In the investment advisory industry, failure to pass regulatory scrutiny doesn’t just leave a black mark with the SEC; it can also sully the firm’s reputation with clients and prospects, warns one compliance consultant.
“Any kind of problem with the SEC can and will be used against you by your competition … We see it all the time,” Todd Cipperman, Philadelphia-based founding principal of Cipperman Compliance Services, said last month during a free FA-IQ webcast on compliance risks.
These bumps in compliance become a challenge when advisory firms are trying to gain new assets — especially from institutional investors, says Cipperman.
And it’s not just the violations that get the attention of the SEC. “You can get a compliance case just because of your weak compliance system. You don’t have to have an underlying violation or an underlying client harm,” he said. “If your [compliance] program itself is insufficient, the SEC has and will bring cases … They want to make sure firms are compliance-healthy.”
Cipperman’s firm provides outsourced chief compliance officers to brokers, advisors, mutual fund issuers and alternative asset managers.
Examples of weak compliance programs include: having an inexperienced chief compliance officer; having a dual-hatted CCO; having insufficient resources; having code of ethics problems; and the absence of testing compliance procedures or annual reviews, according to Cipperman.
Brian Vendig, Farmington, Conn.-based president and managing executive of MJP Wealth Advisors, agreed during the webcast that compliance can impact a firm’s competitiveness.
Demonstrating that the firm has effective suitability and know-your-client procedures in place, for example, “really helps to demonstrate to the people that you’re aligned with from a relationship perspective that you’re covering all the bases,” Vendig said.
“When I think about compliance, I see it more as an inherent aspect of the business that we definitely have to do,” he said. “But on the flipside of that, it’s the things that we want to do because it actually will ensure that we do have that direct line to the people that we’re working with and trying to help.”
Having a compliance checklist is very useful when accomplishing day-to-day compliance-related tasks, according to Vendig.
“Sometimes you don’t remember all the right things to ask if you have a busy day, and sometimes having that checklist in front of you to make sure that you are being complete … actually helps to also ensure that you’re uncovering all the right things that you should be asking your clients,” Vendig said.
“We’re all human beings; we can sometimes get distracted in working with multiple households on the same day with a busy schedule,” he added.
Being able to demonstrate to regulators and clients that the firm has a well-documented compliance process “really supports your credibility and where you might be coming from in giving advice,” according to Vendig.