Kelli Haugh of National Compliance Services says the stepped-up communication and examination from the Securities and Exchange Commission and state regulators constitutes a “double-edged sword” for RIAs, making “the risk of noncompliance greater” these days.
Speaking at the Shareholders Service Group national conference in San Diego on Thursday, Haugh, vice president of Investment Adviser Services at NCS, also had a warning for those advisors who have so far dodged a visit from examiners. If you’re an advisor who’s never been examined, “you can expect to be so.” While the initial exam may be “limited,” the better you do on said exam, the less likely you’ll be audited in the future. However, if you don’t do well on that first exam, “you can expect to be audited every three years,” she said.
So what are the high-risk areas that SEC auditors and state regulators will be examining at RIA firms?
Based on the SEC’s stated 2016 exam priorities, and on her advisor clients’ exam experiences, Haugh said retirement plan rollovers take first place. Based party on the SEC’s ReTIRE initiative last June, she said examiners want to know if there is “a reasonable basis for recommendations” on rollovers, both the initial recommendations and ongoing recommendations. Examiners will want to see “written disclosures or scripts” on the distribution, tax and other options presented to clients on whether they should keep their 401(k) plans with their old employer, rolling over to a new employer or taking a lump sum, she said.
The examiners are “focused on conflicts of interest — how are you identifying and mitigating them,” she said, and that includes both “actual and potential conflicts — there’s no such thing as ‘potential’ conflict.” She presented an example of an RIA who’s also an insurance broker. “Is he getting dually compensated by referring” the insurance sale to his own firm? If so, examiners will want to see if “he’s mitigated the conflict by rebating the commissions,” for example.
The important point is that any such conflict be clearly documented. Then there’s documenting that an end client’s risk tolerance has been assessed.