Let’s face it—the world of RIA compliance is tricky at best. With constantly evolving law and reporting requirements at play, RIA compliance can keep you up at night.
However, it’s really a matter of perspective. You can choose to see registered investment advisor compliance as a burden, or you can see it as a way to protect your clients, your company, and yourself. If you are proactive about compliance, you can save your firm valuable time and money.
Here are a few common errors that have resulted in an audit, or even repeat audits, for RIA firms.
1. Overstating or Understating AUM
Be sure that your Assets Under Management (AUM) figure is accurate and consistent across all communications, along with your Form ADV. Update this figure regularly, and double check for consistency.
The SEC has caught several firms intentionally falsifying this information. Less scrupulous RIAs will either overstate AUM to attract more lucrative clients or understate to duck under regulations. Don’t let an honest error or outdated figures lump you in with these types.
2. Conflicts of Interest
According to RIA Compliance Group, the SEC is cracking down on conflicts of interest in 2016. For example, Investment News reported on a case in which a Tennessee RIA did not report a personal loan between the firm’s CEO and a third-party adviser, which the Tennessee RIA recommended to clients.
In conflicts of interest, what you don’t know can hurt you. Make sure your Code of Ethics is clear and that all employees have acknowledged reading it. Check in with them regularly. If you’re not sure whether something is a conflict of interest, err on the side of caution and report it to your CCO.
3. Poor Tracking of Client Complaints
If you are examined by SEC or state auditors, they will ask to see records of any client complaints and how they were managed. Good record keeping, documentation, and proper complaint escalation are all vital to this process. Everyone who has contact with your clients should have a clear understanding of what constitutes a client complaint and the procedure for addressing complaints. If there is any uncertainty, you should again err on the side of caution and involve your CCO.
4. Incorrect Registrations
Be sure that your firm is registered with the correct authorities, including all states in which you have enough clients to meet their requirement for registration. And, be aware of when you will be required to register your firm with the SEC.
Again, don’t let a simple mistake put you in the company of rule-dodgers. In 2015, Investment News reported on three firms that falsified the states in which they did business. By registering in Wyoming, which doesn’t regulate investment advisers, the firms would have automatically defaulted to SEC oversight. The advisers wanted to have SEC oversight to give the appearance that they were larger than they were, according to the SEC.
5. Failure to Comply
If you have been audited before, the SEC or state examiners probably sent you a “deficiency letter” outlining RIA compliance trouble areas and suggestions for improvement. This will remain in your file and will be a subject of discussion during future audits.
If the examiners tell you to do something, do it, and don’t mess around. It’s that simple. Document your efforts and be ready to present them to show a “good faith effort” during future audits. Continual neglect of audit findings will only result in more audits, more time lost, and damage to your reputation.
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