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.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Last year was full of changes for the investment advisory community. What lies ahead for advisors to do or consider in 2012?
1. Has the firm finalized, filed and provided to its clients its initial written disclosure statement on the new Form 2A?
2. Does the firm have the qualifying assets needed to remain SEC-registered? If not, is it prepared to transition to state registration by filing a Part 1 amendment by March 30, 2012, and transition registration to all required states by June 28, 2012? Remember: Assets over which you do not maintain trading authority generally do not qualify as assets under management on Part 1 of Form ADV, including assets allocated to separate account managers for which you do not retain authority to hire or fire on behalf of the client.
3. Has the firm updated its policies and procedures to reflect substantive regulatory changes resulting from Dodd-Frank? The SEC is becoming adversarial with advisors who fail to update their written policies.
4. Do the firm’s policies and procedures documents reflect the firm’s operations, or have they been purchased from a “one size fits none” consulting firm? If the latter, the firm must review and revise the documents. That is not to say that the firm should not engage or disengage such providers, but only that it requires some additional review and work internally to ensure that they reflect the firm’s practices.
5. Is the firm adequately prepared for a regulatory exam? The scope of the regulatory examination process continues to become increasingly more complex. However, if the firm is adequately prepared to answer all of the issues that will be raised by the SEC during the examination process, the exam should not be painful. Please continue to be mindful that issues uncovered during mock exams conducted by non-law firms are discoverable by regulators and plaintiff’s lawyers, especially any written reports regarding same.
6. Has the firm continued to reconfirm client investment objectives on an ongoing basis? Does the firm use an investment policy statement? If so, has it been updated to reflect any changes? Correspondingly, does the firm use a “canned” initial client questionnaire? Questions such as “How much of a market decline could you afford or tolerate?” should be reconsidered. Clients never respond by indicating that they can withstand or tolerate large fluctuations or losses—most firms greatly exceeded those parameters during the 2008-2009 correction.
7. Does the firm have clients who may outlive their funds? If yes, what has the firm done to both alert the client and protect itself from potential liability? Although a very sensitive issue, it is one that needs to be squarely addressed and documented.
8. Do the firm’s marketing materials indicate incorrect “assets under management” or promise too much? Not every client will receive the same services. Avoid superlatives such as “comprehensive.” Have your marketing materials reviewed from both a compliance and liability perspective.
9. Has the firm reviewed and updated its advisory agreements? Do they adequately reflect the firm’s practices? Generally, one size cannot fit all client engagements, especially if the firm’s client base or service offerings are diverse.
10. Has the firm reviewed its E&O policy? Are the coverages still adequate given changes in the firm’s practices, service offerings and asset levels? Too many firms are under a false sense of security that the policy covers all of its activities. Read the exclusions and obtain a policy rider or endorsement if necessary to fully protect the firm.
Remember, compliance is not difficult if you understand the rules and how they apply to the firm. Make 2012 the year that you undertake a real review of the adequacy of your compliance processes, disclosure statement, advisory agreements and preparedness for a regulatory examination. If you do so correctly, it will pay dividends.