This year is the second full year of a new, more aggressive SEC regulatory regime. Has the
majority of the advisory community
taken heed? Unfortunately not.
In October 2013, the Securities and
Exchange Commission pronounced
that it would examine all previously
unexamined advisors by the end of 2014.
Although it did not achieve its goal, it
did make a strong effort to do so, and
will most certainly complete the task in
2015. However, that does not mean that
previously examined advisors should
feel that they are not on the commission’s radar. To the contrary, all advisors
must continue to be vigilant with their
compliance-related efforts, especially
given the SEC’s recent initiatives that
apply to all registered investment advisors. What was adequate in 2013 was
most likely somewhat deficient for 2014,
and will be even less complete in 2015.
Remember, unless your compliance
efforts are geared toward successfully
completing an exam, you are generally
wasting time and resources. Compliance
is not a bunch of forms or checking
boxes—don’t drink that “Kool-Aid.” The
only way to successfully navigate through
an exam is to know what the examiners will be looking at given your specific operations. Only after you are able to
effectively make that determination can
you adequately prepare for an exam.
I continue to spend the vast major-
ity of my time traversing the U.S. and
Canada making those determinations
and preparing advisors for the exam.
Stop going through “one size fits no one”
electronic exercises. These are generally
not the areas that could result in adverse
SEC outcomes. No, the areas that will
receive SEC focus may have little to do
with your day-to-day “checking the elec-
tronic boxes.” That is not to say that they
should be ignored. However, don’t get a
false sense of being prepared because you
have completed such rudimentary tasks.
Stop paying for services you do not
need. Most firms can and should take
ownership of their day-to-day compliance requirements. To do otherwise
could prove detrimental during an exam
if you are not able to demonstrate to the
SEC that you understand your compliance efforts, how they are completed
and why. Too many firms undertake too
many tasks that are not required given
their operations but because they are
what their consultant requires, only to
find that the areas of real SEC focus
have been neglected.
So, what are these areas? They
include, but are certainly not limited to:
1. Cybersecurity. Have you identified
the risks and adopted corresponding
adequate information security processes? Can you demonstrate same to the
SEC during an exam? You can’t just say
you rely on the efforts of others without knowing what those efforts are.
2. Custody. Do you really under-
stand what constitutes custody?
Unfortunately, we have found that
sometimes the SEC doesn’t understand
(or ignores) its own published FAQs. Do
you serve as a trustee, maintain SLOAs
or have possession of client passwords?
Is it custody? Is there an exception?
3. Conflicts of Interest. Are you adequately (and clearly) disclosing them
on your Form ADV Part 2A? This is a
primary SEC focus and the genesis of
many adverse SEC findings.
4. Wrap Programs or Asset-Based
Pricing. This is when clients are
charged a percentage of the account
market value for transaction fees.
Can you demonstrate to the SEC
that these programs and arrangements are beneficial to the client?
Remember, you are a fiduciary—you
are required to do so.
5.Composite and Non-Composite
Performance Presentations. Do
you really need them? Are they compliant with SEC rules and no-action
letters? Can you use them in a manner that will lessen your risk exposure during an exam?
It’s not too late to get on track. Look
at your efforts—are you in control or is
a third party? Remember, the SEC will
be examining you, not a third-party
consultant, and you can’t blame the consultant. You can try, but the SEC will not
care. It is and will continue to be your
responsibility to ensure that your compliance efforts are appropriate given the
scope of your firm’s operations.
Thomas D. Giachetti is chairman of the
Securities Practice Group of Stark & Stark, a law
firm with offices in Princeton, New York and
Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a
regular contributor to Investment Advisor. He
can be reached at firstname.lastname@example.org.
The ComplianCe CoaCh
By Thomas D. Giachetti
don’t Be Complacent About Compliance
Fulfilling your compliance obligations is your responsibility, not a consultant’s