Welcome to Financial Advisor IQ


RIAs Face Growing Compliance Headaches

May 7, 2015

As the SEC allocates more resources to RIA exams, compliance responsibilities are growing for firms in the channel. Enforcement proceedings against financial advisors are on the rise too. There were 205 cases against RIAs in fiscal 2014, compared with 170 at the start of the financial crisis.

As increased regulatory scrutiny becomes the norm, many advisors are asking, “Where do I start?” and “What should I be most concerned about?” Fortunately, there are many resources available to help compliance-conscious RIAs, including “priorities letters” from the SEC that identify what examiners will be looking at. Areas of focus this year include the following:

Marketing. Regulators are paying close attention to advertising content during compliance reviews. Specifically, they are checking that firms provide proper disclosures, avoid misleading language and report investment performance accurately.

When it comes to advertising, a “less is more” attitude can be dangerous. RIAs should ensure they have procedures to review advertising materials. Also, the individual responsible for doing so should be well versed in existing regulations and know the most common mistakes firms make, such as failing to document source information. A good rule of thumb is being able to answer “Yes” to the question, “Would my mother understand this piece and be able to make an informed investment decision based on the information provided?”

Cyber security. Regulators expect firms to create and enforce cyber-security procedures and to examine vendor relationships to identify potential risks. Additionally, RIAs need to train staff on what to do in case of a cyber-security breach. Senior advisors should communicate regularly with their firm’s IT department and have disaster-recovery plans that can prevent a cyber-security issue from escalating. Additional details and guidance can be found in recently published updates from the SEC and Finra.

Disclosures. RIAs are required to submit multiple filings to the SEC on a routine basis. Perhaps most important is the annual Form ADV. The SEC reviews the business summary information in Form ADV very carefully and has recently taken action against firms for filing inaccurate or misleading information. Firms should take this filing seriously and make sure they can substantiate all information provided.

RIAs should read the SEC’s instructions on submitting these filings and verify their information is consistent with prior disclosures. Consider that much of the information firms provide can be found in other documents or filings. Refer to these documents before finalizing Form ADVs, and maintain a file with supporting documentation. Overall, it is important to be able to show the SEC that the firm conducted a due diligence review prior to submitting the form.

Compliance resources. Many RIAs have limited resources for compliance, often requiring individuals to perform the function in addition to other duties. While there is no rule prohibiting this, firms should ensure that employees who do perform multiple duties can allocate appropriate time and effort to each one. It is also important for managers to show they view compliance as a vital function of the business and to “set the tone at the top.”

The securities industry is extremely fluid, and firms are expected to keep pace with the constantly changing regulatory environment. The best defense is a good offense. In short, RIAs need to be proactive and ensure they have a compliance program they can count on, so they can sleep at night.