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Regulation and Compliance > State Regulation

Start 2019 Right by Syncing Your Personnel Protocols

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Compliance is not a foreign concept in the investment advisory world. In fact, maintaining regulatory compliance is one of the most essential components in running a successful advisory firm. However, compliance obligations do not stop with the Securities and Exchange Commission. Having compliant protocols in place regarding personnel issues is also vital.

There are numerous laws on both the federal and state levels governing employment matters. Accordingly, human resources management should be incorporated into every investment advisory firm’s compliance regiment. To address these issues, I spoke with my colleague, Tara Speer, who assists our clients with employment-related matters.

Tara advised that there are areas where advisory firms are particularly vulnerable due to the nature of the work they perform and the way they are structured. For example, background checks are commonly performed on new and existing firm employees but compliance with the Fair Credit Reporting Act (FCRA) often is overlooked, and many firms may not even know they have an obligation to comply with the FCRA when running a background check on an employee. Failure to obtain informed consent in a standalone document and failure to provide required notices are common place occurrences that could land a firm in hot water.

Inconsistency among firm agreements and policies is another area that often goes unnoticed, Tara added. It is not uncommon for firms to have advisors who join a firm, sign some combination of an offer letter, employment agreement, restrictive covenant agreement or confidentiality agreement. However, problems can arise down the road when these documents have conflicting terms. Therefore, it is prudent for firm management to decide what type of onboarding documents it wants to use, have the content reviewed for consistency, and ensure any firm handbook or policies do not conflict with these documents.

Multi-Jurisdictional Issues Firms that operate in multiple jurisdictions face their own unique set of challenges. As many facets of employment law are regulated on the state level, these firms must take special care to familiarize themselves with the varying laws in those states (and sometimes on a local level as well).

A standard firm employment agreement or restrictive covenant agreement with a non-compete provision may be enforceable in one state but may not be enforceable in another. Mandatory sick leave laws may have been enacted in one jurisdiction but another jurisdiction may have no regulation in place in that area. Pay day laws also differ by state. Whereas one state may require that a terminated employee be paid at the time of termination, another may permit payment on the next regular pay day or may require payment within a set number of days.

“Consideration” for new mid-employment covenants and restrictions is another area of particular concern. Some states permit “continued employment” as satisfactory consideration for a mid-employment agreement, but other states may require a promotion, bonus or other type of “meaningful” consideration to bind employees to the new agreement.

Firms that act without knowing the potential ramifications could find themselves without enforceable covenants and in violation of the law.

Tara cautioned that that firms operating out of a single location or a single state are not necessarily in the clear if they employ remote workers. A firm that has employees working in other states needs to be mindful of the laws applicable to those employees as well, even if the firm doesn’t otherwise have a presence in that state.

Because the laws are always changing, especially in the employment realm, it is often an arduous task to keep abreast of all the nuances and intricacies. Nonetheless, failure to comply can be costly from both a financial standpoint and a public relations standpoint.

Regular review of agreements, policies and protocols is a best practice that advisory firms should consider implementing in 2019.

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a regular contributor to Investment Advisor. He can be reached at [email protected]