Adviser and Fund Compliance Roundtable - Q4 2024
Below is a summary of the Compliance Roundtable table from November 2024. which included Regulatory / Industry Developments (Sharing Insights and Observations on 2025 Examination Priorities), Group Q&A (Compliance Risks Around Artificial Intelligence, New AML Rule for Advisers, and Recent Cases), and Best Practices and Solutions.
2025 SEC Exam Priorities
Fiduciary Duty: emphasis on fiduciary duty related to conflicts of interest, sources of revenue / compensation, business practices restrict client freedoms (stemming from arbitration clauses and illiquid investments), and the blurring of lines around dual roles.
Valuation: emphasis on illiquid and hard to value investments, including commercial real estate.
Fees and Sources of Revenue: includes from the sale of non-securities related products / services, accuracy and appropriateness of fees, and conflicts between clients from MFNs and side letters.
Adequacy of the Annual Review and Compliance Program: emphasis on conflicts of interest related to compensation, arbitration clauses, marketing, custody, disclosures and filings, portfolio management, and trading.
Hot Topics
Artificial Intelligence (AI)
Discussed how firms can develop policies and procedures around AI usage, including 3 primary concerns: the source and control of the algorithms / machine learning, the content and information input into AI, and how the output will be used.
Discussed disclosures and the transparency with clients on the use of AI applications.
Third Party Risk Management / Vendor Due Diligence
Discussed how time-intensive due diligence is and the disparity in the responses.
Discussed vendors that provide assistance with vendor risk management and due diligence (withoutany irony in our discussion), such as Drawbridge and Security Studio.
T+1 Settlement Books + Records
Discussed new books and records rule stemming from T+1 implementation: 204-2(a)(7)(iii) requiresadvisers to keep records of any allocation and each affirmation sent or received, with a date and time stamp for each allocation and each confirmation received
Discussed embedded functionality within Tradesuite to provide required information.
Short Reporting
Discussed new short reporting requirements.
Beginning January 2, 2025, managers holding short positions exceeding $10 million or 2.5% of acompany’s shares must file Form SHO on a monthly basis, within 14 days of month-end.
The report must include the manager's total short position in the stock at the end of the month, as well as their net activity (including options) in the stock on each settlement date during the month.
Reportable positions include a gross short position in the equity security with a U.S. dollar value of $10 million or more at the close of regular trading hours during the calendar month, or $500,000 or more at the close of any settlement date during the calendar month for any equity security of an issuer that is not a reporting company issuer.