SEC Is Now Examining Whether Investment Adviser Obtained Informed Consent When Amending Advisory Agreements

SEC Taking a Closer Look at Whether Investment Advisers Are Obtaining “Informed Consent” When Amending Advisory Agreements

October 17, 2023


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New Exam Priority

The Division of Examinations of the U.S. Securities and Exchange Commission (“SEC”) recently issued the Fiscal Year 2024 Examination Priorities signaling areas of particular interest for the upcoming audits of investment advisers. Notably, this year’s exam priorities introduces what appears to be a new focus on whether investment adviser firms are obtaining “informed consent” from clients when making material changes to advisory agreements:

“The [SEC’s] Division [of Examinations] is also focused on [investment] advisers’ policies and procedures for …obtaining informed consent from clients when advisers implement material changes to their advisory agreements.”

See https://www.sec.gov/files/2024-exam-priorities.pdf at page 10 (emphasis added).

What Is Informed Consent?

Although the SEC doesn’t specify in the FY 2024 Examination Priorities what constitutes “informed consent” by a client for purposes of amending an advisory agreement, the following are examples possible questions that an SEC examiner might consider:

Disclosure: Did the investment adviser provide the client with full and fair disclosure of all material facts concerning the amendment to the investment advisory agreement?  A lack of adequate written disclosure can make it difficult for the investment advisory client to give truly informed consent.

Timeliness: Was the disclosure given well in advance of the amendment taking effect, giving the investment advisory client ample time to consider the changes and to decide whether to continue the advisory relationship under the amended terms?

Multiple Notices or Confirmation of Receipt:  To the extent that the investment advisory agreement expressly allows the investment adviser to obtain client consent through a no-response notification letter, did the investment adviser provide multiple notices of the proposed amendment or verify client’s receipt of the proposed amendment?

Comprehensibility: Was the disclosure about the proposed amendment made in “plain English,” meaning it was easily understood by the investment advisory client? If the disclosure about the proposed amendment is written in complex legal jargon, a SEC examiner might argue that a retail client would struggle to understand the amendment and cannot provided informed consent.

Access to Information: Did the investment advisory client have the opportunity to ask questions about the proposed amendment and receive full and clear answers from the investment adviser? This includes access to additional documentation or clarification as necessary.

Termination Rights: Was the client made aware that they have the right to terminate the investment advisory relationship without penalty if they do not agree with the investment adviser’s proposed changes?

Takeaways

Proving “informed consent” could be challenging for an investment adviser firm and will likely require careful documentation and active participation by the assigned investment adviser representative.

In light of the evolving regulatory landscape, it is crucial for an investment adviser firm to keep an eye on SEC risk alerts and enforcement actions for further guidance and specifically consult with its compliance professional and legal counsel to ensure that its methods of obtaining “informed consent” when amending advisory agreements are in line with current regulatory expectations.

Related Resources

SEC Exam – Best Practice Checklist

SEC Exam – Mock Exam Document Request List

SEC Exam – Log of Requested Docs & Info

SEC Exam – Privilege Log

SEC Exam – Investment Adviser’s Confirmation of New Deadline for Response

 SEC Exam – Response to Deficiency or Findings Letter from Securities Regulator

 SEC Exam – Sample Letters Requesting Confidential Treatment under FOIA

Annual Review – Spreadsheet for Risk Assessment, Supervision Chart and Assessment Log

CCO – Third-Party – Confirming Annual Review Completion

Branch Office Review – IA Checklist

RIA Express – Compliance Review Tool

Recorded Webinar: Reviewing and Updating Investment Adviser Client Agreements (4/27/2022)

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SEC Provides Investment Advisers with Insights on Examination Process (9/7/2023)

Key Takeaways from NASAA’s 2023 Investment Adviser Coordinated Exam (8/15/2023)

Common Deficiencies of Newly Registered Investment Advisers (4/14/2023)

SEC Issues Investment Adviser Exam Priorities for 2023 (2/16/2023)

SEC Announces 2021 Examination Priorities for RIAs (3/15/2021)

SEC Announces 2020 Exam Priorities (1/16/2020)

NASAA Releases 2019 Investment Adviser Coordinate Examinations Report (10/25/2019)

2019 SEC Examination Priorities (12/27/2018)

NASAA Investment Adviser Coordinated Examinations Report (1/24/2018)

NASAA Report on Common Investment Adviser Deficiencies (10/2/2015)

SEC’s 2015 Examination Priorities for Investment Advisers (1/13/2015)

Coordinated Examinations Result in the Release of Recommended Best Practices for Investment Advisers (10/19/2011)

NASAA Report on State Investment Advisor Exams (11/12/2005)

Disclosures

The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all topics covered in the regulator’s guidance. RIA Compliance Consultants, Inc. is not offering any safe harbor, guarantees nor other assurances associated with the example questions that an examiner may consider related to informed consent. The content of this blog post may become dated and inaccurate; RIA Compliance Consultants, Inc. does not typically update past posts.  This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above.  RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This blog post should not be considered legal advice. RIA Compliance Consultants, Inc. recommends that an investment adviser discuss how to obtain “informed consent” from clients when amending advisory agreements with its legal counsel. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.

Posted by Bryan Hill
Labels: Client Contracts, Examination, Examination Priorities, SEC, SEC Inspection