The notion of "regulatory hot topics" has become somewhat of a misnomer given the "broken-windows" approach of today's SEC.[1] To say that some regulatory topics are "hot" naturally implies that some regulatory topics are…not hot. I don't think I'm too far afield to suggest that SEC Chair Mary Jo White would never concede that some regulatory matters are not important, inconsequential or otherwise should be treated with less rigor than others. Given limited resources and the continual squall of regulatory change, what's an investment advisor to do?
Listen to the SEC, but Don't Become Myopic
One classic example is the intensely scrutinized and widely discussed annual SEC Examination Priorities letter. The letter should be reviewed for what it is: a snapshot of a much larger regulatory map with points of interest that are only viewable by zooming out from the four corners of the letter.
Indeed, the 2014 Examination Priorities letter stresses this very point: "This description of [national exam program] priorities is not exhaustive. While the [national exam program] expects to allocate significant resources throughout 2014 to the examination of the issues described below, the [national exam program] will conduct additional examinations in 2014 focused on risks, issues, and policy matters that are not discussed here." For example, the 2014 Examination Priorities letter makes no mention of Form ADV; if an adviser thinks that such an omission means the SEC isn't spending much time reviewing its ADV, think again.
Prioritize and Customize
Prioritization is the natural result of an internal risk assessment, in which an advisor determines where and when things are most likely to go wrong. The greater the risk, the more time and energy should be spent mitigating it and preparing for when it hits the fan. An adviser that routinely accepts and forwards customer checks, for example, should build and test a process that ensures the adviseor does not violate the custody rule.
An advisor that routinely publishes marketing material with performance information should focus its time on the Clover Capital No-Action Letter and SEC Rule 206(4)-1. Where an adviser spends its time and where it doesn't should ultimately be reflected in a customized policies and procedures manual that is reasonably designed to prevent violations. Translated: simple firms with minimal conflicting interests can have simpler policies and procedures. Compliance programs should be customized for one advisor and one advisor only; it is the governing document that highlights the points of interest beyond the four-corners of the Examination Priorities letter.
