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In 2023, the Securities and Exchange Commission announced various proposed rules regarding regulatory changes affecting SEC registered investment advisors (RIAs). Since these rules are likely to be implemented, RIAs should consider preliminary steps to begin integrating the new requirements into their compliance policies and procedures.
1. Updated storage rules
The purpose of the Custody Rule, Rule 206(4)-2 of the Investment Advisers Act of 1940 (Advisers Act), is to protect client funds and securities from potential loss or misappropriation by the custodian. The SEC’s recommended storage rule updates include:
- Expanding the scope of the rules to include all client assets managed by RIAs, not just client funds and securities
- Expanding the definition of custody to include discretionary rights
- Requires RIAs to enter into written agreements with qualified custodians that include certain reasonable assurances regarding the protection of client assets;
2. Internet Advisor Exemption
The SEC also proposed modernizing Rule 203A-2(e) of the Advisers Act. Its purpose is to allow Internet investment advisors to register with the SEC even if they do not meet other legal requirements for SEC registration. The proposed rule would look like this:
- Advisors relying on this exemption must: always Advisors need to have an operational, interactive website to provide investment advisory services
- of minimal The exception is eliminated, so advisors must provide advice under Rule 203A-2(e). all Support customers only through live interactive websites
3. Conflicts of interest related to predictive data analytics and similar technologies
The SEC is proposing new rules under the Advisers Act to regulate RIAs’ use of technologies that optimize, predict, guide, anticipate, or directly guide investment-related actions and outcomes. Specifically, the new rules aim to minimize the risk that RIAs will prioritize their own interests over those of their clients when designing or using such technology. The new rules require an RIA.
- to evaluate the use of such technology and to identify and eliminate potential conflicts of interest or neutralize their effects;
- Adopt written policies and procedures to prevent rule violations and maintain books and records regarding compliance with new rules.
4. Cybersecurity risk management and outsourcing to third parties
The SEC has not yet issued a final rule on the proposed New Advisers Act of 2022, Rule 206(4)-9, which would require RIAs to appropriately address cybersecurity risks and incidents. Similarly, the SEC still needs to issue the final language of new Rule 206(4)-11, which establishes supervisory obligations for RIAs that outsource certain functions to third parties. Here is a summary of the proposed rules: 2023 Regulatory Update for Investment Advisers: Miller Canfield
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