How to test your firm’s readiness

April 28, 2010 — 5:46 AM UTC by Les Abromovitz, Guest Columnist

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In the April 9 online edition of InvestmentNews, Jed Horowitz reported that SEC examinations of registered investment advisers (RIAs) will now be conducted in response to tips and complaints. According to the article, the SEC will undertake unannounced examinations of RIAs instead of inspecting firms on a regular schedule as it has done in the past. In response to this new approach, RIAs need to look closely at their compliance programs to ensure that their firms are ready for a surprise visit from an SEC examination team.

This can’t be good: The SEC is here

In the past, although few RIAs were thrilled to learn about an impending SEC exam, there was usually no reason to suspect the worst. In most cases, you were facing a routine exam, not an examination for cause, and received notice in advance of the SEC’s visit. Under the new system, if the SEC shows up on your doorstep, it might be safe to assume that the examination was prompted by a tip or complaint, not just because it is your turn. You might also infer that the SEC examiner in your office is a bit more skeptical about your firm’s conduct than was previously the case during a routine examination.

There have always been firms that paid little attention to compliance until they received word from the SEC that it was time for an examination. With this change in the SEC’s approach to scheduling of RIA exams, the “I’ll get to it” compliance strategy is an even worse idea than it was before. Regardless of when the SEC may come for a visit, it pays to be proactive.

Conduct a review of your compliance manual

Rule 206(4)-7 under the Investment Advisers Act of 1940 requires SEC-registered investment advisers to adopt and implement written compliance policies and procedures. These compliance policies and procedures should be designed to protect investors and prevent violations of securities laws. The rule requires that RIAs review their policies and procedures annually in order to strengthen them and improve their effectiveness. Even if you conducted your annual review late last year, now is a good time to go through the process again, so you will be ready in case the SEC shows up unexpectedly.

As you review your policies and procedures, remember that the SEC expects them to be tailored to your business model and specific compliance risks that might result in harm to investors. Boiler-plate policies and procedures are not going to impress an examiner.

Policies and procedures should evolve in response to regulatory changes, new business arrangements, and other significant events that affect the interests of investors. Furthermore, if you receive a complaint from a client, you should look at your policies and procedures to determine if changes are warranted to prevent similar problems from occurring.

It is not enough to institute robust policies and procedures. You should also make certain that investment adviser representatives and associated persons are following those policies and procedures to the letter.

Aside from tweaking your policies and procedures, make sure all of your firm’s books and records are thorough and complete. For a sample of the types of records the SEC has asked for in the past, you can click on the following link: http://www.ncsonline.com/Portals/0/pdf/SEC_Examination_Chec-1.pdf.

Conduct a test run to make certain that these records are easily accessible. For example, before examiners show up, RIAs should test their ability to locate and produce e-mails using specified criteria.

Cranky clients may cause you a regulatory problem

Just about every adviser claims to be committed to customer service and client satisfaction. Furthermore, almost every RIA understands that satisfied clients generate referrals. Nevertheless, the fact that a client may complain to the SEC and that complaint is now more likely to trigger an exam should give advisers even more reason to stress the importance of customer service to every member of the firm.

Unfortunately, having a high level of customer satisfaction will not preclude tips to the SEC from competitors or a former employee dissatisfied with his holiday bonus. The best defense is being committed to compliance all year long, not just when the SEC is likely to come for an examination.

Too many RIAs procrastinate on compliance improvements, because they believe their firms will receive sufficient notice that the SEC is coming soon. Because of this latest turn of events, RIAs should be ready at any time for an exam. If your compliance program is in good order, an examiner might find a tip or complaint less credible. In addition, following the rules helps you run your RIA in a way where there is nothing to hide and nothing to worry about when the SEC shows up for an unannounced exam.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.


Mentioned in this article:

NCS Regulatory Compliance
Consulting Firm
Top Executive: Mark Alcaide, COO/Partner



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