are often very similar year to year. They sort of focused on the issues that, you know, everyone generally knows they’re going to focus on. And it doesn’t talk about the results. Like, what did you actually find on these exams. And that’s where the risk alerts really come in and I think are really terrific docume...