Absolutely. The Fiduciary Standard is written to protect clients from a “bad act(or)” as the SEC has labeled them. An Investment Advisor Representative’s (IAR) fiduciary responsibility is really quite simple – put your client’s interest above your own. As for the RIA’s fiduciary responsibility, it is not as clear.
If an IAR breaches his fiduciary responsibility, the firm has done so as well. The RIA has a fiduciary responsibility to have a compliance program in place to prevent violations of the Investment Advisors Act of 1940, if the firm does not have this in place it is in breach of their responsibility. Breaching your fiduciary duty is the most severe infraction that can be committed. This breach will have more than just a regulatory impact – your personal and professional reputation will receive a severe blow. The ability to attract and retain clients, receive referrals from them as well as centers-of-influence and attracting competent advisors will all be impacted.
How will my clients know? The regulators (SEC and state) will publicize regulatory events brought against IARs and RIAs who have violated the Investment Advisors Act of 1940. This information may be picked up by local media and it will be recorded on the SEC’s Investment Advisor Public Disclosure site as well as FINRA’s Broker-Check, if applicable. Today, more clients and financial advisors are conducting due diligence on RIAs and IARs before they engage in a relationship.
In addition to the public display of regulatory infractions, it is a regulatory requirement the RIA and IAR disclose these non-compliance acts on Form ADV (1 & 2) and Form U-4. The disclosure is for regulatory and civil actions brought against the firm or an associated person. If the firm neglects to disclose this on their ADV they will experience more disciplinary actions, and depending upon the severity of the disciplinary event you are now ‘on the list’ and may see the regulators more frequently. If an IAR neglects to include the event on his or her ADV 2B or U-4 they will also face further disciplinary review, the results of which can range from a written notice to being barred.
Rule 204a-1 of the Investment Advisers Act will guide the RIA and IAR about unsuitable activities. The costs associated with regulatory violations can be considerable; attorney fees, regulatory fines, civil fines and possibly compliance remedies. Additionally, the RIA or IAR may be limited to the type of business they can conduct if not barred from the industry.
Is there protection a firm can employ? Yes, and believe it or not it is in the rules. Rule 206(4)-7 of the Investment Adviser Act of 1940 requires SEC Registered
Investment Advisors (most states have adopted this rule as well) to designate an experienced Chief Compliance Officer (CCO) who has the responsibility and authority to develop a compliance program to prevent violations of the 1940 Act. The rule also requires the CCO to test the firm’s Policies and Procedures at least annually and make any amendments deemed necessary and report the findings to the executive team. If Rule 206(4)-7 is adhered to and the CCO is provided adequate resources and budgeting, the RIA firm can meet its fiduciary obligations by having in place a compliance program and protect its reputation.
Developing a compliance program suited to the firm’s specific business model will bring clarity to the requirements and the compliance tasks. RegMaven is experienced with integrating the firm’s business model and compliance requirements – Where Compliance Meets Business.
