Legal Insights & Thought

Client Insights

September 5, 2024

Broker-Dealer and Investment Adviser Alert – Sec is on the Hunt for Anti-Whistleblower Provisions in Client and Representative Agreements.

The SEC has repeatedly warned firms to avoid clauses that stifle whistleblower speech in client and financial adviser agreements. Most recently, the SEC sanctioned a New Jersey broker-dealer and 2 affiliated investment advisory firms for having some clients sign confidentiality agreements that impeded the clients’ ability to communicate with the SEC about possible securities law violations. The Order requires the firms to pay a total of $240,000 in civil penalties and to cease and desist from further violations.

Best Practices—Firms should review their client and FA agreements to make sure that they do not limit whistleblower speech in any way. Moreover, firms should have a provision that states that clients are in no way restricted from voluntarily contacting the staff or other regulators about potential securities law violations. Failure to do so can leave a regulatory mark on the firm’s record.

The SEC’s Order can be found here.
https://www.sec.gov/files/litigation/admin/2024/34-100908.pdf

July 30, 2024

Investment Advisers: Be Prepared for New AML and CIP Requirements.

In coordinated actions, the SEC and FinCEN have proposed changes to the definition of "financial institutions" covered by the BSA to include RIA and ERAs, and to add customer identification program (CIP) requirements for advisory firms. Pointing to the more than $115 trillion RIA space as an entry point for terrorists and other bad actors, the SEC/FinCEN have stated that they are trying to close out this loophole in the compliance regime.

If enacted, RIAs would be subject to the BSA's AML regime, just like other financial institutions, and would be required to maintain CIPs that, at a minimum, implement reasonable procedures to require customer identity verification. Notably, RIAs can rely on their clearing firm's CIP program provided that the clearing firm certifies on an annual basis that it has implemented its AML/CIP programs, and meets other requirements. Alternatively, RIAs would have to directly implement their own CIP program.

Timing: The public comment periods for the proposed rules have passed. It is now in the government's hands to respond and refine the proposals. If the agencies adopt the rules, they would go into effect 60 days after publication in the federal register, with a compliance date 6 months later.

Here is a link to the joint SEC/FinCEN press release.
https://www.sec.gov/newsroom/press-releases/2024-54