Compliance is a fundamental aspect of the financial industry, especially for Registered Investment Advisors (RIAs). These professionals are entrusted with managing clients’ investments and financial well-being, making it imperative to adhere to stringent regulations and ethical standards.
As financial planners and money managers for wealthy individuals and corporations, registered investment advisors or RIAs are required to comply with a set of rules and regulations laid down by the Securities and Exchange Commission (SEC).
RIA Compliance involves upholding regulatory frameworks, clear and transparent disclosure, meticulous record-keeping, ethical practices, client suitability assessments, compliance testing and auditing, regulatory reporting, and stringent cybersecurity and data protection measures. It ensures that RIAs act in their clients’ best interests, maintain the integrity of their advisory services, and adhere to legal and ethical standards, ultimately safeguarding client interests and regulatory adherence.
First, some basic housekeeping- advisers handling small-scale accounts must register with the state securities authorities, while those who handle more than $100 million worth of assets must register with the Securities and Exchange Commission (SEC).
According to the Investment Advisers Act of 1940, the Registered Investment Advisers (RIAs) have to set up plans and strategies that will comply with the rules established by the Securities and Exchange Commission (SEC). Note the Investment Advisers Act has been modified twice, once in 1996, and later in 2010. As per the new amendments, only advisers with at least $100 million under management must register with the SEC. Essentially, abiding by the rules and regulations put forth by the SEC is known as RIA compliance.
RIA Compliance has many different aspects such as the Investment Advisers Act, the Securities and Exchange Commission (SEC) Examination Priorities, Form ADV, Compliance Officers (CCOs), Funds & Assets, and Code of Ethics. The Advisers Act exists along with the SEC’s rules to prevent any breach of the law. The SEC’s rules are constantly changing in order to be up-to-date with evolving technology.
RIA compliance can present a few challenges to investment firms such as valuation, cybersecurity and theft, custody of assets, and foreign tax compliance which we’ll review in depth in this article.
Before we move on to discuss RIA compliance in detail, we’d also like to shine a light on the basic differences between RIAs and broker dealers. It’s common for professionals to confuse the two. However, they vary not just in their scope of work, but also in the laws they must follow and the way they earn a living.
A broker dealer helps in carrying out investing deals. Think advisors that tell you which shares to buy and which ones to sell. Broker dealers collect a small percent of the transaction as commission. Unlike RIAs, they are not bound by fiduciary rules. What does this mean? They generally focus on the deals that are most beneficial to them, as opposed to those which are best for the client.
Registered brokers work for full-service broker dealers, where they have to follow a set of guidelines when it comes to recommending stocks, suggesting investments, and carrying out their business.
On the other hand, independent broker dealers have more legroom when it comes to suggesting investments. For instance, they can also advise clients to invest in hedge funds, IPOs, and nonqualified plans.
Here are some differences between broker dealers and RIAs:
On the contrary, RIA’s provide advice according to the fiduciary standard which means that they provide advice which is best for the customers needs. The fiduciary standard is stricter than the suitability standard.
RIA compliance has a lot of different aspects such as:
Here are some of the common challenges that registered investment advisors can face with compliance:
A better and faster way for RIAs to manage their compliance is using an automated system such as VComply, that helps them receive alerts, automate their calendar, and assign responsibilities.
In order to safeguard their organization from cybersecurity thefts, advisors must run their cybersecurity measures through frameworks such as CIS, PCI, NIST, and SOC 2, to determine if their security measures are appropriate.
Compliance for RIAs is not straightforward, and with ever changing regulations, CCOs are forced to balance budgets as well as ensure compliance. As the organization grows larger, it becomes even more cumbersome to track and map regulations.
In this section, lets explore the key steps and strategies for RIAs to achieve and maintain compliance effectively.
Achieving and maintaining compliance for Registered Investment Advisors is a multifaceted endeavor that requires dedication, ongoing effort, and a commitment to ethical practices. By understanding the regulatory landscape, establishing comprehensive policies, and staying informed, RIAs can protect their clients’ interests, maintain their reputation, and thrive in the highly regulated financial services industry.
The best option for RIAs to ensure compliance as well as data security is to opt for an automated system for compliance. To reduce the cost of non-compliance, and keep risks at bay, RIAs can take a look at VComply, an automated governance and compliance software. Explore what makes VComply a consistent G2 high performer in Compliance Management. Request your demo today and transform your approach.
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