Why You Shouldn't Follow the Lazy Compliance Crowd

“You should not conclude that any of the firm’s activities not discussed in Exhibit A are in full compliance with the federal securities laws. Nor should you conclude that Exhibit A sets forth an exhaustive list of the ways in which the firm’s activities do not comply with the federal securities laws.

“Neither the Staff’s findings or its communications during the course of the examination nor any remedial actions undertaken in response to such findings or communications foreclose the Commission from taking any action, including but not limited to an enforcement action, with respect to the firm.”

Risks vs. Rewards

So, the question is not can you do a specific activity? In fact, you may be able to do so without ever suffering any adverse consequences.

The real issue is should you do it? The answer will generally depend upon the nature of the issue, your tolerance for risk and the gravity of the potential consequences if/when the issue is raised during an examination.

There’s always a risk/reward consideration. Unfortunately, too often the risk is minimized, and a hard — and sometimes costly — lesson is learned.

Some issues that may raise the most scrutiny and harshest consequences are: the lack of clear and conspicuous conflict of interest disclosures; non-Global Investment Performance Standards verified performance advertising/presentations; back-tested hypothetical presentations; billing/fee discrepancies (which mean the SEC won’t conclude an exam unless it exhausts opportunities to get the firm to make client reimbursements); custody; and marketing practices (including what I’m sure might be many instances of non-regulatory compliant use of testimonials and the too-often inflated regulatory assets under management).

What’s the best way to prepare? Based on my background, I’d say by engaging an experienced law firm (for a privileged exercise, as opposed to the non-privileged findings/communications offered by a non-law firm) to conduct a thorough compliance review geared to helping your firm identify deficiencies so that it can successfully complete a regulatory exam.

At the end of the day, if your compliance program is not expressly designed to successfully complete a regulatory exam, you’re wasting both time and money — and potentially putting your firm in regulatory peril.

Thomas D. Giachetti, a former investment banker and NASD registered representative, is chairman of the Investment Management and Securities Practice of Stark & Stark.

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