A compliance audit is a stressful event for a registered investment advisor (RIA.) Whether you have been in business for a while or have recently broken away from another firm, here are a few of the key compliance challenges you may face. Knowledge of problem areas can help you avoid the costly consequences that arise from failure to comply with financial industry regulations.
Getting communication on track
RIAs cannot simply communicate informally with clients and among employees when communications pertain to trading activity. Your RIA must meet strict protocols regarding communications, including archiving messages for later potential scrutiny.
JP Morgan Chase was recently hit with a $200 million fine for failing to preserve sensitive communications employees conducted via texting, personal email accounts and messaging apps. An RIA that allows such communication off of official channels could receive similar unwanted scrutiny from regulators.
Archiving client complaints
On the subject of communications, client complaints are among the most important communications that an RIA must preserve. Complaints are inevitable. Whether those complaints are properly archived, categorized and escalated is a matter that will surely come to light if your firm is ever investigated by the SEC or other regulatory agency.
Avoiding conflicts of interest
One of the most difficult compliance challenges for an RIA is ensuring you are free from conflicts of interest in your business dealings. If you have recently broken away from another firm, your network is probably sufficient to the extent that the potential for conflicts, even unintentional ones, is an ongoing source of concern.
Even if the leadership team of an RIA has a pristine record of avoiding conflicts, ensuring company-wide compliance is another matter. Make sure your Code of Ethics is clear and that all employees have bought in, report potential conflicts as soon as they arise, and always err on the side of caution when red flags appear.
Prevent problems when possible, resolve them swiftly when necessary
With sufficient planning, you can navigate these challenges free from fear of lawsuits, fines and other liabilities. If a concern does arise, don’t hesitate to address it. A proactive stance can help you eliminate or at least mitigate the damage such an issue inflicts on your business interests.