From the August 2008 issue of Investment Advisor • Subscribe!

A Friendly Suggestion to Regulators

More On Legal & Compliance

from The Advisor's Professional Library
  • The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations.  When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.    
  • Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isn’t just a recommended best practice— it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firm’s strategy is proprietary.
Please, regulators, stop with the "best practices" discussions as if they are rules. Please make clear the difference between a "best practice" and a rule requirement. What may be prudent for one firm may have absolutely no relevance for another. Take, for example, Anti-Money Laundering/Patriot Act compliance. The Patriot Act is not currently applicable to investment advisors, because it would most likely result in duplicative efforts that serve no purpose (aren't investment advisors subject to enough regulations that have little to no relevance to their practices or their clients!). Custodian firms are subject to the Patriot Act. Moreover, as indicated above, Rule 206(4)-7 indicates that advisors must establish and maintain policies and procedures that are germane to their advisory operations. Thus, if an advisory firm does not have any clients in any of the OFAC countries, or accepts cash from clients, why would it need to establish a formal AML program? A discussion of AML/Patriot Act and its policies and procedures so that employees/representatives can have an understanding thereof? Yes, a formal program? No.
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