The agency has its own ways of communicating what gets on its regulatory nerves

April 9, 2012 — 5:58 AM UTC by Les Abromovitz


If you play poker, you’re aware of the term “tell.” It’s a change in a player’s demeanor or behavior that tips you off to what type of hand the individual is holding. If you watch and listen closely, securities regulators sometimes tell investment advisers what’s in the cards from a regulatory and compliance perspective.

Risk Alerts and sweep exams

On Jan. 4, the Securities and Exchange Commission published a Risk Alert providing guidance on registered investment advisers’ use of social media. See: How to avoid that fatal blow to client communication. On Feb. 27, the SEC published a National Examination Risk Alert to help RIAs and broker-dealers uncover unauthorized trading in clients’ accounts.

When the SEC publishes guidance of this kind, it is usually a sign that it is aware of risks that may cause harm to investors. More than likely, the SEC will focus on those areas during upcoming compliance examinations of RIAs. See: What not to do during a state or SEC audit.

The SEC’s priorities are likely to shift if sweep exams of RIAs discover there are widespread compliance problems. Sweeps are examinations conducted to learn more about industry practices that may be harmful to investors. When they get wind that a sweep exam is targeting certain industry practices, RIAs had better be sure that their firms are fully compliant in those areas.

Late last year, the North American Securities Administrators Association Inc. identified the top deficiencies it found during a series of coordinated examinations of state-registered advisory firms. It’s a safe bet that most states will be looking for those deficiencies during examinations in 2012. See: The SEC’s unannounced compliance exams are growing more common. That means the 'I’ll-get-to-it’ strategy is an even worse idea than before..

When regulators speak, it pays to listen

The SEC’s website provides transcripts of speeches made by commissioners and directors. NASAA’s website also posts speeches that will be particularly important to state-registered investment advisers. By reading these speeches, RIAs can learn how key securities regulators view recent industry trends and regulatory developments.

Daniel M. Gallagher, a new SEC commissioner, has made several speeches recently on topics of interest to RIAs. He gave his views on the failure to supervise in his remarks at “The SEC Speaks in 2012.” on Feb. 24.

In Gallagher’s speech, he described the SEC’s failure-to-supervise precedents as providing limited guidance for deciding whether a member of an RIA’s legal or compliance staff is a “supervisor” for purposes of liability under the Investment Advisers Act of 1940. Gallagher urged the SEC to demonstrate restraint in bringing failure-to-supervise cases against RIAs’ compliance and legal personnel, because they might be discouraged from carrying out their core duties.

In his speech, Gallagher argued that legal and compliance personnel are providers of support, not supervisors. Imposing supervisory liability on them will have a chilling effect on their willingness to provide the level of engagement that RIAs and broker-dealers need, he said. Gallagher said that the SEC “should strive to avoid attacking or penalizing the willingness of compliance and legal personnel to be fully involved in firms’ responses to problematic actors or acts.

Have no fear

To put it simply, if a firm employee in a traditionally non-supervisory role has expertise relevant to a compliance matter, that employee shouldn’t fear that sharing that expertise could result in Commission action for failure to supervise.” See: Hello! The SEC wants your records by tomorrow.

In a keynote address to the Investment Adviser Association’s Investment Adviser Compliance Conference/2012 on March 8, Gallagher discussed the elimination of the exemption from registration for RIAs with 15 or fewer clients. Before the Dodd-Frank Act, advisers were not obligated to register with the SEC if they had 15 or fewer clients and were not holding themselves out to the general public as investment advisers. Gallagher said that this was Congress’ attempt to protect investors from the existence and practices of highly leveraged hedge funds.

He expressed concern that those previously-unregistered advisers will incur a great deal of expense for compliance, even though many of them do not use leverage as part of their business strategy and only market to institutional and sophisticated individual investors. Gallagher’s position is that the SEC should conserve its resources by focusing its attention on protecting ordinary retail investors, not sophisticated clients who can fend for themselves.

Examiners hold their cards close to the vest

Every speech by SEC higher-ups usually begins with a disclaimer that their positions don’t necessarily represent those of the commission or other members. They also don’t represent the views of the examiner in your office who is looking at which rules you may have broken. Nevertheless, by paying attention to Risk Alerts, sweep exams, and speeches, you can stay abreast of the hot button compliance issues that examiners are likely to address.

If you ignore securities regulators’ priorities and your other compliance obligations, however, you’re likely to get dealt a bad hand during an examination. The situation brings to mind Warren Buffett’s famous quote: “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

Les Abromovitz is a senior consultant with National Compliance Services, Inc.. Les, an attorney, is the author of a new book, The Investment Advisor’s Compliance Guide (National Underwriter Co., 2012). Les can be reached at 561-330-7645, Ext. 213, or at

Mentioned in this article:

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

Aurora Compliance Solutions
RIA Set-up Firm
Top Executive: Edward Romanowsky

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