SEC Penalties Prompt RIAs To Employ Greater Compliance Oversight

Over the last year, the SEC rolled out new rules and regulations regarding Form 13F, Form ADV, private funds, marketing and advertising, and environmental, social, and governance disclosures. Now, regulators are walloping firms that neglect to comply with hefty fines. The message to RIAs and firms is clear — get your compliance house in order

In September, millions of dollars in fines were issued to RIAs who violated the SEC’s custody rule and Form ADV rules, as well as for failures to disclose conflicts of interest. Last month, the SEC issued nearly $2 billion in fines against firms for violating texting rules and utilizing prohibited external communications. 

This crackdown is just the latest example of how the SEC is becoming more aggressive in its enforcement of compliance rules. As a result, financial-services firms, both large and small, are taking steps to strengthen their compliance infrastructure and invest in support to mitigate the risk of potential penalties imposed by the SEC and other regulatory bodies. 

Many smaller firms rely on their chief compliance officers (CCOs) to simultaneously manage customers, advise on investments, and supervise their own personnel. These new rules place an extra layer of stress on CCOs that can be overwhelming. In today’s landscape, a robust compliance infrastructure is no longer optional — it’s a necessity.

The Importance Of Appointing A Designated CCO

One of the most important steps that companies can take to strengthen their compliance infrastructure is to appoint a designated CCO, rather than having a producing representative try to multi-task — often to the detriment of both compliance and production. The CCO is responsible for monitoring the company’s compliance with all applicable laws and regulations. This includes keeping up to date with any changes to state or SEC rules. Trying to both support your clients and manage a firm’s compliance program can be unduly challenging.

By having someone specifically dedicated to compliance, companies can mitigate the risk of potential penalties imposed by the SEC and other regulatory bodies. The CCO is also responsible for creating and enforcing internal compliance procedures. These procedures must be designed to ensure that all employees are aware of their responsibilities under the law and that they understand which actions could lead to potential fines or penalties.

Technology Solutions For Compliance Monitoring

In addition to appointing a designated CCO, firms should also invest in the latest compliance technology to stay informed about potential risks and issues related to regulatory compliance. Integrating new software will ensure that your employee’s communications are monitored, and messages that violate company policy or applicable laws and regulations can be flagged. As the cost of non-compliance rises steeply, firms can’t ignore how essential compliance support is to their business.

Cover your compliance bases.

  • If you’re in charge of managing your RIA’s compliance, are you confident that your supervision is adequate?
  • If you’re already using a compliance consultant in some form, are you sure they’re providing sufficient compliance guidance and keeping up with recent rule changes and updates?
  • If you feel that you’re already getting good advice, has your team been executing it properly?

The punishments for not following the guidelines set forth by the SEC can be harsh. Depending on the severity of a firm’s violations, some may find themselves facing cumbersome fines or even criminal charges. Furthermore, any organization that is found guilty of a violation could suffer from significant reputational damage that may take years to shake off.

Ultimately, this increased focus on compliance reflects an overall change in attitude across financial firms — one where proactive strategies for avoiding costly fines are preferred over reactive ones designed simply to mitigate losses after the fact. Firms today recognize that strong compliance is not only essential to staying out of trouble with regulators, it’s also vital to developing trust among stakeholders and their customers who rely on these organizations for their investments and services.

By early next year, the SEC plans to approve several new rules, including cybersecurity updates. AdvisorLaw has extensive experience in the compliance space. We can assist with the creation of internal compliance procedures, provide cutting-edge technology solutions, including our CyberProtection service, and even appoint an outsourced CCO for your firm.

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