NASAA open for comments on proposed WSP rule until August 1, 2020

The Investment Adviser Regulatory Policy and Review Project Group (Project Group) of the North American Securities Administrators Association, Inc. (NASAA) is soliciting public comment on proposed policies and procedures model rule requiring investment advisers to establish, maintain, and enforce written policies and procedures tailored to the investment adviser’s business model.

This Rule requires state-registered investment advisers to establish, maintain, and enforce comprehensive written procedures to facilitate compliance with state securities laws, rules, and regulations. Ultimately, the NASAA expects the resulting enhanced culture of investment adviser regulatory compliance to minimize the effects of conflicts and other risks unique to investment advisers.

The proposed Policies and Procedures Rule will support oversight of compliance, supervision, proxy voting, physical and cybersecurity, deliver a code of ethics (including holdings and transaction reports), handling of material non-public information, as well as business continuity and succession plans. NASAA requires an annual review of all policies and procedures, as will the appointment of a chief compliance officer who has the responsibility and authority to enforce the policies and procedures required by the Rule.

Public comment period ends August 1, 2020

Comments may be mailed to Project Group Co-Chairs Stephen Bouchard (BouchardS@dca.njoag.gov) and Stephen Brey (breys@michigan.gov), with a cc: to the NASAA Corporate Office (nasaacomments@nasaa.org) by August 1, 2020.

What prompted the WSP rule?

The Securities and Exchange Commission (SEC) has long required investment advisers under its regulatory purview to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940. The Commission notes, “The rule requires advisers to consider their fiduciary and regulatory obligations under the Advisers Act and to formalize policies and procedures to address them.”

State-registered investment advisers differ from their federal-covered counterparts in many respects. However, they still owe the same fiduciary duties to clients and face the same sorts of conflicts and varieties of risks faced by federal-covered investment advisers. For this reason, it was decided that state-registered investment advisers also be required to field similar policies and procedures as those required under SEC Rule 206(4)-7.

As SEC Rule 206(4)-7 does not identify specific elements that must be included in an adviser’s policies and procedures, advisers must define their own unique conflicts and risk exposures and design policies and procedures that address those conflicts and risks. The SEC identified the following list of items to be included, at a minimum should be included in every adviser’s policies and procedures:

• Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
• Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services (known as “soft dollar arrangements”), and allocates aggregated trades among clients;
• Proprietary trading of the adviser and personal trading activities of supervised persons;
• The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
• Safeguarding of client assets from conversion or inappropriate use by advisory personnel;
• The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
• Marketing advisory services, including the use of solicitors;
• Processes to value client holdings and assess fees based on those valuations;
• Safeguards for the privacy protection of client records and information; and
• Business continuity plans.

Bringing like federal compliance to state-registered advisers

Like their federal-covered counterparts, state-registered investment advisers owe fiduciary duties to their clients and have regulatory obligations designed to prevent harm to investors. NASAA’s Policies and Procedures Rule is intended to require state-registered investment advisers to identify similar conflicts and risks and to use those to establish, implement, and maintain policies and procedures tailored to their firms, which will reduce risks to their advisory clients.

NASAA’s Policies and Procedures Rule consolidates into one overarching rule for specific, existing NASAA model rules on physical security, cybersecurity, and business continuity and succession planning, and adds compliance and supervisory policies and procedures, proxy voting, code of ethics, and material non-public information policies. The Policies and Procedures Rule combines the various policy and procedure requirements under current NASAA model rules and includes a series of new policy and procedure requirements designed to enhance compliance by state-registered investment advisers.

Is your compliance team ready for this change?

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