Likely on Its Way: Greater Compliance Burden for Advisors

More On Legal & Compliance

from The Advisor's Professional Library
  • Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors.  When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
  • 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.   

Last week, our organization convened our annual two-day compliance conference for investment advisory firms. More than 200 compliance professionals made the trek to Crystal City, Virginia (across the bridge from Washington, DC) to hear SEC staff, in-house legal/compliance professionals, and practicing attorneys opine on topics ranging from the SEC’s new whistlebower program and changes to Form ADV, Part 1, to issues relating to CCO liability, the SEC’s ever-changing inspection program and much more. 

At the start, I moderated a panel of  veteran compliance experts: Bob Plaze, deputy director of the SEC’s Investment Management Division (who has been with the SEC for nearly three decades and involved in every major regulatory decision involving the Investment Advisers Act during that time), Chris Jackson, senior VP and general counsel at Calamos Investments (who previously worked at Deutsche Asset Management, Hansberger Global Investors, and Van Kampen since starting his career in 1986), and Tom Giachetti, a shareholder and chairman of the securities practice at the law firm Stark & Stark (who started practicing law in 1986 and authors regular columns for Investment Advisor magazine).  

In reviewing the history of Advisers Act compliance, we all agreed that there have been exponential changes in the amount and complexity of regulations governing the investment advisory profession. Many of those changes can be traced to 1996, when Congress enacted legislation allocating regulatory responsibility between the SEC (advisory firms with at least $25 million AUM) and the various State regulatory authorities (advisory firms with less than $25 million AUM). 

Consider the following:

  • In 1996, there was only one written policy required by federal law of investment advisory firms: insider trading.  Today, investment advisers must have written policies covering numerous areas, from a code of ethics, to privacy, proxy voting, and much more.  In addition, advisory firms are subject to an overarching fiduciary duty requiring them to place their clients’ interests ahead of their own.
  • In 1996, it was not an easy task to get a copy of a firm’s Form ADV.  Today, investment advisory firms file extensive required disclosures electronically (Form ADV, Parts 1 and 2) that are instantly available to anyone with Internet access (www.adviserinfo.sec.gov), including the SEC, potential clients, your competitors  and the media.  These disclosures range from your firm’s address and phone number to types of clients, assets under management, principal owners, disciplinary history, investment strategies, compensation and background information on those who provide advice.
  • In 1996, the SEC created the Task Force on Investment Adviser Regulation: the first time investment advisers were recognized on the SEC’s organizational chart.  Today, the Division of Investment Management is a growing and key part of the SEC; the Office of Compliance, Inspections and Examinations employs 450 examiners who conduct inspections of investment advisory firms and mutual funds; and the Division of Enforcement has a separate Asset Management Unit dedicated to bringing cases against investment advisory firms.
  • The compliance program rule, adopted by the SEC in 2003, epitomizes the evolution of investment adviser compliance.  It is all-encompassing (requiring advisory firms to adopt policies and procedures reasonably designed to prevent violations of the securities laws).  It institutionalizes compliance (requiring firms to appoint a chief compliance officer who is responsible for administering such policies and procedures).  And it is never ending (requiring firms to review their policies and procedures at least once a year). 

Going forward, the consensus is that advisory firms will need to spend even more time and resources to meet their compliance ooligations.  Like it or not, it is unlikely that the regulatory pendulum will swing the other direction any time soon…    

As always, I welcome your thoughts and feedback.    

Reprints Discuss this story
This is where the comments go.