More On Legal & Compliance
from The Advisor's Professional Library- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firm’s policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
Has the examination process changed post-Madoff? You betcha! The process has substantively changed, and unfortunately, not entirely for the better.
The good news is that the SEC has hired some very astute examiners. The better news is that there is now a process to detect a future Madoff-like event, confirming that client assets are where they are supposed to be. The bad news, however, is that the process has become increasingly more laborious and aggressive. The Commission appears to have consistently taken the position that if you can’t prove, in writing, that you undertake a specific compliance-related process, then the Commission’s position is that you don’t do it. Even more troubling is that the Commission appears to be undertaking a subjective review of the advisor’s capabilities as an investment manager.
The Commission’s paramount responsibility is to protect the investing public; that is, to confirm that the advisor has provided full and accurate disclosure of the advisory process, fees and conflicts of interests to the client per a written disclosure statement, advisory agreement and any investment policy or objectives confirmations; that the client’s assets are maintained with a qualified custodian; and that the qualified custodian sends a statement to the client at least quarterly. But, whether the advisor is a good investment manager is a different story; the last I checked, we still live in a capitalistic society, and if the advisor is not a good investment manager, clients will leave.
So how does an advisor prepare himself? Conduct a mock exam to ensure the advisor knows how to (and can expediently) respond to each question. The Commission is not interested in your pretty folders or files; what it is interested in is whether you can produce acceptable documentation in response to examination questions. For example:
- Does your Part 2A accurately reflect your operations? Do you clearly disclose all conflicts of interest?
- Can you demonstrate that you have accurately counted and disclosed assets under management on Part 1 of Form ADV? Remember, AUM is a defined term—there is no such term as “assets under advisement.” If you don’t have trading authority (or the authority to hire and fire independent managers), you don’t have AUM—neither discretionary nor non-discretionary for Part 1 reporting purposes.
- Are your policies and procedures up to date? You can’t tell the Commission that your compliance culture is strong if your policies are two years old. Much has happened in the last two years. This is a constant problem I see when I conduct exams; the advisor’s policies are missing critical new sections, such as guidance regarding whistleblowers, pay-to-play or social media.
- Have you completed your required annual CCO review (in writing)? This is another substantial deficiency that I constantly see. I prepare a CCO review and risk assessment for my clients when I conduct a mock exam.
- Do you have a compliance calendar or checklist that makes sense for your practice and that you follow?
- Do you have an initial and ongoing employee compliance training process?
- Have your vendors that have access to client information, such as IT providers and shredders, executed confidentiality agreements?
- Do you have a procedure to monitor and evaluate best execution?
- Can you provide documentation of your initial and ongoing due diligence process when using independent managers or private investment funds?
- Do you have a process for monitoring employees or reps outside business activities?
These are just the basics. The examination is more complex if you publish composite or hypothetical performance reports; have branch offices; have a soft dollar arrangement; sell commission products; engage solicitors; have custody (especially if that is not indicated on Part 1 or you have not engaged a CPA to conduct a surprise examination); and are an active marketer or make uncorroborated or misleading statements in marketing materials.
