Tom Giachetti doesn’t mince words. After Nexus Consulting’s Tim Welsh introduced the “celebrity compliance attorney” at the first of a three-city Laserfiche and Junxure Compliance Workshop road show in November 2012, Giachetti spoke bluntly, broadly and specifically. His topic? How advisors can protect themselves now from regulators, including the issues on which the SEC and state regulators are focusing their compliance exam efforts.
If you’re wondering whether Giachetti, a frequent speaker at industry conferences (disclosure: Giachetti is the longtime Compliance Coach columnist for Investment Advisor), had anything new to offer, consider what Greg Friedman, president of both wealth management firm Private Ocean and advisor CRM firm Junxure, said in his follow-up presentation. “I just took two pages of notes” on what he heard from Giachetti, who happens to be Friedman’s compliance attorney.
First, the big picture. Giachetti said that over the past three years, the compliance world “has changed for advisors.” Specifically, “post-Madoff,” the SEC is focusing on two broad issues when it conducts audits of advisors: the underlying integrity of client assets and the underlying integrity of clients’ information. “Are the assets where they should be?” he asked, and said that advisors need to think about and document their processes, “especially if you use third-party managers.”
One reason why the examiners want to know where client assets are: there have been increased instances of wire fraud, Giachetti said, where a fraudster has stolen client funds using purloined email credentials from clients’ advisory accounts.
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Giachetti’s second warning to advisors was about the present compliance danger. “We’re looking at a dangerous next 20 to 30 days; clients will be looking to get out” of many investments and the markets in general and move to all cash as the fiscal cliff nears, he said. Advisors should ensure that they have signed confirmations from clients stating that they want to move to cash instead of staying the course on their plans, since “clients love you until they don’t” and may well drag advisors into arbitration or court sometimes years down the road. Nutshelling the issue, Giachetti said “money management is easy; client management is difficult.”
In his own presentation, Friedman (further disclosure: Friedman is a regular blogger for AdvisorOne.com) concurred that “it’s not the SEC I’m afraid of, it’s ticked-off clients.”
Third, Giachetti said of the newly aggressive state regulators: “States are becoming adversarial; they are not your friends.” The states are being “very punitive now” in their exams of advisors, Giachetti said, particularly in areas like notice filings and IAR registration filings, “because they need the money.” States are especially focused on firms timely filing those investment advisor representative filings: “IARs must be registered in the state.” Moreover, he said the SEC has four current enforcement actions underway for SEC-registered RIA firms that “puffed up their assets” (including one against a New York-based firm with whom the SEC recently settled for its “aspirational AUM”).
Why that focus? “The SEC wants to push advisors to the states, which are bankrupt,” he argued. The states may be more aggressive, but he suggested they may not be more skilled than SEC examiners: “The states make the SEC look like Mensa members.”
The fourth warning is about your reported AUM and the SEC. “Assets under management is a defined term on Form ADV,” Giachetti counseled. “Don’t mess around with it.” In particular, he urged advisors never to use the term “assets under advisement.” The total might sound impressive to yourself and potential clients, but the SEC will want to know why you’re using such an ill-defined term.