Considerations for Registered Investment Advisors (RIAs) Following the Banking Collapse

Following the collapse of Silicon Valley Bank (SVB) and Signature Bank (Signature) igniting the launch of an investigation by the Securities and Exchange Commission (SEC), there are a handful of things registered investment advisors need to consider.  They include the following:

Reporting Requirements

RIAs should include any new bank/custodian to their Form ADV and file with the SEC on or before the March 31 filing deadline. The Form ADV is a form used by investment advisors to register with the SEC. After filing, the Form ADV is made available to the public on the Investment Adviser Public Disclosure (IAPD) website.

In addition, all RIAs with identified exposure to SVB and Signature on their Form PF should explain the calculation to the SEC. The Form PF is a form used by private fund advisors to report regulatory assets under management to the SEC and the Financial Stability Oversight Council.

Custody of Client Assets

SEC Rule 206(4)-2 requires RIAs in control of client assets to safeguard those assets. RIAs with custodial relationships with any bank/custodian impacted by the bank closures should notify clients of an impending transfer of assets and update client statements before transferring client assets from one bank/custodian to another.

Code of Ethics

SEC Rule 204A-1 requires RIAs to adopt a Code of Ethics. The rule requires access persons of an RIA to report securities holdings and personal trading. An access person is any partner, officer, director or employee who has access to nonpublic information regarding clients’ securities transactions. RIAs should test and document whether all access persons have completed Code of Ethics compliance training and submitted a securities holding report. In addition, RIAs should review access persons’ personal trades to identify insider trading. To do so, the RIA should identify all access persons who may have traded SVB or Signature shares of stock immediately preceding the bank closures and confirm whether such trades comply with the personal trading policy.

Client Communication and Disclosures

RIAs experiencing an increased number of inquiries regarding potential risks to the RIA or its clients as related to the bank closures should implement a communication strategy that responds to the inquiries; doing so would eliminate the potential of making materially false or misleading statements. While devising this communication strategy, the RIA should consider whether additional risk disclosures are necessary.

Conclusion

Details regarding the regulatory complexities caused by the bank collapse could possibly set the stage for reconstruction of the market regulation and industry best practices standards. As these changes become apparent and begin to materialize, there will be added considerations for RIAs to take into account in order to remain in compliance with the SEC.