Proactive Compliance: Mitigate Risks & Stay Ahead of Regulators

You can’t be reactive in this environment.

You can’t wait for an SEC audit or FINRA exam to get in compliance.

Regulators expect registered investment adviser (RIA) compliance officers to proactively review guidance, risk alerts, and industry changes – and then quickly implement the necessary policies, procedures, and testing to stay compliant.

Failing to take a proactive approach puts your firm and your clients at risk.

In this article, we’ll explore why proactive compliance is essential for RIAs and discuss the key elements of an effective proactive compliance program.

What is Proactive Compliance?

Proactive compliance means anticipating and addressing compliance risks and requirements before they become issues as opposed to waiting for problems to arise or for regulators to spot deficiencies and serve up penalties.

Being proactive involves constantly monitoring the regulatory landscape, identifying potential risks, and preemptively implementing the necessary policies, procedures, and controls.

At the core of proactive compliance is the forward-looking mindset of an experienced CCO.

Compliance officers actively seek out new rules, regulatory guidance, and industry best practices. They assess how these changes may impact the firm’s operations and prepare for implementation.

This allows them to be proactive instead of reactive – deploying compliance measures BEFORE regulators come knocking.

The Importance of Proactive Compliance for RIAs

There are several key reasons why proactive compliance is critical for Registered Investment Advisers (RIAs):

Rapidly Evolving Regulatory Environment: With so many new rules in the pipeline, the investment management industry faces a constantly shifting regulatory landscape. For example, the recent amendments to SEC Regulation S-P demonstrate how financial regulations can change to address emerging risks and industry trends.

Cybersecurity and Data Privacy Concerns: In recent years, the SEC has heightened its focus on cybersecurity and the protection of customer information. RIAs must have robust incident response plans, data breach notification procedures, and other controls in place to mitigate the risks of unauthorized access to client data.

Reputational and Financial Risks: Failures in compliance can expose RIAs to significant reputational damage, regulatory enforcement actions, and financial penalties. Proactive compliance helps firms respond to risk alerts, avoid costly consequences, and maintain clients’ trust.

Fiduciary Duty and Client Expectations: As fiduciaries, RIAs have a duty to act in the best interests of their clients. Maintaining a strong compliance program demonstrates the firm’s commitment to upholding this duty and meeting client expectations for responsible management of their assets.

SEC Examination Priorities: The SEC has outlined several key focus areas for its 2024 examination cycle. These include cybersecurity and data protection, oversight of new products, conflicts of interest, and retail investor protection. RIAs must ensure their compliance programs are prepared for SEC exams.

You can find out more about the SEC’s examinations focus for 2024 in the video below:

With a proactive approach to compliance, RIAs can better protect their clients, mitigate legal and financial risks, and position their firms for long-term success in the rapidly changing investment management landscape.

Penalties of Noncompliance

The SEC is coming! Failure to maintain a robust and proactive compliance program can expose firms to significant penalties and consequences, including:

• Regulatory Enforcement Actions
• Reputational Damage
• Financial Penalties
• Personal Liability for Executives
• Loss of Business Opportunities

RIAs can NOT afford to be lazy with compliance. As recent enforcement actions have shown, the consequences of noncompliance can be really, really… really costly.

In June 2024, the SEC charged R.R. Donnelley & Sons Co., a major business services firm, with disclosure and internal control failures related to cybersecurity incidents. The company was forced to pay over $2.1 million to settle the charges. This should serve as a wake-up call for RIAs – if you don’t have proper controls in place to address cyber threats, the SEC is going to find out.

And it’s not just cybersecurity. In April 2024, the SEC cracked down on five investment advisers for violations of the new marketing rule. These firms learned the hard way that the SEC is serious about enforcing the new advertising regulations. Compliance missteps can lead to hefty penalties and serious reputational damage.

The stakes are high, but the solution is clear – RIAs need to make compliance a top priority. Staying up-to-date on the evolving regulatory landscape and proactively addressing risk areas will be crucial in the years ahead.

Our favorite compliance nerd, Leila Shaver, discusses the top 10 things you should be concerned about after the SEC’s enforcement report in the video below:

What’s included in a Proactive Compliance Program

A knowledgeable and empowered Chief Compliance Officer (CCO) is essential for maintaining a robust and proactive compliance program. Whether you choose an in-house or outsourced CCO, they should be responsible for the following key aspects of a proactive compliance approach:

Comprehensive Policies and Procedures

Developing and maintaining up-to-date policies and procedures that address all relevant rules and regulations is crucial. These documents should provide clear guidance on compliance requirements and be regularly reviewed and updated to reflect regulatory changes.

Systematic Risk Assessments

Regularly conducting thorough risk assessments and mock exams to identify potential vulnerabilities. This involves evaluating the firm’s operations, practices, and controls to prioritize and address the most critical compliance risks.

Targeted Compliance Training

Implementing comprehensive compliance training programs to ensure all employees understand their obligations and know how to apply policies and procedures in their daily work is essential.

Cultivating a Compliance Culture

Promoting compliance and empowering employees to proactively identify and report potential issues is important for maintaining a strong compliance culture throughout the organization.

Audit Preparedness and Regulatory Collaboration

Maintaining open communication and a collaborative relationship with regulatory bodies like the SEC and FINRA, as well as being audit-ready at all times, helps firms stay ahead of examinations and address any inquiries or concerns promptly.

Continuous Monitoring and Improvement

Compliance is an ongoing process, so firms must continually monitor for regulatory changes, update policies and procedures accordingly, and make necessary adjustments to the compliance program to ensure its continued effectiveness.

Outsourced Compliance Support

Consider partnering with an experienced outsourced compliance provider, like the team at My RIA Lawyer. We can supplement your internal resources and provide valuable guidance to keep you ahead of the compliance curve.

By incorporating these key elements into your compliance program, you’ll be well-positioned to anticipate challenges, mitigate risks, and give your clients peace of mind.

Overcoming Compliance Pitfalls with My RIA Lawyer

Even seasoned firms can inadvertently fall out of step with regulatory requirements, leading to costly penalties and reputational damage.

Phillip W. Statler, President of Statler Financial Services, Inc., found this out the hard way when he was audited by the State of Florida after 11 years of using a compliance consultant.

The ADV forms didn’t match up with what was actually happening in the business, and his firm was penalized.

My RIA Lawyer helped guide the firm through the process, communicate with regulatory bodies, and get them back on track while minimizing the penalties for past noncompliance.

Check out the testimonial from Mr. Statler below:

Proactive Compliance. Long Term Success.

Whether you’re facing an impending audit, need to overhaul your compliance program, or simply want to ensure you’re always audit-ready, My RIA Lawyer is the complete compliance solution.

With our comprehensive suite of compliance and legal services, personalized guidance, and unwavering dedication to client success, we help you stay ahead of regulatory changes and avoid costly missteps.

Stop being reactive. Safeguard your firm’s future and maintain your competitive edge in the industry.

Contact us today to discuss proactive compliance solutions for your firm.