How New Technology and Regulations Will Impact the Future of RIA Compliance - PowerPoint Presentation

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How New Technology and Regulations Will Impact the Future of RIA Compliance

May 24, 2017

FPA of Georgia

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GJ King

President, RIA in a Box

GJ is the President of RIA in a Box® which provides compliance and operations support to over 1,500 registered investment adviser (RIA) firms. He is a frequent industry speaker on the topics of RIA compliance, operations, and technology best practices. GJ previously worked in the investment management division of Goldman Sachs serving as a trusted advisor to a select group of high net worth entrepreneurs, families, and foundations. King holds an MBA from the Graduate School of Business at Stanford University and a BA from Brown University.

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Disclosures

RIA in a Box is not a

law firm, CPA firm, or registered investment advisory firm. None of the information presented, advice given, or services rendered should be considered legal, tax, accounting, or investment advice.

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Today’s

Topics

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Today’s RIA Technology Landscape

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Integrated RIA Compliance Technology

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Your CRM System

48%

of RIA firms use a CRM system

today*

2015 AUM growth rate: 4.6% vs. 2.0% average

Most popular solutions are Redtail and SalesforceGeneral client information and notesGood business practice that is crucial during any regulatory issueIntegrated calendar and tasksDocumentation of compliance program implementationClient suitability informationTop deficiency cited during regulatory examsClient locationIs your firm registered in all proper jurisdictions?Documented processes via workflowsInternal review and approval processes for investment recommendations

Source: 2016 RIA in a Box Technology Survey

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Your Portfolio Management & Reporting System

48% of

RIA firms use a portfolio management and reporting system

today*

2015 AUM growth rate:

3.8% vs. 2.0% averageMost popular solutions are Morningstar Office and OrionForm ADV filing informationAutomatically aggregate and normalizes data across multiple custodiansCalculate total regulatory assets under management (“AUM”)Discretionary vs. Non-discretionaryAUM by client typeSystemized advisory fee billingManual fee calculation is a major compliance riskOpportunity to determine a “reasonable fee”Systemized review of client portfolio performanceAre there any outliers?

Source: 2016 RIA in a Box Technology Survey

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Your Document Storage System

46%

of RIA firms use a document storage system

today*

2015 AUM growth rate: 4.8% vs. 2.0% averageMost popular solutions are DropBox and BoxOfficial books and recordsFoundation of your firm’s compliance programOrganized client documentationAbility to produce required client filesBusiness continuityAbility to access files and continue operations during a business disruption

Source: 2016 RIA in a Box Technology Survey

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Your

Archiving System

~50%

of RIA firms use

an archiving system

today

Some systems focus exclusively on email

Some systems archive across all channels (social media, text, etc.)

Requirement to keep correspondence and advertising records

Can lead to serious regulatory issues

Easier compliance monitoring

Centralizes capture of all information to allow for easier review

Demonstrate “Culture of Compliance”

Ability to demonstrate program implementation during an exam

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Your

Compliance Software Platform

39%

of RIA firms use

compliance software todaySome systems focus exclusively on employee trade monitoringSome systems serve more broadly as your firm’s compliance hubImplement a comprehensive yet efficient programPerform only relevant tasks based on your firm’s profileCentralized compliance program documentationOrganize all competed activities in a digital compliance logSupervise staff Track and document all staff attestations and activitiesAutomatically capture all employee trade dataMore efficiently review employee trades vs. client trades

Source: 2017

InvestmentNews

Adviser Technology Study

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This rule does impact RIA firms but it is manageable

June 9, 2017: Comply with the Impartial Conduct Standards

Example impacted investment recommendation scenarios:

IRA rollover from a Qualified Retirement PlanIRA rollover from another IRASwitch from commission-based to fee-based IRA

DOL Fiduciary Rule

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Impartial Conduct Standards

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Qualify for streamlined Level Fee Exemption

Educate and train all staff members

Create an “IRA Investment Recommendation Checklist”

Implement a process to review recommendationsEstablish additional procedures to ensure compliance

Five Steps to Comply

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This rule impacts all state and SEC-registered RIA firms

October 1, 2017: New Form ADV becomes effective

Significant changes include:

Disclose company social media pagesDisclose use of outsourced Chief Compliance OfficerMore detailed AUM information by client typeMore detailed information on Separately Managed AccountsMore detailed information on Wrap Fee Programs

Form ADV Changes

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Begin to organize portfolio management and reporting

information

to mirror Form ADV data fieldsEnsure that all social media pages are properly archivedDocument all new required information by October 1, 2017

Three Steps to Comply

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While

the above statement is a sometimes overused phrase in the RIA compliance world,

our team of former regulators can

assure you that it is taken very seriously by every regulator in every jurisdiction.If you are successful in demonstrating a “culture of compliance” at your firm and willingly cooperate with the examiners, your exam is more likely to have better results.

Establishing the Culture of Compliance

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Know the rules applicable to your firm

SEC Rule 204-2

Georgia Rule 590-4-4-.14

Are you aware of your jurisdiction’s Books & Records requirements?Inspection of the firm’s books and records is a key audit focusDon’t wait to prepare these until requested by the examinerUnique Georgia requirementsSpecific supervision rules including annual office inspection

Keep the Proper Books & Records

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Elements of Effective Compliance Program

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SEC

has stated

:

Even small advisers may have arrangements, such as soft dollar agreements, that create conflicts… Advisers of all sizes, in designing and updating their compliance programs, must identify these arrangements and provide for the effective control of the resulting conflicts...We would expect smaller advisory firms without conflicting business interests to require much simpler policies and procedures than larger firms.

Policies & Procedures

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Rule 206(4)-7 under the Investment Advisers Act of 1940 requires SEC registered investment advisers to:

adopt and implement written policies and procedures reasonably designed to prevent violation, by you and your supervised persons, of the Act and rules under the Act.

conduct a review, no less than annually, of the adequacy of the policies and procedures and the effectiveness of their implementation.

designate a Chief Compliance Officer (CCO) to administer the policies and procedures.

Policies & Procedures

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At

a minimum, the SEC has stated the policies and procedures should address the following (if applicable

to an investment adviser’s

business):Portfolio management processes – allocation of investment opportunities among clients, consistency of investments with investor goals, disclosuresTrading practices – procedures to determine best execution, allocation of aggregated trades among clientsProprietary trading of the adviser and personal trading of supervised persons (Code of Ethics)Accuracy of disclosures to clients and regulators – brochure, advertisingAccurate creation and secure maintenance of required records

Policies & Procedures (Cont.)

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Marketing – use of solicitors

Processes to value

client holdings and assess fees based on those valuationsSafeguards to protect client assets from conversion or inappropriate use by advisory personnelSafeguards to protect client informationBusiness continuity plans

Policies & Procedures (Cont.)

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Requirement

to have language that all supervised persons will comply with security laws.

Requirements for reporting of access persons’ personal securities transactions and holdings and pre-approval of IPO investments and limited offerings.

Procedures to report violations of the Code and sanctions for violations.Requirement to provide copy and obtain annual acknowledgments.

Code of Ethics

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Provide

investment adviser

personnel with copies of Policies and Procedures, Code of Ethics, and Privacy Policy.

Do they understand them? Individual’s attestation that they have read, reviewed, and understandInitially, annually, or when modified

Staff Training & Attestations

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Neither

Rule 206(4)-7 nor similar state rules require a risk assessment; but, the SEC’s initial request for information during an exam asks for:

Inventory of compliance risks that forms the basis for policies and procedures

Documents mapping the inventory of risks to written policies and procedures

Risk Assessment

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Four

Step Process:

Prepare risk

inventoryAssign a “rating” to each risk identified in your inventory“Map” risks to specific procedures and/or disclosuresReview and update, as needed

Risk Assessment

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Use

a compliance calendar to monitor and test your policies and procedures

.

The calendar should indicate:What is the specific task to be performedWhen and how often will the specific task be performedWho will be responsible for performing the task

Compliance Calendar

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Your

c

alendar

will have tasks designed to monitor and test your policies and procedures.Monitoring: Keeping track of and checking your procedures on a continuing basis.Testing: Submitting your procedures to evaluation to determine their ability, or inability, to detect and prevent compliance violations.

Compliance Monitoring & Testing

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Policy:

The

firm’s Chief Compliance Officer (CCO) shall be responsible for approving all company advertising and ensuring it is in compliance with jurisdictional regulations. No advertisement shall be distributed without the CCO’s approval.

Task: Review and approve advertising.When: As needed: Review and note approval when advertisement placed; Quarterly / Annually: Spot check advertisement records to ensure prior approval was obtained and perform a general internet search for “unapproved” advertising

Compliance Monitoring & Testing

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Policy:

The

Firm shall bill clients accounts on a quarterly basis and deduct the fees directly from clients accounts.

Task: Review client accounts for billing errors. When: Review sample client files every quarter after the most recent billing cycle.

Compliance Monitoring & Testing

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CCO

or person designated to conduct a review must assess the

adequacy

and effectiveness of the compliance program at least annually.AdequacyHas the firm updated its policies and procedures in response to changes in business practices or regulatory requirements? Has the firm conducted risk assessment in response to any changes?EffectivenessIs the firm implementing policies and procedures as designed?Document the annual review and make changes as necessary.

Annual Review

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What percentage of SEC-registered RIA firms are audited on an annual basis?

11%

18%

27%43%

RIA Examination Frequency

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SEC Audit Statistics

RIA Examination Frequency

Examined 30% of total assets under

management (“AUM”)

in 2014

From 2001 to 2015,

total aggregate SEC-registered RIA AUM increased

approximately 210% from $21.5 trillion to approximately $66.8 trillionAs of February 28, 2017, there are 12,286 SEC-registered RIA firms with a median AUM of $302 million and an average of $5.459 billion AUMSEC exam volume is up 25% in 2017 vs. 2016

Sources: 2014, 2015, 2016, and 2017 SEC Fiscal Year Congressional Budget Justifications

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Exam

Document

Preparation

Overview slide deck

Org chart

Joint ventures

Client account information

Type

Custodian

E-delivery authorization

Custody

Value for advisory fees

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Lost advisory clients

Registration justification

Service provider list

Policies and Procedures

Non-compliance records

Review documentationCode of EthicsTrade errorsRisk assessmentEmployee trade records

Exam

Document

Preparation

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Litigation records

Security list

Soft dollar arrangements

Custodial agreements

Financial statements

Trade blotterAdvertising materialsAdvisory agreement

Exam

Document

Preparation

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What percentage of SEC RIA audits result in a deficiency being cited?

34%

42%

63%77%

Exam Deficiencies

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What percentage of SEC RIA audits result in a referral to Enforcement?

7%

11%

26%32%

Referrals to Enforcement Division

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Possible Referral to Enforcement

SEC Enforcement Statistics

Sources: 2014, 2015, 2016, and 2017 SEC Fiscal Year Congressional Budget Justifications

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Deficiencies

Source: 2015 North American Securities Administrators Association RIA Coordinated Examination Report

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Evolving Audit Scope

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Better Data and More Focus

The Form ADV Part 1 changes taking effect October 1, 2017 further demonstrate this.

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Best Practices

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3

rd

party self regulatory organization (SRO)

Congressional bill introduced by Spencer Bachus (formerly R-AL) in April 2012User feesCongressional bill introduced by Maxine Waters (D-CA) in April 20133rd party auditsIntroduced in May 2014 by former SEC Commissioner Daniel Gallagher at a Financial Industry Regulatory Authority (FINRA) eventIncreased SEC focus on RIA firmsShift of 100 broker-dealers to adviser examsHiring more adviser examinersChanging AUM registration thresholdPreviously raised from $30 to $100 million as part of Dodd-FrankRaising to $300 million would shift around ½ of SEC-registered firms to state level

Efforts to Increase Audit Frequency

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About RIA in a Box

We

support RIA firms with industry-leading registration and compliance services

Experience & Expertise

30+

employees including former regulators, advisors, and technologistsHave helped register over 3,000 new RIA firmsMyRIAComplianceTMProprietary RIA compliance management softwareProvide compliance software and ongoing consulting support to over 1,500 RIA firms

www.riainabox.com

@

riainabox