Page 42 - Investment Advisor July/August 2023

COMplIANCE COACH

By Thomas D. Giachetti

Don’t Follow the Lazy Compliance Crowd

When regulators visit, they don’t care what other firms are doing; they’re
focused on examining you and your firm’s conduct.

’ve spent almost 35 years traveling the for risk and the gravity of the potential
country preparing firms for regula- consequences if/when the issue is raised
Itory exams. Having conducted sev- during an examination.
eral thousand on-site compliance reviews, There’s always a risk/reward consid-
I think I’ve generally heard and seen it all. eration. Unfortunately, too often the risk
Most times, firms listen to my recom- is minimized, and a hard — and some-
mendations, but sometimes — and unfor- times costly — lesson is learned.
tunately to their peril — they don’t. Why do Some issues that may raise the most
some firms determine they should do oth- scrutiny and harshest consequences are:
erwise? I have found two primary reasons. the lack of clear and conspicuous con-
Remember when your mother said flict of interest disclosures; non-Global
“no” to something that you wanted to to your attention for immediate cor- Investment Performance Standards
do, and you retorted with, “Mom, all the rective action, without regard to any verified performance advertising/pre-
other kids are doing it!” other action(s) that may result from the sentations; back-tested hypothetical
Unfortunately, after 35 years, I con- examination. The findings are based on presentations; billing/fee discrepancies
tinue to play that mom role, countless the Staff’s examination and are not find- (which mean the SEC won’t conclude
times hearing from firms throughout ings or conclusions of, or binding on, the an exam unless it exhausts opportunities
the country that “all the other advisory SEC or any of its divisions or offices. to get the firm to make client reimburse-
firms are doing it.” “You should not conclude that any ments); custody; and marketing practices
That may be the case — but when reg- of the firm’s activities not discussed in (including what I’m sure might be many
ulators visit, they could care less! They Exhibit A are in full compliance with instances of non-regulatory compliant use
are there to examine you and your firm’s the federal securities laws. Nor should of testimonials and the too-often inflated
conduct, not that of the “other kids.” you conclude that Exhibit A sets forth regulatory assets under management).
What other firms have done or might an exhaustive list of the ways in which What’s the best way to prepare? Based
currently be doing will not serve as a the firm’s activities do not comply with on my background, I’d say by engaging
defense. Such protestations will fall on the federal securities laws. an experienced law firm (for a privileged
deaf regulatory ears. “Neither the Staff’s findings or its exercise, as opposed to the non-privi-
In other cases, I encounter the fol- communications during the course leged findings/communications offered
lowing retort from advisory firms: “Tom, of the examination nor any remedial by a non-law firm) to conduct a thorough
the SEC was here two years ago and actions undertaken in response to such compliance review geared to helping your
they never raised the issue, so they can’t findings or communications foreclose firm identify deficiencies so that it can
bring it up now!” the Commission from taking any action, successfully complete a regulatory exam.
Oh yes, they can — and often do. This including but not limited to an enforce- At the end of the day, if your compli-
is because when regulators subsequent- ment action, with respect to the firm.” ance program is not expressly designed
ly revisit a firm, they couldn’t care less to successfully complete a regulatory
about prior exams — unless of course rIsKs vs. reWArDs exam, you’re wasting both time and
they advised you to do something in a So, the question is not can you do a money — and potentially putting your
previous exam’s Findings letter (about a specific activity? In fact, you may be firm in regulatory peril.
deficiency) and you didn’t do it! able to do so without ever suffering any
Here’s the proof from material infor- adverse consequences. Thomas D. Giachetti, a former investment
mation included in Securities and The real issue is should you do it? banker and NASD registered representative, is
Exchange Commission Findings letters: The answer will generally depend upon chairman of the Investment Management and Adobe Stock
“The staff is bringing these findings the nature of the issue, your tolerance Securities Practice of Stark & Stark.

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