Blog Post

3 Reasons Not To Stress The New SEC Regulations

You're reading:

3 Reasons Not To Stress The New SEC Regulations

Alex Serman • August 03, 2022

For years, investment advisors have relied on an outdated system of rules when it comes to governing advertisements, endorsements, solicitations, and other methods to expand and promote their business. The previous regulations were not up to speed with the current technology landscape and were in desperate need of modernization. On December 22, 2020, the U.S. Security and Exchange Commission (SEC) adopted amendments that consolidated Rule 206(4)-1 (“Advertising Rule”) and Rule 206(4)-3 (“Solicitation Rule”) with intentions to modernize the framework for investment advisor advertising. With a compliance deadline of November 4, 2022, and the extensive nature of compliance, many firms are even considering avoiding marketing altogether versus risking the consequences of not being in compliance. 69% of firms are reviewing the rule now or plan to do so soon, and 62% are worried about updating manuals, revising materials, performance, and implementation. Here are 3 reasons not to stress and to become proactive about complying with the new regulation:

RegTech to the Rescue

    While the name is new, the marriage of technology and regulation has existed for quite some time. As financial technology enters into rapid development, startups are emerging out of every corner looking to claim themselves as the next disruptor. This fast-paced and urgent ‘go-to-market’ innovation has presented a challenge to regulators. Ironically, it’s forced regulators to modernize the way they enforce and implement new regulations. RegTech has emerged not only to benefit regulators, but also to help institutions digest and adopt the necessary standards for compliance. However, it is still in the early stages. According to a 2021 survey by Thomson Reuters, it was reported that only 16% of firms that participated in a regtech-related survey have implemented a regtech solution. Despite the slow adoption rate, the value is undeniable. For example, First Rate has partnered with the RegTech firm Regalytics to provide automated alerts that allow institutions to notify their subscribers of regulatory insights including updates and data on what is necessary to meet compliance.

    Trust the Experts

      Although new regulations typically put a lot of pressure on operational teams, many times compliance also requires strategic solutions. Understanding, implementing, and embedding new regulations require firms to carefully consider the impact and pressure on internal resources, and in this case, one size does not fit all. Fintech and RegTech experts can help firms understand how to transition and adopt the necessary processes for compliance that fit the overall strategic needs of the firm, which can include adopting AI and Machine Learning technology to eliminate human error and eliminate strain on internal resources. Experts can provide clarity with end-to-end support teams that instill confidence in their ability to meet the requirements with a timely and efficient approach.

      Composite Management Made Easy

        Although the new SEC regulation does not require full GIPS compliance, the monitoring and management of composites is a critical component of compliance. Composite management is a hurdle for many firms with manual and outdated portfolio management processes. A composite is an aggregation of portfolios that are managed according to a specific investment mandate, objective, or strategy. They are created to ensure an accurate and exact comparison of performance relative to standard indices. Composites need to be carefully defined according to the strategies they represent. This can include adding new accounts that have come under management, removing those that are no longer discretionary, understanding quickly when an outlier is skewing the performance data, and how discretionary accounts are considered for participation to fit the strategy for the portfolios. Fintech and RegTech technology, such as First Rate ACE (Automated Composite Engine), can streamline and solve these challenges by automating the creation and maintenance of compliance as well as eliminating human error.

        Whether your firm is in the process of adopting necessary practices for compliance or is just in the consideration phase, First Rate’s team of experts can help your firm implement a strategy to overcome compliance challenges with more than 30 years as performance and client reporting experts. Our upcoming webinar with Meradia, a leader in investment operations and technology consulting, is designed to educate firms on how to prepare for the SEC’s new marketing rule compliance deadline. With this information, firms can face the challenges of today and the future with confidence and ease.