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.
- 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.
I have never been political in this column, but the time has arrived. The current administration distrusts the financial services community. That’s not to say such a position is not without some justification considering the actions that contributed to the market meltdown of 2008. That being said, the investment advisory community was not a contributor to such events—the buy-side seldom is. The advisory community did not make questionable loans or package explosive investment products. Nevertheless, the advisory community (including small firms that comprise the overwhelming majority of registered investment advisors) has now been lumped in with the rest of the alleged perpetrators and is now the focus of aggressive SEC scrutiny and increased enforcement actions, many of which involve issues that previously would not (and arguably still should not) be the subject of enforcement except for one overriding purpose: to set the bar high and make an example.
In an October speech, SEC Chair Mary Jo White, a former top federal prosecutor, indicated that SEC enforcement will be “felt and feared.” The commission will have a wide presence, focusing on both big and small violations, and employing a “Giuliani-style” approach. The mission: to maintain a strong presence beyond its ordinary reach for the purpose of “cracking down on both major and minor violations to deter wrongdoers.”
A noble mission and, in some respects, given past events and conduct, warranted. I submit that with respect to the advisory community, such an aggressive posture is overreaching, but given the current environment, advisory firms must be at the top of their game when it comes to compliance. They can’t just talk a good game, but must be able to definitively demonstrate it to the commission when it comes knocking.
And when, pray tell, might that happen? Subsequent to White’s October speech in Washington, Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, announced that the SEC will focus on advisory firms that have never been examined. Bowden indicated that in 2014, the commission plans to give top priority to those approximately 4,000 RIAs who have never been visited by an examiner.
In that same address, White said, “Our aim is also to create an environment where you think we are everywhere, using collaborative efforts, whistleblowers and computer technology to expand our reach, focusing on gatekeepers to make them think twice about shirking responsibilities, and ensuring that even the small violations face consequences.”
The SEC is not interested in your many files or pretty folders, and if you believe they make you examination ready, you may be sorely mistaken. And no more long written reports conducted by non-law firms citing various deficiencies, either; remember, such manifestos are not privileged and are subject to turnover to both the commission and plaintiff’s lawyers. That is not to say that “consultants” cannot play a material role in preparing for an exam; they can, but be smart as to how you permit them to do so. Make sure you are prepared to demonstrate compliance with, and a thorough understanding of, the hot topics including custody, composite performance, due diligence, conflict disclosure, private investments, business continuity and information security. Also be sure to have updated policies and procedures and a completed annual CCO review and risk assessment.
Based upon the above, I have advised my wife that I will not be home in 2014 (don’t feel sorry for her, she has a “pool boy”) as I continue to spend the vast majority of my time traversing the country getting firms ready for SEC examinations. Given my current scheduled 2014 travel calendar, it promises to be a very busy year. Someday I may even get a pool.