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- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Lori Richards, director of the Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations (OCIE), told chief compliance officers (CCOs) March 12 that they play a crucial role in helping SEC Chairman Mary Schapiro achieve her goal of creating "a new era on Wall Street."
Speaking at the Investment Adviser Association compliance conference in Washington, Richards warned CCOs that since six years have passed since the SEC adopted its rule requiring firms to have a CCO and to adopt a compliance manual, the agency's examiners are not going to give any leeway when it comes to compliance. "This is no longer a new obligation," Richards said in referring to the compliance manual. Firms must strive to have "evergreen compliance programs," she said, meaning ones that are continuously updated.
She urged CCOs to focus on four compliance areas that will be of utmost interest to SEC examiners. First is disclosure, she said, specifically disclosure of conflicts of interest that get in the way of an advisor performing their fiduciary duties. SEC examiners, she said, "consistently" find disclosure to be an area of weakness among firms.
The second area is custody, Richards said. "Have you confirmed that your clients' assets are safe?" she asked. Third is performance claims: be sure they are accurate, Richards warned. And fourth, making sure the compliance program has adequate resources.
Harmonization of Rules?
Meanwhile, Andrew "Buddy" Donohue, director of the SEC's Office of Investment Management, and Erik Sirri, director of the SEC's Division of Trading and Markets, were also on hand at the conference. When asked by David Tittsworth, executive director of the Investment Adviser Association, who moderated a panel discussion with Sirri and Donohue, whether broker/dealer and investment advisor rules should be "harmonized," Sirri said that even though Schapiro has only been chairman for six weeks, she "cares a great deal about this" issue, and "has pledged to keep an open mind."
Donohue responded that while broker/dealer activity has been developing toward the advice model, and that the SEC has "an appreciation for the different regulatory structures," he could see the potential for some harmonization in some areas.
Donohue also pledged to have Form ADV Part II out by the end of this year, as well as the books and records rule.
With reports that the agency plans to release a proposal for comment in April that would reinstate the uptick rule, Sirri said the SEC will be releasing a proposal "related to the uptick rule" next month, but decline to provide details. He said the agency needs to get "a lot of feedback from the industry" on the topic.
Many Advisors, Few Examiners
Tittsworth also asked Sirri and Donohue whether they believed an SRO for advisors is needed. Sirri said that Schapiro has acknowledged that there's a regulatory gap and that an SRO is an alternative option. Citing the 11,000 advisors who are examined by only 400 SEC examiners, Sirri said that Schapiro "wants to leverage someone is the private sector," to bridge this gap, and it could be an SRO. When queried on whether it would be appropriate to merge the CFTC and the SEC, Sirri said this "is for Congress to decide in the coming year." Donohue stated that it would likely be better to wait to decide on any merger of the two commissions until the financial services reform landscape becomes "clearer."