For IFA’s, regulation and compliance can be added to the cliche about the certainty of death and taxes.
The industry certainly recently scored a win with the recent federal court decisions over the DoL’s fiduciary rule, but the SEC has continued to update and enforce regulatory obligations in 2024.
Most significant for IFAs has been the agency’s application of the Marketing Rule, with an emphasis on the advertising of hypothetical product performance. A February notification clarified that when offering policies to clients, gross and net performance must be presented with standardized date ranges ( e.g., 1-, 5-, 10 years). As the agency puts it, “net returns must be calculated over the same time period and using the same type of return and methodology as gross performance.”
The consolidation of traditional advertisements and solicitation activities under the broad category of “marketing” may require a review and update of advisors’ policies and procedures. Any statements that could be interpreted as hypothetical performance should be carefully reviewed.
The recent growth in RILA sales has inevitably attracted the attention of the government, and the SEC is now implementing the Registration for Index-Linked Annuities Act (RILA Act) 2022. The main action item here is the requirement of “layered disclosure”. Essential product information should be communicated to customers upfront, creating the first layer, followed by more detailed and optional aspects of the policy, which are disclosed as part of the second layer.
However, the requirement to display the maximum possible financial loss (should the RILA be adjusted) on the cover or first page of product literature and proposals seems excessive. This obligation does not apply to other financial vehicles, including other types of annuities. There is a whiff here of anti-RILA sentiment.
The agency also appears to be hot on enforcing regulation of Off-Channel Communications. In August the SEC made sanctions against 26 broker-dealers and investment advisers for “widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications.”
While the agency will tend to target larger firms dealing primarily in securities, IFA’s are required to keep records of all communications: emails, social media posts, even texts and WhatsApp messages. Anything that is material to the business will need to be recorded and retained, including internal communications. While the agency will tend to target larger firms dealing primarily in securities, IFAs should be mindful of the risk of non-compliance.
More long-term, the Supreme Court decision to vacate the Chevron Deference earlier in the summer are likely to restrict future SEC actions These rulings restrict the courts’ deference to administrative agencies’ interpretations and expand the ability of investment advisers to challenge agency actions.
Advisors and IMO’s aren’t lawyers, but it is incumbent on us to keep up to date and in compliance with legal rules and regulation. We have to accept that there will be oversights when dealing with other peoples’ money. It is the cost of doing business. Sometimes that cost can feel unnecessarily high, especially when it has become important for advisors to promote their services as much as possible across as many channels as possible.
As we move further into late 2024, it’s clear that the regulatory landscape will continue to evolve, presenting both challenges and opportunities for IFAs. Staying informed and vigilant is not just a legal necessity, but a strategy for success. IFA’s can not only mitigate risks but also position themselves as trusted advisors in the eyes of their clients and their market.