More On Legal & Compliancefrom 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 isnt 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 firms strategy is proprietary.
Hello all from 40,000 feet. As I compose this column, I am on my way back to beautiful Princeton, N.J. (No, New Jersey is not just the smokestacks and oil cans that are situated on the New Jersey Turnpike) from client meetings and speaking engagements in Seattle and Portland. I am blessed to have met and worked with so many wonderful people and firms throughout the United States and Canada over the last 25 years.
As I write, I am approximately 24 hours from the fateful March 31, 2011, SEC deadline for filing new Form ADV Part 2A. I now know what it feels like to be a CPA trying to meet his April 15 deadline. I have reviewed approximately 1,500 Part 2As that my firm has drafted and will have filed by midnight tomorrow. I, and the marvelous people that I have the privilege to work with, are exhausted.
So, here is the “$100 million” question (yet another issue advisors will have to address by July of this year—stay tuned to future columns): Will all the stress and cost associated with this new Part 2A make a substantial difference for the investing public? Unfortunately, the truthful answer is no. Will the new Part 2A stop the next Madoff or Stanford? Absolutely not. To the contrary, future crooks (and there will always be future crooks, as well as current crooks who have as of yet gone undetected) may have the most eloquently drafted written disclosure statements.
What our politicians (and the SEC, which too often buckles to the political pressure of our “esteemed” elected officials) do not and—based upon recently enacted rules and regulations—will never realize, is that you can’t regulate crooks. Rather, the result of the vast majority of regulation (which is usually reactive to the unfortunate events perpetrated by crooks) is to further frustrate the 99.9% of the advisory community that works diligently every day to do, what they believe, is in the best interests of their clients. The unfortunate result of unscrupulous activity is to propound additional rules and regulations on the advisory community that add no value to the services they provide. Rather, the unintended, but real result is to further deplete precious time and resources that advisors could and should be spending on the benefit of their clients.
The custody-related issues set forth on the amended Part 1 continue to confuse the vast majority of the advisory community—which I can empirically confirm from my many speaking engagements throughout the United States over the past six months. Advisors are now burdened with confusing custody rules that I dare to say the adverse impact of which (on both advisors and their clients) the SEC still does not fully appreciate. As a result of Madoff, a fraud that should have been discovered, but went for years undetected, by both the SEC and FINRA—the SRO that dreams of becoming the “uber” regulator of all things financial (a grave mistake that I will address in a future column), the SEC re-adopted the CPA annual surprise examination. This is the same SEC that removed the requirement in 2002, advising at the time that it added little to no safeguard against criminal enterprises. The SEC was correct then and should have stuck to its knitting. Now, as a result of Madoff, the SEC determined that an annual surprise exam is now a critical exercise to stop crooks! How many crooks will undergo a surprise exam by an independent CPA firm?
It’s getting late, and the flight attendant has just cut me off of my libations. So, I will just go back to dreaming of what it would be like (and what would be different) if I were SEC chairman.