State regulators propose model rule for advisers’ written policies, procedures

State securities regulators are proposing that state-registered investment advisers establish written policies and procedures to curb potential conflicts of interest.

Under the model rule written by the North American Securities Administrators Association, advisers would have to put into place and enforce policies that cover compliance, supervision, proxy voting, ethics, material nonpublic information, business continuity and succession. The policies can be “tailored” to fit the adviser’s business model.

Advisers would be required to review the guidelines annually and would have to appoint a chief compliance officer, according to the proposal.

“Ultimately, an enhanced culture of investment adviser regulatory compliance minimizes the effects of conflicts and other risks unique to investment advisers; minimizing the effects of these conflicts and risks serves to protect the investing public,” the proposal states.

The model rule is open for public comment until Aug. 1.

The proposed measure would be a stand-alone rule under the Uniform Securities Act of 1956 and 2002. It would replace existing NASAA model rules on business continuity and succession, as well as cybersecurity.

“The motivation is to promote regulatory efficiency to help facilitate compliance with state securities laws and enhance investor protection,” Indiana securities commissioner Alex Glass wrote in an email. “The proposed policies and procedures model rule includes a consolidation of current model rules into one convenient package.”

In 2004, the Securities and Exchange Commission started requiring investment advisers registered with the agency to adopt written policies and procedures to address potential conflicts of interest and comply with the Investment Advisers Act of 1940.  

Under the Dodd-Frank financial reform law, advisers with more than $100 million in assets under management are regulated by the SEC. Those with less than $100 million in AUM are overseen by the states.

State regulators want to ensure there is a parallel policies-and-procedures requirement for state-registered advisers and SEC registrants.

“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,” Glass, who heads the NASAA Investment Adviser Section Committee, wrote. “State-registered investment advisers should be required to have similar policies and procedures as those required by the SEC.”

After reviewing the public comments, NASAA could revise the proposed rule. It would then have to be approved by NASAA membership before being made available for adoption by each state. Glass said the organization hopes to vote on a final model rule at its annual conference in early September.

Another NASAA model rule that could come up for a vote at the annual meeting is one that would establish a restitution assistance fund for harmed investors.