More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- 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.
Fresh off starting their new positions at Regulatory Compliance Associates, Craig Moreshead and Lori Weston have zeroed in on three issues they should be on advisors’ radar screens: the Securities and Exchange Commission’s pay-to-play rule and Form PF as well as the use of social media.
While both are busy assisting client firms with registration issues surrounding the switching of advisors from federal to state registration, Moreshead and Weston told AdvisorOne they are also looking at issues that are bringing a lot of inquiries like the SEC’s pay-to-play rule, which Moreshead says is “not so new; it came out about a year ago, but it is certainly new to managers who haven’t been registered before and haven’t had to deal with it. It’s a unique regulation, and certainly the penalties are severe if you go awry.”
The pay-to-play rule restricts advisors’ and their employees’ ability to make political contributions to government officials to influence the selection of advisors to public pension funds and other government entities.
The pay-to-play rules are “a challenge for advisors because it is a trap for the unwary, especially since political contributions are beyond the purview of what an advisor would normally consider investment-related compliance.” Not only that, but the involvement of hiring personnel also comes into compliance, he says, thanks to the "look back" provision that attributes to the firm political contributions made by new employees up to six months prior to employment—going back two years instead of six months, if the new employee is a solicitor.
He continues, “The books and records requirement to maintain a record of all government entities to which the firm has provided advisory services also presents challenges for many firms (especially those firms providing advisory services to registered investment companies or private funds in which government entities are investors).”
It’s also important to remember, he adds, “the severity of the penalties for non-compliance where a firm would be barred from receiving compensation from a government entity within two years after a contribution has been made. In addition, private fund managers who are exempt from registration (i.e., exempt reporting advisors) are subject to the play to play rule.”
Social media is a fairly new topic that is also on “the radar screen of the SEC and the states,” says Moreshead. Questions are already coming in on what a firm’s policy ought to be in practice and controls, he says. In this area as in so many others in the field of compliance, he points out that for each firm the correct policy will be different. A formula for compliance in this arena is definitely not one-size-fits-all.
A third subject that is also already an area of interest to client firms as they prepare to satisfy regulators is Form PF, which, says Moreshead, isn’t in effect yet, but will require a lot of disclosures on the part of private fund managers. He adds, “We’re getting questions on those, and looking at those requirements and how we might be able to service clients in that area.”
Both, formerly with Lincoln Financial—Moreshead with Lincoln Financial Group and Weston with Lincoln Financial Network—bring substantial experience to their new roles as manager of investment advisor services and investment advisor compliance specialist, respectively.
Moreshead is responsible for compliance consulting, hedge fund registrations and examinations, SEC and state regulation interpretation, and client compliance and procedure manuals, and will draw on his experience in his former role as assistant vice president and senior counsel.
Weston is responsible for investment advisor state, SEC registration and compliance consulting. She also manages day-to-day requirements and requests from RIA compliance partners. Before coming to Regulatory Compliance, she was a senior manager of RIA compliance, and oversaw compliance and marketing support of corporate and independent RIAs.
Moreshead, who has spent much of his time since his arrival working with new registrants and SEC/state transitions for midsized firms, says that it has been an educational process for many—executives and compliance staff at client firms are learning what is required. He adds that for many who have never registered before, there is an initial “fear factor” that he works to alleviate. He adds that once the transition period to state registrations is over, there will be “a lot of education.”
“One of the common misconceptions,” says Moreshead, “is that compliance is black and white, cut and dried.” Instead, he says, consultants need to learn about their clients and “tailor a compliance program to fit their business. ... It needs to fit their business model: the types of clients they have, the kind of business, how they make money, what their risks are, how large they are, basically how they operate. Each management firm is different; how they structure their compliance program needs to be different.”
Weston agrees. Prior experience has taught her, she says, that many RIAs would purchase a compliance package without really realizing what it contained. “It made their firm compliant, but almost overly so,” she explains, “because in [the package’s] policies and procedures, it would discuss almost every one even if it didn’t apply to the firm. The firm may have overstated its responsibilities.”
Something she is looking forward to, she says, is making compliance more customizable for firms, so that they get exactly what they need. Regulatory Compliance’s tier service, she says, will be developed so that it is more customizable—and she is also looking forward to working with firms to make sure they understand what they are buying and what their responsibilities are.