More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The notion of “regulatory hot topics” has become somewhat of a misnomer given the “broken-windows” approach of today’s SEC. To say that some regulatory topics are “hot” naturally implies that some regulatory topics are…not hot. I don’t think I’m too far afield to suggest that SEC Chair Mary Jo White would never concede that some regulatory matters are not important, inconsequential or otherwise should be treated with less rigor than others. Given limited resources and the continual squall of regulatory change, what’s an investment advisor to do?
Listen to the SEC, but Don’t Become Myopic
One classic example is the intensely scrutinized and widely discussed annual SEC Examination Priorities letter. The letter should be reviewed for what it is: a snapshot of a much larger regulatory map with points of interest that are only viewable by zooming out from the four corners of the letter.
Indeed, the 2014 Examination Priorities letter stresses this very point: “This description of [national exam program] priorities is not exhaustive. While the [national exam program] expects to allocate significant resources throughout 2014 to the examination of the issues described below, the [national exam program] will conduct additional examinations in 2014 focused on risks, issues, and policy matters that are not discussed here.” For example, the 2014 Examination Priorities letter makes no mention of Form ADV; if an adviser thinks that such an omission means the SEC isn’t spending much time reviewing its ADV, think again.
Prioritize and Customize
Prioritization is the natural result of an internal risk assessment, in which an advisor determines where and when things are most likely to go wrong. The greater the risk, the more time and energy should be spent mitigating it and preparing for when it hits the fan. An adviser that routinely accepts and forwards customer checks, for example, should build and test a process that ensures the adviseor does not violate the custody rule.
An advisor that routinely publishes marketing material with performance information should focus its time on the Clover Capital No-Action Letter and SEC Rule 206(4)-1. Where an adviser spends its time and where it doesn’t should ultimately be reflected in a customized policies and procedures manual that is reasonably designed to prevent violations. Translated: simple firms with minimal conflicting interests can have simpler policies and procedures. Compliance programs should be customized for one advisor and one advisor only; it is the governing document that highlights the points of interest beyond the four-corners of the Examination Priorities letter.
Focus on the Client
The SEC’s stated mission is to protect investors and so forth. Don’t worry about the “and so forth” part…investor protection is the name of the game. Broken windows that jeopardize investors are treated the most severely, and justifiably so. Said another way, any rule or regulation that is designed to protect investors is and always will be “hot.”
Take disaster recovery and business continuity plans, for example: the fact that an advisor’s business is disrupted during a natural disaster is irrelevant but for the fact that the advisor’s clients may consequentially not be able to access their funds, communicate pertinent information to their advisor, or generally receive the investment advice they are paying for. An advisor’s duty to seek best execution is another prime example: higher execution quality and lower execution cost among the advisor and the executing broker-dealer are irrelevant but for the fact that clients are entitled to the spoils of their advisor’s execution advocacy.
The point is that an advisor attempting to decipher what regulatory matters are “hot or not” should always view the regulatory matter through the lens of the client (which is, presumptively, the same lens the SEC is looking through). The degree of potential client harm determines how high the regulatory dial is turned. The SEC’s broken windows approach means that even “minor violations” will be “pursued,” but minor violations that have the potential to harm clients will not be treated as minor come exam time.
 See Chair Mary Jo White’s Remarks at the Securities Enforcement Forum last year. http://www.sec.gov/News/Speech/Detail/Speech/1370539872100. Incidentally, these remarks were made on my birthday. As an attorney and compliance professional for the investment management industry, I cannot think of a more appropriate present from the SEC.