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The Securities and Exchange Commission (SEC) recently sent shockwaves through the financial industry with its charges against 16 firms for widespread recordkeeping failures, resulting in hefty fines and sanctions. This serves as a stark warning for registered investment advisors (RIAs) to ensure that their practices are squeaky clean, as the “Books and Records” rule applies equally to both FINRA and RIA firms. Furthermore, as part of the penalty, the SEC required the firms to engage independent compliance consultants to conduct comprehensive reviews of their policies and procedures related to electronic communication retention on personal devices and their frameworks for addressing noncompliance by their employees. This additional step highlights the SEC’s heightened focus on electronic communication oversight and the potential risks associated with personal device usage.
What Went Wrong, & Why It Matters To RIAs
The SEC’s investigation revealed several key areas of non-compliance:
- Off-Channel Communication: Firms were found to be using unapproved communication methods, like personal text messages and email accounts, to discuss client investments. This lack of oversight creates a blind spot for regulators and increases the risk of fraud or manipulation.
- Compliance Reviews: Many firms lacked robust compliance programs, failing to identify and address potential issues. The SEC expects firms to conduct regular, independent reviews to ensure that their practices meet regulatory standards.
- Supervisory Failures: Supervisors often fail to properly monitor and oversee the activities of their advisors, leading to missed red flags and potential violations.
RIA-Specific Considerations
The SEC’s action highlighted several areas of particular concern for RIAs:
- Investment Recommendations: Off-channel communications related to investment recommendations were specifically mentioned. RIAs must make sure that all client communication involving investment advice is properly documented and retained.
- Dual Registrants: RIAs who also hold FINRA registrations face double the scrutiny and compliance burden. Their practices must comply with both sets of regulations — across their broker-dealer and RIA activities.
How To Protect Yourself
Don’t wait for an investigation to hit. Proactive steps can significantly reduce the risk of non-compliance and costly penalties.
- Seek Compliance Guidance: Partner with legal or compliance professionals specializing in RIAs. They can offer tailored advice and set up your practice to meet regulatory expectations.
- Develop Clear Policies & Procedures: Establish written policies and procedures for approved communication channels, record retention, and supervisory responsibilities.
- Invest in Supervisory Training: Equip your supervisors with the knowledge and tools to identify and address potential compliance risks within your firm.
AdvisorLaw Can Help
At AdvisorLaw, we understand the delicate dance that RIAs must navigate — balancing client needs with ever-shifting compliance demands. That’s why we offer a comprehensive suite of services tailored to your unique needs.
We provide expert guidance so that your RIA remains compliant, minimizing legal exposure and maximizing peace of mind. Our team develops and implements effective policies for communication channels, recordkeeping, and supervision — so your firm can operate with the highest integrity. We don’t stop there — we equip your firm with the tools to identify and prevent compliance risks, proactively safeguarding your business.
Check out the full suite of our RIA Compliance services here.
Take the first step today
Contact AdvisorLaw for a confidential consultation, and let us help you navigate the ever-evolving regulatory landscape with confidence. Remember, compliance is an ongoing journey, not a one-time destination. By partnering with us, you can be sure that your RIA operates smoothly and ethically, avoiding the pitfalls that have landed others in hot water.