FIN Family of Companies

Annual Reviews for Advisors, Robo's, and Blockchain Technologies

By Cory Roberson, Principal at RIA Review and RIA Consults



What's in your Annual Review Process?


Since 2004, the Securities and Exchange Commission (SEC) has required its registrants to conduct annual reviews to determine the adequacy and effectiveness of firm procedures (ref. Rule 206(4)-7).  In 2011 the commission voted to increase its oversight of private funds (Form PF), establish new exemptions, and concurrently reallocate its jurisdictional authority over many mid-sized advisors (firms with AUM under $100 million) to state regulators.

Six years later, the securities industry is undergoing another shift and updating procedures for firms moving towards Robo-Advisors and Blockchain Technologies.
Ultimately, the annual review process will pivot to include provisions for these new technologies. 
Under Rule 206(4)-7, current requirements are that firms must:
Develop policies and procedures: Adopt and implement written policies and procedures reasonably designed to detect, identify, or prevent violations of the Investment Advisors Act.

Conduct an annual review: Review at least annually the adequacy of the firm’s policies and procedures. (i.e. updates, forensic testing, risk assessment, etc.).

Designate a Chief Compliance Officer:  Select a supervised individual responsible for administering the firm’s policies and procedures.

Best Practices for updating compliance manuals: 

Compliance manuals should be customized to the firm’s business practices.

Examples of customization include specifying: (1) investment strategies, (2) all types of clients, (3) firm trading procedures, (4) valuation procedures (sources of data, fair value, illiquid securities), and (5) advisory fees.

What about Blockchain/cryptocurrency reviews?

In July 2017, the SEC issued guidance on Cryptocurrency, ICO's and DAO tokens/offerings that operate on Blockchain/distributed ledger technology.  In this guidance, the agency deemed virtual currency as a 'Security' under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. A Security includes an "investment contract.”   This means that such contracts must be SEC-registered through an appropriate issuer.

Congress, and ultimately the SEC, are still interpreting what bitcoin technologies will mean for the securities industry on a broader scale.  The House of Representatives is currently reviewing a nationwide Bitcoin/Blockchain policy (HR. 835).  

On December 11th, SEC Chairman Jay Clayton weighed in on the issue of cryptocurrency and blockchain technologies. 

He says, “I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years.” 
New technologies are always speculative in nature.   For now, most advisors would have a difficult time justifying these investment types into their client's objectives or investment policy statements.  With that said, firms with employees who invest in cryptocurrency should consider adding these new products to their code of ethics.

With the emergence of Betterment, Wealthfront, and hybrid (robo/human advisor) models from established firms like Charles Schwab, more advisors are adopting these services into their business models. In tandem, the SEC is providing more guidance on compliance for robo-advisors.
How can your firm update your Reviews for Robo Advisory Services?

In February 2017, the SEC Division of Investment Management issued a whitepaper (“IM Guidance”) on automated trading algorithmic platforms also known as 'Robo-Advisors.' The guidance is meant to help firms to determine the implications for using automated trading capabilities as a service for its advisory client base.

Similar to all registrants, robo-advisers are subject to the same fiduciary requirements as described in the Advisers Act. In light of the unique business model, firms may need to think about disclosing additional information to comply with the Advisers Act.

Click Here if interested in our procedures Annual Review Center: RIA Review 

Robo-Firms should focus on three areas:

Provide substantive disclosures to clients about automated trading:
Disclose material facts
Methodology of trading algorithms used
Business model, scope of services, fees
Risk, limitations
Oversight process

Provide client suitability documentation specific to robo-advice:
Client Questionnaire (e.g. Client objectives, financial pictures, net worth)
Investment policy statement (e.g. showing recommendations, periodic changes to strategy)

Develop a compliance program tailored to automated advice:

Annual (or periodic) compliance reviews
Testing/detection methods for algorithms/automated trading
Oversight of vendors/cybersecurity
Protection/safeguarding client information






Please contact us at http://RIAreview.com or call us at 650-305-2688.







Our Mission: “Serving the Investment Community to Make a Social Impact”

Compliance

FIN Compliance (FinCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), RegTech Products is a product notification portal for product offerings in financial service markets.

Business Listings

FIN Community (FINcommunity.io) is a business listing and network for providers in the Financial Services, FinTech, RegTech, Crypto and Blockchain communities.  We believe in supporting the gig economy through building business opportunities.

Impact

SoCap Missions (socapmissions.com) provides business support group sessions.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.





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