When it comes to NRS compliance, Los Angeles RIAs have a fiduciary duty to establish and implement written policies and procedures that ensure compliance with securities laws. They must also supervise all employees to prevent compliance failures and violations.
It is a herculean task that generates a mountain of reports, checklists, spreadsheets, and other documents, and not everyone accomplishes it successfully. Recent news headlines about personal trading practices and insider trading indicate that compliance and proper employee oversight remains a challenge for Los Angeles RIAs.
In 2008, the Securities Exchange Commission (SEC) issued a Compliance Alert report that listed the most common shortcomings. They included:
- The adviser’s code of ethics was incomplete and/or disregarded
- Reporting requirements were not correctly followed
- There was no employee monitoring
- Disclosure of the company’s code of ethics provisions was not correct
More and more RIAs are depending on software solutions to help manage their risks and guide them in the fulfillment of their NRS compliance obligations.
Creating Audit Reports
Software platforms such as ComplianceMAX turn piles of data into accurate audit reports, which makes it easier to monitor, manage, and assess a firm’s compliance activities. Certain compliance processes are automated by the software system, creating verifiable audit trails more quickly and precisely.
Disclosures and Attestations
Another useful feature of NRS-approved compliance software lets RIAs track and report all disclosures and attestations, which reduces risk and simplifies the compliance process for all of the firm’s registered representatives.
Communications and Advertising Reviews
The manual process of reviewing all public communications and advertising materials is time-consuming and prone to error. Software-driven review platforms facilitate cooperation between compliance professionals and a registered representative of a firm. These programs also generate comprehensive audit trails that document every submission, all changes, and the final approvals.
Code of Ethics Creation
Putting together a code of ethics document that meets regulatory requirements is time-consuming, but failing to do so can expose a firm to serious problems. Some compliance software packages include modules that automatically monitor personal securities activity, political contributions, and gifts. Company-specific rules are integrated into the process so that activities can be approved or denied in accordance with the firm’s guidelines.
While no program can identify and prevent all possible problems, Rule 206(4)-7 under the Advisors Act requires Los Angeles RIAs to implement policies and procedures that are reasonably designed to detect, prevent, and correct Act violations. Permitting compliance issues to arise that could have been averted by diligent reviewing and reporting methods does not meet that definition of reasonable.
Has your firm ever experienced NRS compliance issues? How were they addressed and corrected? Let us know your thoughts in the Comments box below.
And to follow-through on the tips introduced in this short article, be sure to download your free guide, Investing in High Net Worth Clients: The LA Investment Advisor's Guide to Using Technology to Manage and Grow Your Firm.