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January 21, 2013 at 07:00 PM
The article below appeared as Tom Giachetti’s Compliance Coach column for Investment Advisor’s February 2013 issue. But speaking at the TD Ameritrade annual conference Jan. 31 in San Diego, Mr. Giachetti provided some additional color on how advisors—specifically RIAs—can stay compliant. “Compliance is all about getting you through the exams” of SEC and state examiners, and to do so, Giachetti said, “you have to know what questions” those examiners will be asking.
What are they asking now? Three new, post-Madoff questions are on the SEC exam, he reported: on an advisor’s pay-to-play policy, on outside business activities (three questions) and on an advisor’s whistleblower policy—“you’d better have one.” Other items that may come up in the exams and which advisors should have a written policy on are referral fees, directed brokerage, social media, and 13F and 13H filings.
Giachetti said there is a growing incidence of email fraud being perpetrated on advisors by fraudsters masquerading as clients, so he urged RIAs to “robustly” protect any client identifying data. He also urged CEOs of advisory firms to step out of the way in favor of the firm’s chief compliance officer when an examiner pays a visit.
Saying that “the SEC is getting smarter; they’re hiring good people,” Giachetti also warned of the dangers of advisory firms “puffing up” assets under management to go under or remain under SEC regulation rather than the states. Regarding client assets, “if you can’t touch it or trade it, don’t count it.”
Along those lines, he also argued that an advisory firm should never use the term “assets under advisement,” since there “is no such thing” as far as the SEC is concerned.—James J. Green, editor)
Let’s make 2013 the year that advisory firms finally take internal control of their compliance obligations, rather than relying on unrelated parties to do so. That is not to say that outside consultants, including attorneys, do not offer a wide range of assistance, but these providers are not on premises. Someone at the firm must take supervisory responsibility. (Certain tasks may be delegated to others throughout the firm, so long as one qualified individual has the supervisory role).
Firms that have compliance programs designed for their operations (not a one-size-fits-none) will be surprised by how much easier and less time consuming compliance can be. For years, I have been saying that compliance is not hard; advisory firms make it hard. It is only with a compliance program designed for the firm, based on its operations and supervised internally by a qualified individual—the individual who the firm believes can lead it through a regulatory examination—that a firm can succeed. After all, but not for a regulatory examination, would the firm undergo all of the required (and much too often incorrectly “presumed” required) compliance tasks? So, in 2013, stop drinking the kool-aid and take control. I have compiled some top considerations below:
