Wealth Management
Earlier last week, the SEC and the Commodity Futures Trading Commission disclosed that they levied fines of more than $1.71 billion on several Wall Street firms. The regulators issued penalties to 16 financial companies for the failure to monitor the use of unauthorized messaging apps. The banks that were penalized include some of the largest firms on Wall Street, including Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Credit Suisse, and Barclays. The SEC’s probe revealed that between January 2018 and September 2021, employees of the aforementioned firms used WhatsApp, personal email, and other unauthorized services on their personal devices to communicate work-related matters. Personal devices can pose risk to an organization's data since it may not be as protected from cyberattacks as a secure company device, which enforces corporate security policies. Making matters worse, the 16 companies also failed to adequately maintain records of the communication, which hindered the investigation. In fact, the firms were not charged for the lax security, but their negligence in the documentation.
Finsum: The SEC and Commodity Futures Trading Commission fined 16 Wall Street firms a combined $1.71 billion for not maintaining documentation on the use of unauthorized messaging apps.
During recent testimony before the Senate Banking Committee, SEC Chair Gary Gensler told senators that the agency needs more resources for exams. He said the exam division’s “work is essential to ensuring strong compliance across the board,” including “work to test for compliance with Regulation Best Interest.” Gensler said the enforcement division “is doing more with less” and “more cases are being litigated and going to trial.” He also stated, “The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.” For fiscal 2021, Gensler said the SEC received 46,000 tips, complaints, and referrals from the public. This was up from about 16,000 five years earlier. For the exam division, Gensler said the division exceeded the previous year’s numbers by completing more than 3,000 exams and the fiscal 2023 budget request supports an additional 4% increase in full-time examiners.
Finsum: In recent testimony, SEC Chair Gary Gensler asked the Senate for more funding for exams, including compliance with Reg BI.
According to a recent report from Cerulli Associates, increased demand from financial advisors had led fund managers to include separately managed account (SMA) strategies into their model portfolios. Matt Apkarian, a senior analyst at Cerulli, told FundFire “Typically, model portfolios tap mutual funds and exchange-traded funds, but large asset managers are now seeing demand for SMAs, given their customization and tax-management capabilities.” According to FundFire, citing data from Cerulli, assets in model portfolios hit $2 trillion through the end of 2021. That was a 22% increase from the prior year. That included assets from home-office model portfolios and portfolios offered by asset managers, but excluded advisor-built model portfolios. Cerulli attributes the rise in assets to home offices directing their advisors to outsource investment management. The firm also believes that home offices will increase their model portfolio capabilities to compete with third-party strategists.
Finsum: SMA strategies are being incorporated into model portfolios as a result of advisor demand for more customization and tax management.
More...
According to Sage Advisory in its recently released fourth annual stewardship report, ETF issuers offered much less manager disclosure and transparency regarding their ESG activities compared to their responses in the previous year’s report. The financial firm said that ETF firms had a “distinct change in tone” and “restrained language” in their responses to the survey. The firm attributes the drop in transparency to pending regulation in Europe and from the SEC that would require issuers to define ESG investments more clearly. Regulators are looking to crack down on firms that government agencies believe are overstating their fund’s ESG credentials, also known as greenwashing. The survey covered seven areas of stewardship such as proxy voting, climate and governance, and had a total of 69 questions. Based on its report, the firm believes that fines and proposed regulations could have both positive and negative consequences. The positive is that greenwashing could become less common, while the negative is that a lack of transparency could become an issue.
Finsum:As a result of pending regulations, ETF firms are becoming less transparent regarding their ESG activities.
Direct indexing has recently become a hot topic in the financial industry and for advisors looking to differentiate themselves from the pack, fund giant Vanguard recently identified four situations that they should consider using direct indexing. The first is tax-loss harvesting. For example, when an index is up, some of its holdings can be trading at a loss. An investor in a direct indexing strategy can sell those stocks and create a tax loss that can be used to offset taxes that are due as a result of an overall gain for the index. The firm also lists ESG as another reason. A custom index can be designed to avoid shares of firms involved with fossil fuels. The third situation is factor investing, or investing in companies that have specific factors such as growth, value, or quality. A custom index can be created to meet those criteria. The last situation Vanguard recommends is diversification. A custom index can be built to accommodate an investor that may be required to hold a certain number of shares in his or her employer.
Finsum:According toVanguard, tax-loss harvesting, ESG, factor investing, and diversification are four strategies that advisors should consider when building custom indexes.
While the SEC has been pushing public companies to improve their cybersecurity, minimal adoption of stronger cybersecurity rules has led the agency to draft new rules requiring more formal cybersecurity reporting and disclosure. The SEC proposal outlined several requirements that are designed to improve cybersecurity awareness and reporting for corporate executives and board members. The first is cybersecurity incident reporting, including current reporting about material incidents and periodic reporting about previous incidents. The second requirement is cybersecurity policies such as periodic reporting about policies and procedures to identify and manage risks. The third proposal is management requirements including management’s role and expertise in assessing and managing risk and management’s role and expertise in implementing policies and procedures. The final requirement is board oversight such as reporting on how the board of directors performs oversight on cybersecurity and disclosure of the board of directors’ cybersecurity expertise if any.
Finsum:The SEC recently drafted new cybersecurity rules for companies, including incident reporting, policies, management requirements, and board oversight.