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Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs

Consideration was given for the editing and publication of this post.

The Securities and Exchange Commission (SEC) wields considerable power. A federal government mandate can initiate investigations and criminal inquiries into companies and individuals found in contravention of federal regulations regarding US markets. This means that companies and individuals always have to keep abreast of changes in regulations to ensure that they have solid SECinfo to avoid fines and criminal charges.

Having experienced advisers as part of a legal team is all companies should endeavor to do. Such advisers ensure that their clients follow SEC regulations in all their business dealings. An effective way of doing this is to create compliance programs. The programs can help to guide such advisers and their clients better.

Asking key questions while formulating such compliance programs is crucial. Below are some of the questions that such advisers should ask.

1)Is the Compliance Rule Being Followed?

Every adviser should strive to follow the Compliance Rule. This regulation forbids investment advisers from giving financial advice unless the said advisors have set strong guidelines to prevent actions that can be considered fraudulent. As an extension of the Compliance Rule, investment advisers are required to be mindful of the Advisers Act, a federal law that monitors their activities. Advisers should conduct a thorough risk assessment of their clients’ business dealings to ensure compliance. For example, affiliations that may cause a conflict of interest can violate the Advisers Act. This means that advisers should encourage their clients to set up policies that mitigate such issues.

2) How are Brokerage Arrangements and Trade Executions Managed?

Making stock trades and other brokerage arrangements are part of what investment advisers do for their clients.  Advisers should ensure that their clients have policies in place to address regulatory issues and disclosures. For example, investment firms may have to execute trades in other jurisdictions different from where they operate. In such cases, the adviser should ensure that the investment regulations of that particular jurisdiction are followed. Sometimes, erroneous trades are made.  Resolving such errors in a manner that is consistent with disclosures made to clients and all parties with a vested financial interest is key to maintaining a good broker-dealer relationship. These are pertinent issues that an adviser should help incorporate into a compliance program.

3) How is Sensitive Information Handled?

An adviser should ensure strict policies and procedures regarding information that is not public knowledge. Investment trading relies heavily on information. If, for example, an employee of such an investment institution comes into crucial information that’s not known to the public, it could provide an unfair advantage to any party that chooses to use (or misuse) it. A compliance program should have clear procedures for dealing with such instances.

Information about clients’ financial dealings, investment objectives, risk tolerance, and financial circumstances constitute key data that should be well protected. Such information is key to making trades and financial decisions on behalf of clients.

Managing all such information should be part of a strict supervisory process to ensure that there’s no misuse of information.

4) How are Investment Opportunities Allocated?

Limited investment opportunities like initial public offerings (IPOs) and initial coin offerings (ICOs) can become contentious issues if not distributed fairly among clients. Of course, clients have different investment objectives. Some clients, for example, prefer an arrangement like bunched trading which ensures parity among all clients when it comes to investment opportunities like ICOs.

Evaluating the extent of client participation in trades is also crucial. This can be part of a forensic test to assess the performance among the different client accounts. This should reflect the equitable allocation of investment opportunities.

Access to proprietary accounts—those maintained on a company’s or individual’s behalf for payment of goods or services—should be consistent with disclosures made to clients. It should also be in line with the company’s code of ethics.

A good adviser should ensure that a company’s compliance program includes all such details. This helps to mitigate acrimonious situations between the brokers and clients.

5) How Knowledgeable are the CCO and Other Staff Members?

The amount of knowledge and experience that the Chief Customer Officer (CCO) of an investment firm has will greatly influence the effective compliance programs and their implementation. The CCO and other staff members need to know how to handle all aspects of the compliance policy. For example, if there are any issues with clients’ accounts, the staff needs to handle them. Even when that involves asking tough questions or reporting such issues to higher management, the CCO and his people should not shy away from taking appropriate measures. The staff should always approach any discrepancies with a healthy level of professional skepticism, ensuring that they don’t pass judgment before fully implementing the necessary procedures. Sometimes, there are inconsistencies between facts and what’s actually happening. Say a trade is not matching up to what was disclosed to a client. The staff should be empowered to pursue such matters further.

An adviser’s job is to ensure that such effective procedures are part of the compliance program, reviewing such procedures periodically if need be.

6) How Strong is the Code of Ethics?

The code of conduct surrounding trading and securities transactions requires that they be reported, including any transactions in mutual funds managed by an adviser. This is a tenet of the SEC’s Rule 204A-1 that deals with investor conduct.

As part of the compliance program, the code of ethics should foster an environment that promotes honest dialogue and dealings. The code of ethics should stipulate periodic training sessions for the staff on ethical issues. Legislation and regulations may change from time to time. Such training helps to keep their skills up to date, ensuring that they can adapt to evolving industry trends.

Insider trading, for example, can be a serious violation of the code of ethics, usually resulting in legal action against the accused parties.

An adviser has a crucial role to play in how trading activities are conducted. They do this by ensuring that the compliance program of their clients is up to SEC’s standards.


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