Act Like an RIA, Think Like a Regulator

5 min read
September 05, 2019

RIA Compliance is tricky. Many of the regulations do not directly address obstacles faced by firm owners as they attempt to launch and grow their firms in a compliant manner.

At times, it would seem that it takes an attorney to review and adequately interpret regulations. Regulatory guidelines are often outdated and written in legalese. Risk alerts and interpretations are published on a regular basis by the SEC, but for state-registered firms, these things often bring about additional confusion.

Firm owners often pose questions such as, “Does this SEC regulation apply to my state-registered firm?” and “Should I be doing something new to respond to this published piece of SEC regulatory guidance?”

The common response of “You’ll have to check with your state regulator” is not popular among firm owners. Usually, compliance officers would prefer not to reach out to their regulator for fear of setting off a red flag and potentially triggering an audit.

So, the area surrounding the compliance item of concern remains gray.

The good news is that for smaller, state-registered firms, it doesn’t take a full-time attorney on staff to adequately run a compliance program, nor does it require a compliance officer who knows the regulations by memory.

In fact, it doesn’t even take a tremendous amount of experience on the part of the Chief Compliance Officer for the firm to undergo successful regulatory exams. Compliance officers simply need to learn to think like a regulator.

By “regulator”, I am referring to the licensing and examination divisions of the regulatory agencies that have jurisdiction over the firm’s compliance program. For state-registered RIAs, each state has a regulatory office that is responsible for approving the firm’s initial registration and executing audits and examinations to ensure the firm remains in compliance.

The SEC holds jurisdiction for larger firms. Within these offices are individuals who perform the functions necessary to evaluate the compliance merits of the firm and to ensure the regulatory guidelines are serving their ultimate purpose, which is to protect the clients of the firm.

Although the licensing and examinations divisions of regulatory offices do not always agree, their goal is always the same. So, the first step in learning to think like a regulator is for the compliance officer of each firm to adopt the same goal: protect the client.

Here are some tips to assist firms in learning to think like a regulator.

Create for the Least Educated Investor

As industry professionals, there are concepts that are so obvious to advisers that they tend to take for granted the extent to which these concepts are logical to others.

In other words, advisers often can’t fathom how any reasonable person, be it a client or a prospect, would be harmed by certain statements, disclosures of conflicts of interest, clauses, fee schedules, or marketing materials.

When this happens, it creates the assumption that everyone knows what the adviser intends to communicate when a public-facing statement or disclosure is made. Regulators by and large do not think this way.

Therefore, the best practice here is for firms to imagine they are dealing with the least educated investor imaginable in creating their disclosures and communications. Inevitably, if this person exists, then it will most likely be them who will be harmed by their misunderstanding of an adviser’s recommendation, advice, product, or service.

Assume the Worst

Assuming the worst is often seen as the opposite of providing the benefit of the doubt.

Generally, financial advisers are good people with high ethical standards. But for regulators, one bad apple spoils the whole bunch. While each adviser may know within their own conscious that they would never steal money from a client, or potentially mislead a client for their own financial gain, the regulators do not know this.

So, regulators do not generally provide RIAs with the benefit of the doubt. Along with this idea, is the commonly used statement “They know what I mean.” Disclosures must be specific and adequate to clearly and transparently say what is meant.

No, regulators do not “know what advisers mean.” Advisers must say what they mean, with no ambiguity. This ambiguity only feeds into the doubt that will be cast upon the firm and its representatives at the commencement of a regulatory exam.

Prepare for an Interrogation

Anyone who has been through a thorough examination interview will tell you it felt as if they were being interrogated. It’s almost as if they had been arrested and were in the process of being questioned but had not yet been proven guilty.

The questions can often be pointed and cynical. It is difficult for the regulator to ask the questions required to gain insight into a firm’s policies and procedures without sounding accusatory. That’s just the way is. This is part of the value of having a mock audit.

It is imperative that compliance officers maintain their composure and do not take personally the line of questioning.

When learning to think like a regulator, a compliance officer can prepare for this process by purposefully asking pointed questions while reviewing compliance documents. Even if these questions are being asked rhetorically, taking a derisive look the firm’s compliance program can help prepare for audit interviews.

And remember; don’t take it personally—it’s just the nature of the process.

More often than not, compliance officers who have gone through regulatory exams are thankful for the experience. They usually refer to the process as a valuable learning opportunity. The process often alleviates the feeling that “you don’t know what you don’t know,” and it brings about a sense of peace of mind after the regulators have “ok’d” the firm for all intents and purposes.

But the intangible benefit of going through a regulatory exam is the extent to which the compliance officer is better prepared to think like a regulator after having had extensive contact with regulators. Firms do not have to wait until they are audited to begin this process. By paying special attention to communications with regulators during the initial registration process and breaking the ice by reaching out to regulators when needed, compliance officers can get a head start on learning to think like a regulator.


About the Author

Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.

Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.

Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.

You can connect with him on LinkedIn.

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