All too often advisors become complacent with respect to compliance matters, but all registered investment advisors must continue to recognize that compliance is an ongoing process that requires the review/update/amendment of regulatory filings, disclosures, and procedures. Laws and rules applicable to your practice and representatives are subject to change. Agreements and disclosure statements may require review and update due to changes in regulatory or state law or changes to your business operations. Existing restrictive covenant agreements may no longer reflect changes in state law. Policies and Procedures must also be reviewed and revised as required by regulatory changes and changes in your business operations. Documents and disclosures that may have been appropriate or sufficient when you first registered , or even a few years ago, may no longer be adequate or compliant.
The scope of SEC examination issues continues to become more complex. For SEC registered investment advisors, the frequency of compliance inspections, for the most part, will be determined by the Commission’s perception of the advisors’ compliance risk profile. Examiners will focus reviews on issues that represent the greatest potential threat to investors, and the corresponding frequency of examinations will be based on the scope of the advisor’s operations and the results of previous exams. Thus, being adequately prepared for an exam is critical.
In order to be well prepared, the firm should be familiar with both the examination process and the issues that will be raised during the examination. All firms should consider engaging a knowledgeable compliance professional to prepare it for a regulatory examination. By so doing, advisors should be much better able to address and correct current deficiencies, enhance current procedures, and, most importantly, recognize and avoid those issues that could result in potentially adverse regulatory determinations or enforcement matters. Moreover, the firm should gain a better understanding as to what compliance-related tasks are applicable to its operations and those that are not–thereby dispelling any myths, allaying any confusion, and alleviating unnecessary efforts. As a result of the review, the firm should become more confident and efficient with respect to its compliance efforts.
The Benefits of Privilege
Please remember that verbal communications and written reports to and from legal counsel are “privileged” and thus not subject to turnover, disclosure, or production during a regulatory proceeding, including a regulatory compliance examination. Correspondence (including e-mail), results of compliance reviews/mock exams, and verbal communications between an advisory firm and a non-law firm provider are not privileged, and are subject to turnover, disclosure, or production during a regulatory compliance examination, a client lawsuit or arbitration, and a regulatory enforcement proceeding.
Thus, if an RIA obtains substantive compliance-related assistance from a non-law firm provider, it should be guided accordingly. In that regard, if the firm engages a non-law firm provider to conduct a compliance review, avoid the issuance of a written report from the provider to the firm that addresses compliance-related deficiencies. I have never been a proponent of such a process. Rather, it has been my experience over the past 20 years that the best way to prepare a firm for an examination is to actually review each and every exam issue with the chief compliance officer. Upon conclusion of this interactive process (generally a full day long), the CCO will be much better prepared to successfully complete a regulatory exam, (or senior management in the CCO’s absence; see sidebar). Moreover, as result of such dialogue regarding the firm’s operations and processes, issues that would not otherwise have been addressed will generally be raised and resolved.