Common compliance mistakes

Introduction

Financial service professionals who do business as registered investment advisers (RIAs) are well aware of the fact that the securities regulators will periodically conduct regulatory examinations (audits) of the operations of such practitioners. On occasion, such regulatory organizations-both at the federal and state levels-will disseminate information about the most common compliance-related "mistakes" that auditors uncover in the course of their work with advisers. It will prove helpful to review these common RIA compliance-related mistakes.

According to the regulators, there are six separate areas of compliance mistakes that seem to surface repeatedly. The practitioner should pay close attention to each of these six areas to assure full regulatory compliance and to successfully avoid potential sanctions imposed by the SEC or state securities commissioners as a result of such omissions.

Failure to Comply with the Books and Records Regulations

Although there may be some minor differences between the federal books and records rules promulgated by the U.S. SEC and the rules promulgated by the various state securities commissions, there is a common theme in both contexts. In a nutshell, the RIA must do the following in the record-keeping context:

* maintain a general journal

* maintain a general ledger

* maintain a record of all securities purchases

* maintain paid and unpaid bills for a five-year period

* maintain cancelled checks for a five-year period

* maintain trial balances

* maintain signed investment advisory agreements

* maintain a client list

* maintain all evidence of discretionary authority from all clients

* maintain copies of all correspondence including e-mails

* comply with personal securities transaction rules

* comply with all insider trading rules

* maintain substantiation of all performance claims

* maintain an up-to-date compliance manual

* maintain the firm's privacy policy along with proof of distribution

* maintain a complaint file, even if empty

* maintain antiterrorism compliance files (discussed below)

* maintain records that substantiate compliance with the "Brochure Rule"

As long as the adviser complies with each and every one of these record-keeping rules, this aspect of the regulatory examination should go very smoothly.

Inaccurate Documents

Our next area of common mistake is the failure on the part of the investment advisory firm to maintain accurate and current documents. Noted by the regulators...