Welcome back to the Compliance In Context podcast! On today’s show, we discuss how to build a culture of compliance in AI world and some best practices firms are using now to build AI into their respective operations and compliance programs. In our Headlines section, the SEC to Raise Qualified Client Threshold for Performance-Based Fees, SIFMA Re-urges the SEC to Overhaul Communications Retention Rules, and SIFMA Urges SEC to Overhaul Communications Retention Rules, and finally, we close up today with another installment of Outtakes, where we review a recent enforcement action involving fraud and registration charges against three venture capital fund managers and their owner.

Show

Headlines

• SEC issued a final order that adjusts the dollar amount thresholds for “qualified clients” under Rule 205-3 of the Investment Advisers Act
• SIFMA Urges SEC to Overhaul Communications Retention Rules

Interview with Erik Olsen

• How are you seeing firms successfully use AI, both inside and outside of compliance?
• Have you developed an AI policy?
• What voices inside the firm did you engage to help draft it (i.e. what departments were consulted)?
• From an operational perspective, what are the key considerations firms should consider before implementing AI into their systems and processes?
• What impact has incorporating AI into your firm had from a compliance perspective?
• What are some of the best practices you see firms implementing across the compliance program to foster a “culture of compliance” where AI feels ever present?
• Where do you see AI going in the future and what steps are you taking now to help accommodate the changing environment?

Outtakes

• SEC charges venture capital fund managers for making false and misleading disclosures, failing to disclose certain conflicts of interest and failing to comply with Securities Act and Investment Company Act registration requirements.

Quotes

14:13 – “Well, it’s, it’s the new shiny toy, right? It’s the souped-up new shiny toy that, as we always hear, you know, our neighbors down the street have and we don’t have, right? The same way they do marketing or, or something like that. So yeah, I agree with you. We got to figure out what is the use case for us because in, you know, us, you, them, it-it’s not going to be equal. Even though we all do asset management, you know, as we know within even the product lineup and the strategies we offer, it’s not all equal. So we do have to do that analysis. What do we use it for? What type of firm are we? Like I said at the top, we’re about 39 people. That AI use may look totally different than a shop that’s 1,000 people, right? Not only just what it... how you use it, what you’re using it for, but even how you even get to implement it.” – Erik Olsen

16:43 – “We are Microsoft Suite users, right? Copilot is basically in there. So we gave everyone the ability to use Copilot for work-related stuff. And in our acceptable use policy, which is an IT-owned policy, we had a section dedicated to large language learning models and AI and what you--basically the limitations. It was basically Copilot or bust. Here are the finer points. You know, put restrictions around trying to get backdoor access to Claude or Gemini or ChatGPT, whatever, et cetera. So that’s been kind of the last, again, let’s say, call it a year. And of course, people want more, which is fine. And the constant pullback was, “Yes, we want, we want more. Explain that to us,” and us re...

Welcome back to the Compliance In Context podcast! On today’s show, we discuss the FINRA Forward initiative and review some of the recent FINRA rulemaking activity in areas like outside business activities, personal securities transactions, gifts and gratuities, and performance advertising. In our Headlines section, the DOL reinstates the prior fiduciary standard under ERISA and Senator Warren Questions SEC Chair on alleged political interference in enforcement, and finally, we close up today with another installment of Outtakes, where a recent lawsuit filed by a former client against an RIA raises important considerations around appropriate disclosures and applicable standards of care.

Show

Headlines

• The U.S. Department of Labor (“DOL”) restored its prior five-part test for determining “fiduciary” status under the Employee Retirement Income Security Act (“ERISA”)
• Senate Banking Committee Member Elizabeth Warren pressed SEC Chair Paul Atkins to address allegations of political interference in enforcement matters before the agency

Interview with Ed Wegener

• What is FINRA Forward?
• What does FINRA hope to achieve with the FINRA Forward Initiatives?
• What have we seen to-date?
• What are the potential benefits?
• What are some potential challenges?
• What are the key changes in proposed Rule 3290?
• What are the key changes for Rule 3220 related to Gifts and Gratuities?
• What are the key changes Proposed for Advertising (Performance)?

Outtakes

• SEC-registered investment advisor allegedly assured a client that a $10 million bond investment was “guaranteed” before the underlying project collapsed entirely

Quotes

10:55 – “It’s clear that things don’t stay the same. Things change. The way we do business, technology, all of that changes, and it’s important for the rules to keep up with that. As well as show regulators enforce those rules. And so, from time to time, it’s really important to take a look and say, ‘What’s changed?’ and ‘Do we need to realign the rules with those changes?” – Ed Wegener

22:00 – “What you’re going to see is not just much more efficient regulators, which is always good, but more effective regulators. And so it’s important for firms to keep up because what you don’t want is regulators coming in with all this information and data and things that you don’t know about.” – Ed Wegener

22:37 – “There’s an opportunity for a great partnership there, between compliance departments and regulators, and this could be a really good way to do that. And the other thing, too, is all of these things are great. It only takes one big scandal to happen for things to just snap back into a much more reactive mode. So that’s one of the things the industry’s got to keep their eye on the ball, just make sure we’re keeping things in check, because we want to continue the momentum of all these changes and don’t want to have to take a step back.” – Ed Wegener

26:44 – “Probably the most important change in the proposal is that it would only apply to investment-related outside activities. So non-investment-related outside activities (such as being employed at a ride share company or working in a retai...

Welcome back to the Compliance In Context podcast! On today’s show, we will be diving into the SEC Enforcement Manual, and more specifically, to some of the recent amendments that were made and what it tells us about the state of SEC Enforcement right now. To help guide us through the conversation, we are very pleased to welcome in Brian Rubin and Ellen Connell. In our Headlines section, SEC and CFTC begin to clarify application of federal securities laws to cryptocurrency, and finally, we close up today with another installment of Outtakes, where we try to help spread the word about an active phishing campaign targeting FINRA and SEC-registered financial services firms and advisers and how to make sure to avoid getting caught flat-footed.

Show

Headlines

• SEC and CFTC jointly issued an interpretive release regarding the application of federal securities laws and federal commodities laws to certain crypto assets and transactions

Interview with Brian Rubin and Ellen Connell

• What is the SEC Enforcement Manual and what is its purpose?
• The SEC recently announced a broad set of revisions to its Enforcement Manual. At a high level, what was the rationale for the update and what does it tell us about the current state of the Division of Enforcement?
• What is the new process for obtaining cooperation credit?
• What are some of other factors the SEC weighs when determining whether to apply cooperation credit?
• Were there any other noteworthy changes to the manual that firms and individuals should be aware of as they are going through an investigation?
• The staff indicated greater access to the investigative file, evaluating whether providing access would help the recipient respond meaningfully and help both sides assess the strength of the evidence. Does this really mean greater access to the file? Are we talking full open jacket?
• Overall, what is your reaction to the SEC Enforcement Manual updates?
• What is the longest lasting impact?
• Regardless of the increase or decrease in numbers, where do you expect most of the enforcement cases to come from—exams or elsewhere?
• Keeping in mind the new changes to the SEC Enforcement Manual, do you think firms should take a harder look at self-reporting?

Outtakes

• Active phishing campaign targeting FINRA and SEC-registered financial services firms and advisers

Quotes

11:20 – “So the enforcement manual is basically an internal playbook guiding the staff on how to conduct investigations and recommend enforcement actions. When I was there, and I don’t know if this is still the case, it was in a red plastic binder, and we referred to it as the Red Book. It’s to help ensure fairness and consistency, and transparency for the process. And it covers everything from opening investigation to collecting evidence, engaging with companies and individuals, the Wells process, negotiations, cooperation, as we’ll talk about.” – Brian Rubin

13:11 – “This is the first set of updates since 2017, so it’s been quite a while. And the then SEC enforcement director (who just as we’re recording, announced her resignation just yesterday)she was quoted, Judge Margaret Ryan, in the press release explaining the relevance, saying that these updates to the enforcement manual are intended to ensure greater uniformity, to reflect the division’s best practices, to improve the staff’s ability to carry out the SEC’s mission of work on behalf of investors.” – E...