In the wake of the Bernie Madoff investment scandal and other financial scandals, regulatory changes are on the horizon for investment advisors, hedge fund managers, money managers and broker-dealers. To protect consumers, federal and state regulators will be keeping a closer watch on these groups, which will likely soon face new registration requirements, examination requirements and securities reporting requirements, as well as changes in the way they custody client funds.
Rather than take a wait-and-see attitude about these proposed regulatory changes, the best approach is a proactive one, suggests Laura Crosby-Brown, director of compliance at Regulatory Compliance, a Londonderry, NH, firm that has provided compliance services to securities industry firms for more than 20 years. “With regulation changes, the key is knowledge: knowing what’s coming, how it will impact your bottom line and staff, and how to respond. Doing a risk analysis now can help firms be better prepared to seamlessly handle these changes when they go into effect.”
One certain change to be seen by investment advisor firms that custody client assets, except funds used to pay fees, is more frequent surprise audits by SEC examiners. Some in the industry say this is long overdue, as some SEC-registered investment advisors have not been examined in seven to 10 years. Rather than strictly following a checklist, as was done in the past, examiners will be trained to demonstrate increased scrutiny when evaluating a firm’s type of business and potential risks.
“The push for compliance excellence is also coming from the clients of investment advisors and broker-dealers,” notes Peter Flynn, SEC securities attorney. “In the past, clients were generally reactive when there was adverse news about an advisor. Now, consultants to pension plans, for example, require internal control reviews and look to see how advisors monitor compliance within their organization. A trend has developed in which personnel of clients meet with advisors to review aspects of the advisor’s policies and procedures. Clients are taking matters into their own hands.”
By staying on top of federal and state securities regulations, Crosby-Brown and others at Regulatory Compliance keep client firms aware of the ramifications of current regulations and abreast of the latest changes. They educate clients on the impacts of new regulations, how to mitigate the impacts, and how they can prepare for regulatory examinations, such as reviewing supervisory procedures, accurately documenting policies and procedures, and monitoring firm activities.
Especially helpful in preparing investment advisor firms for a surprise visit from regulators is a mock SEC exam. The process examines the firm’s business, Form ADV Part I and II, client agreements, client billings, custody of client funds, and the firm’s written policies and procedures. To help firms perform well when an SEC examiner does make an unannounced visit, an onsite mock exam can help a firm make sure its files are properly set up, its books and records are in order, and that actual procedures follow written policies.
“By making sure that our client firms conduct thorough annual testing of their procedures and processes, we help them address any discrepancies by initiating a revision to their procedures manual or in their processes,” adds Beverly Fetcko, Compliance Partners manager. “We also inquire about whether their various filings are up-to-date and ask them to send documentation so we know it’s complete and accurate, so they are prepared if a surprise examiner walks through their door.”
Seeing the examination results of Regulatory Compliance clients who have undergone an examination by federal or state securities regulators is instructive in understanding the issues they are focusing on, says Jodat. This allows him and others at the company to share these insights with other clients.
Also helpful in determining key examination issues is talking directly to federal and state regulators, adds Crosby-Brown. “The SEC, FINRA and state regulators will enforce the new rules that are the result of legislation enacted by Congress. By talking with these regulators we can see what they’re thinking and how they will enforce the intentions of Congress or the intentions of rules and regulations that are already in place.”
Some post-Madoff regulatory changes have already been instituted. Investment advisor firms and broker-dealers are required to have an annual financial audit performed by a member of the Public Accounting Oversight Board (PCAOB). The result of this heightened scrutiny is rising audit fees for firms because of requirements the PCAOB places on auditors relative to review, registration and oversight.
Helping firms deal with the effects of new and proposed securities regulations is a current focus of Regulatory Compliance. Crosby-Brown says that a firm’s uncertainty about the effects of these regulations can impact its ability to do business and also impact its clients. “So that firms can assure their clients that they are doing things properly and that client assets are safe, we evaluate their policies and procedures and remind them to do their testing. We encourage them to evaluate not only their own business but to look at their custodians, affiliates and transfer agents, everyone who impacts their business, to be sure they are in compliance.”
In the post-Madoff world, taking a proactive approach to being in compliance with proposed securities regulations can make everyone sleep better.
About Regulatory Compliance, LLC
Regulatory Compliance has been assisting broker-dealers and investment advisors with industry compliance since 1989. Steve Sussman, president of Regulatory Compliance, provides commentary and insights to media outlets on industry topics, including the sale of Bernie Madoff’s trading unit, the implication of PCAOB, and the differences between NASD Rule 3010, 3012 and FINRA Rule 3130. To view additional information about Regulatory Compliance, visit www.regulatorycompliance.com
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