Numerous high-profile enforcement actions show that many advisors continue to sidestep their compliance obligations -- and they show where the SEC will be looking for future breaches.
The SEC's
PUT IT IN WRITING
One area that advisors should pay particular attention to falls under the so-called Compliance Rule -- aka Rule 206(4)-7 of the Investment Advisors Act. Under this rule, advisors must adopt written policies and procedures that are reasonably designed to prevent securities law violations.
RIAs must designate a chief compliance officer to administer these compliance policies, and create and maintain a written compliance and supervisory procedures manual that is tailored to the firm's unique business model. The rule also requires advisors to review their policies and procedures at least once a year.
The SEC has sanctioned advisory firms for repeatedly ignoring problems with their compliance programs. One published case involved false and misleading disclosure of the RIA's historical performance returns; compensation, billing and fees; as well as conflicts of interest. Another case cited an advisor with misleading advertising and failing to complete its compliance reviews several years in a row.
With respect to books and records, deficiencies typically include suitability documentation, missing client contracts, and trial balance/financial statements. Top registration problems involve Form ADV, the form advisors use to register with the SEC and state regulatory authorities; top contracts deficiencies commonly include improper execution, fees, and fee formula.
NEW HIGH-TECH CAPABILITIES
Investment advisory firms of all size, from the leanest to the largest, can leverage technology to maintain accurate books and records and sound, "audit-ready" operations. This is true throughout a client's life cycle -- whether the advisor is bringing a client on board, managing the assets over time or onboarding any follow-on business the client may refer.
Effective wealth management software facilitates client data capture, including the investor's risk profile. Real-time access to data and centralized documentation help advisors steer clients to appropriate investment options, and monitor suitability. Software can help advisors meet rigorous "know your client" mandates and improve client management.
For example, a hierarchical relationship explorer and match-merge tool can compare data to streamline household accounts and avoid duplicate contact and account creation. Advisors can improve client communications and respond better to service requests by using note-taking integrated with email software.
Among other new capabilities: Online contract generation; a rules-based workflow engine; and document authoring, publishing and archiving can help advisors manage clients' investment policy statements at a firm level. Today's wealth management tools also integrate front- and back-office data to ensure account balances and statements are calculated and reported accurately and efficiently.
There are other advantages. Customized reporting via a client portal with rich graphics and on-demand or pre-scheduled reporting build client confidence, while portfolio dashboards and historical performance and transactional summaries deliver a 360-degree view of client assets and liabilities.
Automated workflows and rules-based business logic embedded in today's advanced wealth management platforms deliver immediate access to data and faster answers to inquiries -- whether from your internal compliance staff, investors or regulators. At the same time, today's powerful platforms alert users of potential infractions, including anomalous or fraudulent trading and account activities and potential breaches of client and firm-defined risk thresholds.
ADVISOR IMPERATIVE?
Fueled by intensified regulatory scrutiny and enforcement actions that are unlikely to abate, advisors must design and support policies and processes to avoid compliance missteps.
This includes documenting compliance policies and procedures, designating a compliance officer to manage their oversight, maintaining accurate books and records and leveraging technology to support sound and transparent operations.
Effective tools and best practices can help advisors manage an effective compliance infrastructure to build client trust and stay in good stead with regulators. Conversely, advisors that do not address their compliance pain points put their business at undue risk and, as a result, will fail to retain the client loyalty that's needed to build and maintain a healthy business.
Harold Reimer is head of private wealth management for
Read more:
Dually Registered Advisors in SEC Crosshairs For RIA Compliance, When Size Matters Regulation Produces More Questions for Advisors than Answers
