Simple, Not Simplistic

Tom Giachetti is no stranger to Investment Advisor readers, nor to many advisors who have heard this securities lawyer extraordinaire speak at all manner of national conferences. A shareholder of the 110-attorney Princeton-based law firm of Stark & Stark, where he chairs the securities group, Giachetti is a plain speaker whose expertise comes from knowing not merely what the SEC or FINRA requires an advisor or broker/dealer to do to stay compliant–he’s just as valuable in telling those clients, readers, or listeners what they don’t need to do to stay compliant. For example, with a twinkle in his eye, at a live Giachetti session, once he determines that most of the advisors in the room are RIAs, he likes to ask how many of them have a policy to comply with the Anti-Money Laundering (AML) rules of Sarbanes Oxley. When only a few sheepishly raise their hands, Giachetti lets them know that there is no such requirement for RIAs. No blushing violet when it comes to the importance of advisory firms getting good legal advice rather than buying off-the-shelf compliance programs–”buying documents is not a program; you can’t buy compliance in a box,” he says, and “most of these are one-size-fits-none, just like the SEC exam,” or in boasting of his firm’s reach and expertise–”We represent more money managers than anyone else,” and “our clients sail through examinations,” he’s also down to earth: “There’s not a whole lot of rocket science” when it comes to compliance. His basic advice to advisors? “You have to understand your own business.” That’s where the AML question might come into play, as does staying current with recent SEC or FINRA actions, a task that most advisors will find extremely difficult at best.

When asked to enumerate the most common mistakes advisors make when it comes to compliance, he responds quickly. “The general issue with compliance is that we get so caught up with the noise. This stuff is not that difficult. The hardest thing for any advisor is to know what you are responsible for, and what you are not responsible for.” Instead, he counsels, determine “what applies to your practice, and don’t worry about the noise.”

Once you understand what you are responsible for, Giachetti says you must demonstrate it to the examiners, “and if there are conflicts of interest, you disclose them.”

It’s a Living Thing

Since he says “compliance is a living thing,” it’s important that advisors not be misdirected or become complacent or think that an off-the-shelf document will be sufficient. “The documents,” he says, “is where the process starts.” Moreover, knowledge of how a law or regulation reads is nowhere near as necessary as knowing “how it applies to you.” While networking with other advisors may be a good thing when it comes to business practices, that’s not the case with compliance. “Study groups are the scariest source of compliance” misinformation, Giachetti says, followed closely by “going to an SEC CCOutreach” program sponsored by the SEC or FINRA–”you’re not going to get a lot of help there, just more confusion.”

It’s also critical that you show some internal harmonization between how you actually conduct your business and the documents you use with clients and the regulators. “Here’s the problem with disclosure and your policies and procedures manual,” he says. “Your agreements say A, your policies and procedures manual says B, and your disclosures say C.”

Giachetti may seem cocksure, but even when it comes to what he sees in client exams, he is quick to point out that just a few instances does not new SEC policy make. For example, in a presentation at the TD Ameritrade conference in February, Giachetti mentioned that some of his clients in the Pennsylvania-New Jersey region who were involved in advising retirement plans had heard from the Department of Labor, which was checking into those advisory firms’ compliance with ERISA. Was this a sign that advisors would be facing scrutiny from yet another federal auditor? Giachetti says he doesn’t have enough evidence yet of that being the case.

But what of the problems with increased scrutiny of investment advisors that could be traced to reaction to the financial crisis and the massive Madoff fraud? He laments that “regulators have made things so difficult that it takes advisors away from meeting with clients and managing assets.” Moreover, “since we had Madoff, as a result we have an amended custody rule, under which the [advisor] client will have to incur additional expense to have a CPA do a surprise exam.” Giachetti says that much of what the regulators are requiring now in reaction to Madoff is a “prophylactic–to confirm that the assets are where they’re supposed to be.”