Compliance March 15, 2023

SEC Reopens Comment Period for Proposed Cybersecurity Rules

The rules from the February 2022 proposal include new recordkeeping requirements, and industry actors requested more time to review them.

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The Securities and Exchange Commission today reopened the comment period on proposed rules and amendments related to cybersecurity risk management and cybersecurity-related disclosure.

The rule proposals were put forward by the SEC on February 9, 2022. Under the proposals, registered investment advisers and fund companies would be required to adopt and implement written cybersecurity policies and procedures “reasonably designed to address cybersecurity risks.”

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The new rules operating under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 had an initial comment period ending April 11, 2022. RIAs, investment companies and business development companies now have 60 additional days to comment once the reopening release is published in the Federal Register, according to the SEC.

The proposed rule includes a new form requiring advisers to report “significant cybersecurity incidents” affecting the adviser, or its fund or private fund clients, to the regulator. The SEC also proposed new recordkeeping requirements. The additional time shows an acknowledgment by the SEC that interested parties need further review and preparation to provide organized comment.

Gail Bernstein, general counsel at the Investment Adviser Association, issued a statement of appreciation for the extended window, as well as another proposed rule that requires advisers be responsible for vetting third-party firms—such as cybersecurity providers.

“The IAA appreciates that the SEC has heard us on the interrelatedness of its current proposals and is reopening the comment period on its cybersecurity proposal,” she wrote. “We’re assessing the potential implications for advisers and how these proposals interact with each other and with other recently issued proposals, like outsourcing.”

The SEC also proposed enhancements to Regulation S-P, which is designed to protect the privacy of consumer financial information. The regulation requires institutions to notify individuals affected by certain data breaches that may be harmful.

“We appreciate the SEC’s recognition that an adviser’s policies and procedures should be calibrated based on its business, size, and risks,” Bernstein wrote. “Preliminarily, we expect to have questions around the scope of how customer information is defined in the proposal, the duplicative and potentially inconsistent obligations imposed on advisers by the proposal in relation to other similar proposed rules, and the implications of proposed timeframes.”

Data & Research March 15, 2023

Shifting Adviser Preferences Transform Broker/Dealer Revenue

Advisers gravitate toward ETFs, SMAs, ESGs and products emphasizing flexibility, sustainability and lower cost. 

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Research from Cerulli Edge, part of Cerulli Inc., strongly recommends that broker/dealers respond to shifting adviser preferences. Advisers have gravitated toward exchange-traded funds, separately managed accounts and environmental, social, and governance-oriented products. Portfolio elements providing flexibility, sustainability and lower cost were also attractive to advisers. 

The findings come from Cerulli Edge’s U.S. asset and wealth management edition examining broker/dealer trends. Advisers have steered away from revenue-sharing payments, which asset managers have long relied on, in favor of passive products instead, marking a transformation for broker/dealer revenue.  

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Advisers are expanding ETF allocations, as asset flows through mutual funds have seen a long-term decline, according to the research.  

“The industry is evolving. Advisers across all channels are shifting their investment allocations away from mutual funds and their associated revenue-sharing payments and toward ETFs,” said Matt Belnap, an associate director at Cerulli Edge, in a statement.  

SMAs have also received growing demand. The report said SMAs give advisers the benefit of customization, while outsourcing trading to an asset manager or overlay manager. 

“Asset managers, particularly those targeting high-net-worth investors, should develop strategies that will be available in the SMA wrapper as clients down-market will display an appetite for the product structure,” Belnap said. 

High-net-worth, female and younger clients have typically been high adopters of mission-oriented investments. Advisers serving these clients have the greatest opportunity for ESG product adoption. 

“Looking forward, managers should consider a vehicle-agnostic approach to asset gathering in the retail channel, considering changing demographics and evolving demand for customization,” Belnap said.  

The report indicated that approximately one-quarter of advisers create custom portfolios for each client. For almost two-thirds of advisers, portfolio construction influence comes from within their own firm. According to Cerulli, broker/dealers should create model portfolio offerings that give advisers more time to acquire new clients and run their business.  

Advisers are increasingly wary of the price for access to investment strategies. The report suggested that asset managers should adjust product and pricing to relieve problems of margin pressures and scale facing advisers.  

“Cost plays a significant role in advisers’ investment decisions,” Benlap said.  “Placing greater pressure on managers to ensure active strategies are priced appropriately to compete with passive options.”  

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