State securities regulators have proposed a sweeping new model law that would require state investment advisors and reps to bring their policies, procedures and disclosures up to Securities and Exchange Commission standards.
The rules would require each RIA policy and procedure to be customized to each state’s advisor requirements, with a code of ethics that aligns closely with SEC rules, to “enhance investment advisers’ abilities to fulfill their fiduciary duties to clients,” the North American Association of Securities Administrators (NASAA) said in its new proposal.
A firm’s code of ethics “should reflect the adviser’s fiduciary obligations to its clients; legal and regulatory obligations; personal securities transaction reporting requirements; code of ethics violation reporting requirements; and the requirement that the adviser provide a copy of its code of ethics to each of its supervised persons and obtain a signed acknowledgement of receipt from each supervised person,” NASAA said.
Overall, the rule “will require investment advisers to establish, maintain, and enforce policies and procedures that address compliance, supervision, proxy voting, physical and cyber security, a code of ethics (including holdings and transaction reports), handling of material non-public information, and business continuity and succession plans.”
Broker-dealers with registered investment advisories, as well as RIAs themselves, that do business in multiple states, will need to customize their compliance practices to each state’s regulations, NASAA warned in the rule. Advisors and their firms will not be able to rely on their Reg BI materials or any cookie cutter compliance plans.
“Some firms purchase ‘template’ policies and procedures manuals but never customize them to the adviser’s actual business model. ‘Off the shelf’ manuals are often generic and often cover business practices not applicable to state registered advisers. In addition, these manuals frequently reference SEC rules which may differ from the particular state’s rules. Your compliance manual should reflect the business you conduct and the states rules with which you must comply,” NASAA said.
According to the proposal, “requiring state-registered investment advisers to establish, maintain, and enforce comprehensive written procedures is intended to facilitate compliance with state securities laws, rules, and regulations. 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."
The rule also, for the first time, requires advisors to disclose their business model and create supporting customer deliverables. “If your Form ADV describes financial planning as an option for clients to consider, then you must create policies and procedures for the financial planning process, even if you have never actually had a financial planning client,” NASAA said in the proposal.
Each firm will be required to appoint a chief compliance officer who has the authority to enforce the policies and procedures required by the rule, state regulators said.
Comments on the proposal are due by August 1.
The proposal is available here.