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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Advisors, listen up: if you aren’t already doing all the things your compliance manual and supervisor say you are, you’d better start.
That is the first thing you should be making sure of in 2012, and one thing regulators are always looking for, according to Nancy Lininger of The Consortium, a firm that helps RIAs and broker-dealers with compliance issues. She warns that if they find you aren’t living up to those commitments, they will come down hard on you.
Asked about the top compliance issues she sees for RIAs and BDs in 2012, she offers several suggestions for those who want to stay on the side of the angels, and warns, “… regulators are always looking for deficiencies.” In a time when Madoff-sized schemes make the public question who’s in charge, regulators “have to look effective.”
Another red flag, says Lininger, is making sure that your Form ADV accurately discloses your fees and your services. “Regulators [will] go through [the ADV and notice if] you say you’re doing this service and you’re not, or you say you’re charging this fee and you’re charging another. That will be another thing they focus on,” she says.
Have you looked at your ADV Part II lately? Now it is known as ADV Part 2, and that isn’t all that has changed–and it’s another area that she warns will come under scrutiny if you’ve made any material changes in your business.
If you have, you’ll have to fill out the Summary of Material Changes section and be sure to send it to your clients. Previously, says Lininger, advisors had to ask their clients annually if they wanted to see the ADV, “and no clients ever asked for it.” Now, however, it’s not so cut and dried.
Any clients who received an ADV in the past have to be sent the Summary of Material Changes along with the new ADV. Advisors “tend to get lazy on the compliance side,” says Lininger, “and don’t want to bother clients with too much information because the clients won’t read it anyway, advisors might self-justify that it’s not a material change so they don’t have to send out anything.”
That, however, is a mistake, she adds, and points out that it’s better to err on the side of caution, list changes, and send them to clients to show regulators that you’re serious about this item. Changes in services, your fee structure, affiliations, any compensation arrangement such as referral fees to or from solicitors—all those are considered material changes and must be reported.
Another thing not to procrastinate on, says Lininger, for both advisors and BDs, is Part 1 of the ADV. There are more questions now, she says, and they will take longer to answer. In addition, some will require you to calculate the types of clients you have and the types of fees you get from them.
“It’s complicated,” she says, and regulators want to see the types of clients you have and where your money comes from. Although the deadline is March 31, she warns not to wait till the week before; “You will need more time to do them.”
Last but far from least is the need for midsize advisors, with AUM between $25, million and $100 million, to switch to state registration. This is another area where delay can be disastrous, she says. “You have to register with the state first,” she explains, “and states can take, generally, 30 to 60 days to approve [a registration] even if they are not busy–and because of the switch they will be overwhelmed.”
She continues, “Even though it’s before Dec. 31, states are taking information now.” She urges everyone to submit immediately: “Tell them you’re submitting in anticipation of switching over [from federal to state registration], and tell them it’s not for now but for next year.”
Advisors who are going to be registered in four or more states, she adds, can do a coordinated switch through the North American Securities Administrators Association website. “Get in the front of the line, instead of in the back of the line.” NASAA can also assist in cases where state requirements occasionally contradict one another, and coordinate any deficiency letters.
Jumping on these issues early, and dealing with them thoroughly, should lessen any compliance headaches in 2012.