Published on Mar 14th, 2023 |


15 Compliance Considerations Amid Banking Crisis

Vigilant Insights

Brief Introduction

Like many, Vigilant is closely monitoring the impact that the present banking crisis has on certain RIAs.

We recognize that the current environment is fluid and there are rapid developments.

RIAs should take a moment to use the banking crisis as a tool to evaluate their compliance program and develop a risk-based and practical approach to help lessen the impact on their investors and clients where possible.

15 Compliance Considerations

15 Compliance Considerations

  1. Custodian Relationships. After seeing the impact from the initial newsbreak of Silicon Valley Bank, RIAs should consider diversifying custodial relationships which could help minimize the potential uncertainty and destabilizing effect on an RIA’s. operations relying on a single custodian.
  2. Vendor Risk Management. Vendor Risk Management is crucial to help identify risk mitigation practices. As RIAs move assets in efforts to diversify banking relationships, they should ensure that proper due diligence is done at all depositories.
  3. Due Diligence on Cash Management Providers. Managers should ensure that the new cash management providers they are using fit the definition of a qualified custodian and take steps to ensure that their underlying cash management methods are sound.
  4. Scenario Planning. Conducting a deep analysis with scenario planning is important when developing your Firm’s Vendor Risk Management practices and capabilities to help reduce potential weaknesses.
  5. Custody Concerns. RIAs should consider the Custody Rule impact of moving Client funds into bank accounts by ensuring that the receiving bank account is titled correctly or that the Custody Rule impact is otherwise mitigated.
  6. Portfolio Companies’ Liquidity Constraints. RIAs should consider disclosing significant risks that arise as a result of Portfolio Companies’ liquidity constraints in filings and investor communications, where applicable.
  7. Review Risk Disclosures. RIAs should review their risk disclosures (e.g. Item 8, Form ADV Part 2A) to ensure that there is full and fair disclosure of the risks faced by an RIA and/or clients in order to fulfill the fiduciary duty, especially in light of a banking crisis.
  8. Cybersecurity Training and Phishing Attempts. Cybersecurity Training for employees will continue to be essential as there is an anticipation throughout the industry that phishing attempts could see increased volume amid the banking collapse.
  9. Cash Controls. Detailed and enhanced review of cash controls should be conducted by RIAs to ensure all cash is being moved in line with policies and procedures.
  10. Off-Channel Communications. The SEC is continuing to investigate recordkeeping practices; RIAs should ensure all client and advisory business communications remain on archived channels and avoid off-channel communications inconsistent with the regulatory requirements.
    • Having a technology solution to archive and monitor off-channel messages is a must in this regulatory landscape and environment.
  11. SEC Examination Activity Moving Forward.  There is an anticipation of investigative activity by the SEC, as possibly hinted by the SEC Chair. Managers utilizing failed banks should be prepared to discuss exposure with SEC Staff.
  12. Liquidity Risk Management Questions to Consider. 
    • How closely does the investment plan of your company fit the capital base’s liquidity?
    • Can hedge funds use side pockets and gates as necessary?
    • What would happen if a private equity investor missed a capital call?
    • What effects, if any, would an unanticipated change in the availability of leverage have?
    • Have you conducted a stress test?
    • For Mutual Funds, are you evaluating if changes should be made to your Reasonably Anticipated Trading Size (“RATS”)?
    • For Mutual Funds, are you evaluating if changes should be made to your Significant Value Impact (“SVI”)?
    • Has your firm experienced any material impairment or stress to any underlying holdings?
    • Did your firm hold any demand deposit (or similar accounts) with SVB or any other insolvent bank?
    • Are you experiencing any challenges accessing cash?
  13. Valuation (2a-5). By making sure that valuation policies and procedures are well-designed, completely disclosed, and applied consistently, compliance experts can aid in the protection of their Firms.
  14. Additional Items to consider reviewing a Firm’s Valuation Practices. 
    • Check to see that policies and procedures are consistently followed and that workpapers and data inputs required to support previous valuation judgements are retained.
    • Examine the firm’s disclosures to clients and investors to see if they are accurate and complete.
    • Determine whether significant shifts in market dynamics could complicate the management of the company’s valuation policies and procedures or lead to inaccurate or incomplete investor disclosures.
  15. Business Continuity Plans. Managers should review their BCP to ensure that their plans address the potential for loss of access to funds.

Vigilant's Conclusion

Vigilant’s Conclusion

To handle market disruption and help reduce the impact on an RIAs compliance program, compliance professionals should start to seriously consider ongoing assistance and compliance support if they have not already.

There is a significant advantage to having an additional layer of support allowing for a more customized and tailored Compliance Solution to step in to help maintain and improve the existing compliance program.

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