Why is Compliance Important?

There are a couple of universal things all business owners want. They want their business to maintain profitability, sustainability, and growth and they want this done with the least amount of stress and hassle possible. This is far easier said than done, but it’s important to focus on those ideas. The smoother a business can function, the stronger it will be and the quicker it will grow in the long run. Everyone wins.

At Joot, we have an established understanding of the registered investment adviser business and how that industry functions. The financial markets may have their ups and downs and storms will need to be weathered, but, if an RIA captains their ship with the right knowledge and tools, no storm is too rough. SEC compliance is an important piece of knowledge to have for weathering an RIA’s storms.

Unfortunately, a dedicated and focused compliance program is sometimes an afterthought for RIAs. It isn’t something that is considered until it is too late, and the SEC is already here asking for exam documentation. Luckily, Joot can help with that compliance development and preparation. Here, we’ll highlight four main reasons why compliance is important for all RIAs.

1. Compliance Programs Protect Everyone

One of the main goals of an RIA is to grow the profits of the firm’s investments and investors. But that can’t be done if all the bases aren’t covered. A tailored compliance program includes sections like a Code of Ethics that doesn’t just protect you, the firm, but also your investors. Your strong compliance program will dictate to all members of the firm what should and should not be done with investor documentation, how to maintain specific codes of conduct regarding external firm relations, how to properly disclose and deal with any conflicts of interest and so on.

By making sure your investors have all this information readily available, you’re giving them the information they need and deserve to make wise and informed financial decisions. Also, having your compliance program set up properly shows the SEC and those all around you in the industry that you value transparency, honesty, and the connection that it brings with your investors. Investors care deeply about the investments they make with their money, and it helps establish a strong and lasting relationship when you show them you also care about their investments.

2. The Program is Specific to You and Your Needs

It’s not just important to have some semblance of a compliance program, but to have one that is tailored-made and designed specifically for your business, and your investors. Sometimes, RIAs may assume that some “off-the-shelf" compliance manual will suffice for the SEC and give them the protection they need. Although these “off-the-shelf" solutions may be cheap, quick, and easy, they’re no substitute for the real thing. As we recently wrote in a blog post about a certain New York RIA, “off-the-shelf" solutions certainly aren’t worth the hassle (and potential fines) they can carry with them.

If you take the time to develop a program that is specific to you and your investors, you set yourself up for success in the long run. There’s no fear in the program not covering all needs and areas and it can be easily updated as years progress and your business grows and changes. If you aren’t sure where to start, Joot’s team can help you build a reliable and robust program that checks all the right boxes.

3. Compliance Programs are a Set of Routine Checks and Balances

In the United States, our government is built on checks and balances. Nothing is ever perfect, but there are a variety of elements and items set in place that hold all the members and workers accountable for their actions and dealings. These checks and balances help the cogs in the machine turn properly and run smoothly. A dedicated compliance program for RIAs also functions as a set of checks and balances. With a specific program, Chief Compliance Officer, or team, you never have to wonder who watches the watchmen. Your CEO will never have to wonder if the CFO is able to be both the CFO and the CCO. There will never be a fear that duties are slipping because there’s too much to do.

But you may ask, what do we do if we don’t have someone to be the CCO or lead a compliance program? That’s okay! Hiring a consultant with experience in your field – whether it’s private funds, mutual funds, or something in-between – has never been easier. A consultant can take the burden of creation off your shoulders and work with you to build a program that maintains the right amount of oversight at every angle. This set of checks and balances takes the weight off an RIA’s shoulders and lets them continue to do what they do best: grow the business.

4. It's Not a Matter of 'IF', But a Matter of 'WHEN'

It’s important to ask yourself when the last time your firm went through an SEC examination. If you aren’t sure or have never gone through one, it’s extremely important to know that inevitably, the SEC will contact your firm regarding an examination. When they do, there will be a tremendous amount of documentation to collect, review, and submit. The Joot team likes to think of a robust compliance program as a nice, protective umbrella. You never know when rain is going to fall, so it’s better to have the umbrella and not need it than need the umbrella and not have it. Because you know what they say: “when it rains, it pours.” A tailored compliance program makes sure you, your firm, and your investors don’t get soaked.

In January 2018, The SEC’s Fort Worth regional office held a teleconference that summarized the SEC’s 2017 exam findings. The staff noted that some of the common weaknesses in compliance programs for investment advisers include:

• Failure to tailor written policies and procedures to the adviser’s business (i.e., generic compliance manuals)
• Failure to manage or disclose conflicts of interests, particularly for dual-registered investment advisers/brokers
• Employee violations of the investment adviser’s code of ethics
• Failure to conduct a written annual review of the investment adviser’s compliance program
• Inadequate books and records

These five missteps found by the SEC became their focus areas for 2018. With the change in the industry in the last 5 years, including the massive spike in cryptocurrency investments, this list has only gotten longer. When the SEC comes knocking to deliver an exam, your compliance program and your compliance leader (whether external or internal) can make the process simple and easy. A compliance consultant like Joot can even run you through a mock SEC exam to make sure you’re ready before the SEC stops by. This way, you know what you need and will never be surprised.

If you don’t have a proper compliance program in order, the results of an examination may not fall in your favor. If the SEC decides on censure or enforcement actions, the average fine can range from $50,000 to $100,000 or more. The fine can target the firm, an individual, or, worse, both. But it’s not just a fine that a firm needs to worry about. If a censure or enforcement action does come from the SEC, moving forward it is required to be disclosed. Then, the firm will have to explain to any potential investor questioning why the action took place. This may become a red flag for the potential investor that could cost a firm even more than the initial fine in terms of potential revenue and customer longevity. It could also lead to existing investors leaving the firm. A well-developed compliance program can alleviate all these potential issues.

Joot's Compliance Services Make Compliance Easy

Compliance should never be an afterthought. It may seem like a burden or difficult at the beginning, but the dividends a strong compliance program provides are immeasurable. As an RIA, you deal with lots of ups and downs. A compliance program can make sure that an SEC exam isn’t one of the downs. Make sure you protect yourself and your investors. If you’re unsure how to start your own compliance program, check out our past blog on building a compliance program. Or reach out to the Joot team and learn how our RIA compliance services can help you and your firm succeed.