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Need for Compliance is Growing, Especially for Small Firms

A common theme in the materials submitted through our Advertising and Producer Compliance Department is “these times, they are a-changin’.” While the ads are focusing on planning out one’s financial future in a world with new norms, this warning can be applied equally to the world of compliance for small firms.

Mark Schoeff, Jr.’s recent article “‘Enforcement Wave’ heading for advisers: Ex-SEC official” from Investment News discusses the new enforcement actions by the Securities and Exchange Commission (SEC) against investment advisers. It is another example of how the area of compliance is growing in all areas of financial planning.

The article highlights some of the major fines that have been levied just over the past few weeks. For example, “the SEC charged three hedge fund advisory firms and six individuals with improper use of fund assets, fraudulent valuations and lying about fund returns.” Mr. Robert Khuzami, director of the SEC’s enforcement division, says that some examples of the biggest areas being targeted by the SEC are “advisers who lie about graduating Phi Beta Kappa, conceal their association in a past failed business venture or inflate their assets under management, who might well be the same persons who outright steal your money when the markets turn against them.”

However, it’s not just blatant lying that can get you in trouble. There are penalties that can be levied just for having inadequate or non-existent compliance procedures. While these fines, anywhere from $50,000 and up (not including any customer restitutions, which may start at $100,000), may not seem very steep to large firms, they could be potentially devastating to small firms.

One thing that this type of action could lead to is a real distaste for compliance. I cannot emphasize this enough though: compliance is your friend! It is not about limiting what you can do; it is about protecting yourself from losing your livelihood. Times ARE changing, in both how we plan for our financial futures and in how those services are provided. By creating and following compliance procedures and policies, you are sending a positive message that elevates the standards of the whole industry.

Stay tuned for upcoming posts about specific compliance policies and procedures that can help protect your business and your livelihood.