From the March 2010 issue of Investment Advisor • Subscribe!

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More On Legal & Compliance

from The Advisor's Professional Library
  • Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients’ financial well-being may be jeopardized.  RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.   
  • Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.

SEC Chairman Mary Schapiro told chief compliance officers attending the Commission's second CCOOutreach seminar January 26 that since more and more firms registered with the SEC are either dually registered as broker/dealers and investment advisors, or have affiliates that represent each type of firm, the SEC has begun "much greater collaboration between the broker/dealer and advisor examination programs, resulting in successes at uncovering wrongdoing and determining the full nature and extent of fraudulent schemes." Recent enforcement actions have included failure to disclose material conflicts of interest, Ponzi schemes, fraudulent investment schemes, illicit trading on behalf of customers, insider trading, and improper valuation of client accounts. Schapiro noted that Carlo DiFlorio, the new director of the SEC's Office of Compliance Inspections and Examination (OCIE), plans to "think about ways we can better integrate our examinations of investment advisors, broker/dealers, and mutual funds." Schapiro also said the SEC continues its search for staff with expertise in particular areas and also bolstering its training programs. She said SEC examiners are receiving "regular and relevant training," with more than 300 becoming certified fraud examiners last year alone. The Commission is also "seeking input from staff with expertise in areas where risk-targeted examination sweeps might uncover fraudulent acts or might provide valuable insight on strong compliance practices," Schapiro said.

The SEC staff is currently conducting an examination sweep targeting more than 50 registrants across the U.S. and the UK, she said. The sweep "focuses on the manner in which investment advisors that manage CDOs, hedge funds, and other vehicles that hold asset-backed securities and other structured products have managed those assets under the ongoing stresses of the credit market."

FINRA recently issued guidance to securities firms and brokers regarding the use of social networking Web sites such as Facebook, Twitter, LinkedIn, and blogs to communicate with the public. The guidance in Regulatory Notice 10-06, which is presented in Q&A format, clarifies the responsibilities of firms to supervise the use of social networking sites to ensure that recommendations are suitable, and customers are not misled. The Notice also addresses the recordkeeping and other responsibilities of firms. "Social networking sites and blogs raise new regulatory challenges, particularly in the areas of supervision, advertising, and books and records requirements," said FINRA Chairman and CEO Rick Ketchum, in a statement. "Our goal in issuing this Notice is to ensure that firms and brokers use social networking sites in an appropriate manner." The Notice emphasizes that each firm must develop its own policies and procedures -- in the context of its own particular business model and compliance and supervisory programs -- designed to ensure that the firm and its personnel are complying with all applicable regulatory requirements when using social networking sites.

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