Don’t Be Complacent About Compliance

I continue to spend the vast majority of my time traversing the U.S. and Canada making those determinations and preparing advisors for the exam. Stop going through “one size fits no one” electronic exercises. These are generally not the areas that could result in adverse SEC outcomes. No, the areas that will receive SEC focus may have little to do with your day-to-day “checking the electronic boxes.” That is not to say that they should be ignored. However, don’t get a false sense of being prepared because you have completed such rudimentary tasks.

Stop paying for services you do not need. Most firms can and should take ownership of their day-to-day compliance requirements. To do otherwise could prove detrimental during an exam if you are not able to demonstrate to the SEC that you understand your compliance efforts, how they are completed and why. Too many firms undertake too many tasks that are not required given their operations but because they are what their consultant requires, only to find that the areas of real SEC focus have been neglected.

So, what are these areas? They include, but are certainly not limited to:

1. Cybersecurity

   Have you identified the risks and adopted corresponding adequate information security processes? Can you demonstrate same to the SEC during an exam? You can’t just say you rely on the efforts of others without knowing what those efforts are.

2. Custody

   Do you really understand what constitutes custody? Unfortunately, we have found that sometimes the SEC doesn’t understand (or ignores) its own published FAQs. Do you serve as a trustee, maintain SLOAs or have possession of client passwords? Is it custody? Is there an exception?

3. Conflicts of Interest

   Are you adequately (and clearly) disclosing them on your Form ADV Part 2A? This is a primary SEC focus and the genesis of many adverse SEC findings.

4. Wrap Programs or Asset-Based Pricing

   This is when clients are charged a percentage of the account market value for transaction fees. Can you demonstrate to the SEC that these programs and arrangements are beneficial to the client? Remember, you are a fiduciary—you are required to do so.

5. Composite and Non-Composite Performance Presentations

   Do you really need them? Are they compliant with SEC rules and no-action letters? Can you use them in a manner that will lessen your risk exposure during an exam?

It’s not too late to get on track. Look at your efforts—are you in control or is a third party? Remember, the SEC will be examining you, not a third-party consultant, and you can’t blame the consultant. You can try, but the SEC will not care. It is and will continue to be your responsibility to ensure that your compliance efforts are appropriate given the scope of your firm’s operations.