More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
By the time you read this, Elisse Walter (at least temporarily) has replaced Mary Schapiro as chairman of the SEC. Walter may or may not be a lame-duck chairman; her five-year term as an SEC commissioner doesn’t end until next July, but she can serve until year-end 2013 without additional Congressional approval. To my mind, Schapiro did a more than adequate job at the SEC. Her heart always seemed to be where most advisors wished an SEC leader’s would be: concerned about the end investor (see: fiduciary standard for all advice-givers). However, she was also someone who realized the importance of a healthy but ethical financial services business to the country and to consumers. Could she have done a better job politically? Maybe. Or maybe being SEC chairman is a thankless job when you mix together a sharply divided Congress, a financial crisis, runaway trading technology and a recession-cum-anemic recovery.
For advisors, however, the person chairing the SEC pales in importance to the examiner who comes to visit them. If the tales told by most advisors over the years (and similar ones told by broker-dealer executives about FINRA examiners) are accurate, many of those examiners don’t know much of anything about the businesses they are auditing.
In the first of a compliance roadshow series presented by Tom Giachetti, Greg Friedman and Tim Welsh in New York on Nov. 28, those complaints got an airing. First, Giachetti spoke of how compliance has changed since Dodd-Frank. The SEC is getting tougher in its exams, he reported, on everything from accurately defining your AUM to making sure you have accurate and up-to-date whistleblower, pay-to-play and custody rules. States are “very punitive now” in their advisor audits, said Mr. Giachetti (who writes the regular Compliance Coach column for this magazine and heads the securities practice at the law firm Stark & Stark), even though examiners from the “states make the SEC [auditors] look like Mensa members.”
Friedman, who runs the big wealth management firm Private Ocean, followed Giachetti by showing in his matter-of-fact way how the right use of technology can help you deal with compliance, which he defined as “all about surviving audits.” In the five audits his firm has survived, Friedman argued “it’s all about being able to produce” quickly and easily the documents that the SEC examiners will want to see. In an audit two years ago, Friedman mentioned that the examiner asked him to explain how he “determined that the recommended allocation and investments were appropriate” for a particular client. The examiner clearly didn’t understand what or why he was asking for that explanation—“he was probably reading off a checklist,” suggests Friedman—but despite that, Friedman was able to deliver that information very quickly.
Here’s hoping that the next SEC chairman gets the funding to make sure that those examiners who come to visit you are better trained and more experienced and can visit you more often. Here’s hoping as well that you prepare adequately for those exams with good legal counsel and good technology to get those better-trained examiners into and out of your offices in record time.