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The SEC’s New Risk Alert for Newly Registered RIAs

If you’re a financial advisor who recently registered as an investment advisor or you’re considering taking the leap, you need to be aware of some startling information. The SEC just released a risk alert that should make every newbie RIA sit up and pay attention.

The SEC has been ramping up examinations of newly registered investment advisors, and they’ve been finding some glaring issues. As experienced SEC compliance attorneys who have guided countless financial advisors through SEC exams, these deficiencies don’t surprise us. But if you’re new to the RIA world, you need someone who has been battle-tested to help you avoid turbulent regulatory waters.

Inadequate Compliance Procedures Sink Many New RIAs

The Securities and Exchange Commission (SEC) has identified lax compliance policies and procedures as a significant area of concern. As an advisor, it’s understandable that your primary focus is on working with clients, growing your practice, and navigating the transition to full independence. However, neglecting to update outdated manuals or relying on generic templates can expose your firm to serious trouble.

Policies and procedures are the foundation of your firm’s governance, ensuring that compliance requirements are met. Without practical and tailored policies and procedures guiding your daily operations, you run the risk of encountering compliance issues.

Off-the-shelf templates may appear to fulfill the requirement, but they often lack alignment with your specific business. Trying to fit a generic template to your unique circumstances is like forcing size 12 feet into glass slippers—it’s uncomfortable and destined for disaster.

Furthermore, these generic documents often lack clear and meaningful procedures, leaving your team uncertain about their roles and responsibilities. Policy statements alone hold little value if your team doesn’t know how to effectively implement them.

Many newly registered RIAs make the mistake of understaffing their compliance efforts, relying on one individual to fulfill multiple roles. This approach is an uphill battle, especially as your book of business grows.

Perhaps most concerning is the lack of solid business continuity and succession protocols in many new firms. What would happen if the founder experienced a health crisis or worse? It’s crucial to have plans in place to ensure clients are properly cared for in such situations. Simply hoping for good health and longevity is not a reliable strategy.

If any of these scenarios resonate with you, it’s important to recognize that you’re not alone. Many new RIAs innocently find themselves in these risk areas, striving to serve clients without fully realizing the regulatory challenges they face. By addressing these concerns proactively, you can navigate the regulatory landscape more effectively and protect both your firm and your clients.

Improper Disclosures and Statements Undermine New Advisory Firms

Another area the SEC scrutinizes closely is advisor disclosures – those pesky ADV forms and other client communications intended to shine light on potential conflicts of interest.

SEC examiners have found all sorts of inaccuracies and missing information on new RIA disclosures:

  • Not fully disclosing fees and costs borne by clients
  • Failing to describe investment strategies, models, and portfolio management styles
  • Underreporting assets under management
  • Not revealing potential conflicts around compensation, affiliations, and client referrals

Some RIAs have even let key credentials lapse or erroneously touted third-party recognitions that are long outdated. Misstatements and outdated claims may seem harmless on the surface – no one wants to highlight past failures or lost status. But in the eyes of the SEC, inaccurate disclosures undermine client trust if not rectified.

Marketing Messages Also Under Scrutiny

Investment advisors registered with the SEC cannot simply say whatever they want in promotional materials and sales pitches. But, the SEC says some newly registered RIAs have ignored this distinction in their enthusiasm to attract clients.

Those campaigns touting your unmatched greatness can come back to haunt you. The SEC looks skeptically at unsubstantiated claims about being “the best advisor,” guaranteed returns, or other flashy hype.

Maybe early on, you can get away with some promotional puffery absent careful controls. But eventually, the SEC will catch up to you. And their examiners readily identify and address non-compliant marketing content used by advisors during evaluations.

Contact An SEC Compliance Lawyer Before It’s Too Late

If reading this risk alert feels like glimpsing your future in a crystal ball, don’t panic. Many newly registered RIAs have gone before you, escaping enforcement actions and building thriving, compliant practices. But they all have one thing in common – partnering with battle-tested experts.

So, if you see yourself in any of these scenarios, don’t go it alone for one more day. Give the compliance nerds at My RIA Lawyer a call right now.

We live for this stuff and have helped countless advisors in your shoes get buttoned up the right way. Why keep losing sleep or letting that nagging feeling of uncertainty weigh you down? Contact us now, and we’ll quickly get you crossing regulatory hurdles. Then you can focus on clients and finally have confidence your compliance foundation is secured.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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