What an RIA Owner Should Know About Communicating with Regulators

4 min read
September 01, 2016

Every RIA owner must have a designated individual who serves as the primary compliance contact. This person is usually referred to as the firm’s compliance officer, or Chief Compliance Officer (CCO).

And if you’re the RIA owner and the sole person in the business, that means you.

The primary responsibilities of a compliance officer are to make sure the company complies with regulatory requirements and adheres to the firm’s set policies and procedures. In order for the compliance officer to do the job effectively, they must be familiar with regulatory requirements.

These requirements will be what internal policies and procedures are based on and amended as needed. Therefore, one of the most vital aspects of being a successful compliance officer is knowing when and how to communicate with your regulators.

Here’s what RIA owners need to know to ensure these communications are effective and productive:

Know Your Documents

The best way to put your compliance questions or concerns into context is to first review your regulatory documents. Before framing your question, double check your most recently filed ADV, Compliance Manual, and Advisory Agreement to make sure you are familiar with these items.

Not only will this help you ask the right questions the first time around, but it will prepare you for any follow up questions that you may receive from the regulators.

Know Your Regulations

After reviewing your internal compliance documents, access the applicable regulations to your questions to make sure that there are no existing conflicts in your firm’s compliance program. Most state regulators provide online access to their regulatory statutes.

You can also access plenty of resources via the SEC website if your firm is registered with the SEC.

Most RIA owner anxiety over contacting regulators is the fear of “raising red flags.” If you’re familiar with your internal documents and they tie out to the regulations, then you can eliminate this anxiety before contacting the regulators.

Prepare Your Interpretation of Your Documents and Regulations

Many compliance topics live in grey areas. Sure, there are regulatory statutes that are drafted in black and white -- but the interpretation of those regulations is up to the individual who is reading them.

There will be times when you read and review a regulation, but it doesn’t specifically answer your question. At this point, you should contact the regulators to get their interpretation.

But note that by being confident in your own interpretation, you’ll likely experience more success in being able to frame the regulation in a manner that is conducive to the growth and success of your firm.

How an RIA Owner Can Interpret Regulations

This is much easier than it may seem, but it has to be done methodically. In my opinion, each regulation can be interpreted in many ways along a continuum.

At one end, the regulation can be interpreted to be so strict that it constricts the growth of the firm. On the other end, the regulation can be interpreted to the extent of appearing pointless, with virtually no impact on the firm.

The regulator’s interpretation will usually be somewhere in the middle, which is where your interpretation should be as well. Therefore, in order to form your interpretation of regulations, evaluate the most conservative and the most liberal view that you can conceptually imagine.

Then, locate that middle ground that allows flexibility for the firm but also remains compliant with the rule. Present that interpretation to the regulator when you contact them, and stand strongly upon it.

Interpreting regulations is a complete grey area for RIA owners. You may contact your regulators and get different interpretations of the same regulation from two examiners in the same office. Let this give you confidence that you are as capable of interpreting regulations as anyone else. In addition, it is important to note a best practice of documenting your conversations with regulators in case your receive a deficiency resulting from a different interpretation during an audit.

Try to keep track of the name, phone number, and if possible, email address of the regulator that you communicated with.

When an RIA Owner Should Communicate with Regulators

Compliance officers should reach out to their regulators when all other resources have been leveraged but a compliance question still exists. In most cases, a thorough review of your compliance documents along with a review and comparison with the regulations will yield the answer that you need.

If you follow these steps but are still a bit hesitant about how to proceed, you can document your review of the regulation just as you would document a conversation with a client. Then present that information as apart of your audit.

That is to say, that if you don’t want to contact the regulators but you are diligent in your research of regulations, then you can stand upon your own interpretation and wait until your audit or examination to have that discussion.

Communicating with regulators can be a nerve-racking for any RIA owner. The concern for the CCO is that they will inadvertently notify regulators of an existing deficiency that will cause a compliance burden for the firm. That may happen.

But if there is an existing deficiency, the earlier it is identified, the less damaging it will be in an audit. Regulators will probably catch it later anyway, so the CCO may as well reach out to the regulator proactively to get in front of the issue.

Once this method has been utilized once or twice, the benefits will be immediately recognized and hopefully any feelings of anxiety or worry will dissipate.

Remember, regulators aren’t out to get you. They are a resource and their goal is to help you keep your firm compliant.

Scott Gill

About the Author

Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, 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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