If you're starting an RIA firm or evaluating its current compliance program, focus on these nine major requirements.
The governing statute for registered investment advisers (RIAs)— the Investment Advisers Act of 1940— has existed for more than eight decades, amended twice, and is packed with rules and regulations. It's easy for RIAs to get lost in its thickets.
You can either drill down on specifics or hire a chief compliance officer (or consultant) to do it for you. Whether you decide to master the law yourself or delegate the job to someone else, it's essential to know the specific obligations the law imposes on you. We'll cover nine of the most important ones in this article:
Compliance Tip #1— Know where to register your RIA.
Should you register at the federal level (SEC) or the state level (state securities agencies)? The answer depends on your assets under management (AUM). Generally, you must register federally if you have $100 million or more in AUM. If you have less than $100 million, you may register with a state or territorial regulator. There are four exceptions to this rule that allows RIAs with less than $100 million in AUM to register locally. Check with an RIA compliance expert or the SEC website for details.
Compliance Tip #2— File Form ADV correctly.
The SEC is big on disclosure. To that end, it requires RIAs to file Form ADV when they initially register their business. It also reviews the form when they audit firms. Form ADV consists of five parts: 1A, 1B, 2A, 2B and Form CRS. RIAs must submit four parts— Part 1B is only for firms registering with state regulators, not the SEC. Form ADV is a significant source of compliance headaches, the main one being data points not agreeing across all documents. Check this every year when you review your ADV form. Need more guidance on filling it out? Read the SEC's detailed instructions.
Compliance Tip #3— Document your policies and procedures.
The SEC also places great importance on policies and procedures. You must document everything you do to assure your firm's compliance with the Uniform Securities Act of 1956. Also required in writing are those regarding supervisory policies and procedures, proxy voting, physical security, cyber security and material non-public information. Finally, you must provide a written code of ethics and a business continuity and succession plan.
Compliance Tip #4— Name a chief compliance officer (CCO) for your firm.
The SEC requires you to put someone in charge of compliance at your business. That person doesn't have to work solely on compliance, but they should have significant knowledge and experience with RIA regulations. Since SEC and state laws are so complex, consider retaining a compliance consultant to augment your internal expertise. This person or firm can provide the boilerplate content and experience needed to create and file your Form ADV, as well as your policy and procedure documents.
Compliance Tip #5— Understand your fiduciary duty.
Breaching your fiduciary duty is a tremendous SEC red flag. To avoid this, understand how the SEC views an RIA's fiduciary role. In short, it wants RIAs to:
- Maintain a duty of care.
- Provide advice that's in a client's best interests.
- Seek the best execution in securities trading.
- Provide advice and monitoring over the advisor/client relationship.
- Act from a place of loyalty toward the client.
Review this document for more details on how the SEC views an RIA's fiduciary obligation.
Compliance Tip #6— Familiarize yourself with the SEC's new marketing rule.
The SEC's updated marketing rule is the first significant update to the Investment Advisers Act in more than forty years. In summary, it:
- Defines "advertisements" more broadly.
- More clearly carves out activities not considered marketing.
- Prohibits certain advertising practices.
- Expands the concept of solicitation.
- Provides greater clarity around the use of third-party ratings and securities performance advertising.
Since marketing is hugely important for all RIAs, knowing this new rule in detail is essential. Study this resource.
Compliance Tip #7— Keep your assets under management (AUM) number current.
AUM is the most important benchmark in the industry for both SEC reporting and firm marketing purposes. It determines the regulator to whom you report and increases (or decreases) your credibility with prospects. For these reasons, the SEC is strict about AUM misstatements. A word to the wise: Update this number frequently and ensure AUM references across SEC disclosure documents are in sync.
Compliance Tip #8— Disclose all conflicts of interest.
The SEC understands that RIAs may have conflicts of interest. It's unavoidable. When conflicts occur, the agency expects RIAs and investment adviser representatives (IARs) to disclose them fully. This allows prospects and clients to put your investment advice in the proper context.
Compliance Tip #9— Watch your "housekeeping."
We're not talking about keeping your office clean. Instead, we're referring to the SEC's books and records requirement. Rule 204-2 of the Investment Advisers Act defines the items you must create and keep. Store them in an easily accessible location for no less than five years from the end of the fiscal year during which you made the last entry. Also, retain your books and records on your premises during your first two years in business.
Getting familiar with these nine tips is a great first step. But let's be honest, the SEC expects much more from your business. What to do next? Read the linked documents to expand your knowledge. Then discuss your firm's compliance risks with your CCO or outside consultant. If you uncover deficiencies, fix them ASAP.
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